The Hot Springs Village Finance and Planning [F & P] Committee met on February 19, 2024. Some subjects discussed were a possible 2025 assessment increase, Emergency Reserve levels, Fixed Asset Funds, the investment outlook, the amended 2024 budget, and preparation for the OMT review.
Introductory comments from Corporate Treasurer David Moore
Corporate Treasurer and Board Liaison to the F and P Committee, David Moore, said that Doyle Baker, a F and P Committee member, is running in the Board of Director election. There will be discussions about the reserve funds at the March Board Meeting. “It is not my call when we do it, but it will be soon,” stated Moore.
Resignation of Tom Heau
F and P Chair Jeff Lofgren announced that Tom Heau resigned from the F and P Committee. Lofgren said he would be greatly missed, as he was an “incredible wealth of knowledge” on Village financials.
Lofgren welcomed Steve Rogers to the committee. Rogers’ committee appointment is tentatively scheduled to be approved by the Board of Directors at the March Board Meeting.
Report from Jama Lopez, Controller
The audit process was anticipated to be finished on Monday, February 26, minus the report.
The system conversion was not ready for accounting. “We’re hoping they will get it straightened out soon because we feel like we are getting behind,” said Lopez.
The preliminary 2023 financials were presented to the Board. Lopez thinks the financials will be ready to be presented on March 4.
Assessment increase discussion
Lofgren stated that he talked to General Manager Kelly Hale about a proposal to raise assessments according to the Southern CPI, this needs to be considered by the Board. The Declaration says:
“Section 3. Basis and Maximum of Annual Assessments.
From and after January 1, 2014, the annual assessment may be increased each year above the annual assessment for the previous year by a two-thirds (2/3) majority vote of the Board of Directors of the Association, provided, however, that such increase may be no greater than the consumer price index for the twelve-month period ending June 30 of the preceding year using the “Consumer Price Index, South Region All Items” as promulgated by the Bureau of Labor Statistics of the U.S. Department of Labor or, if such is not available, any other reliable governmental or other non-partisan publication evaluating similar information. Unless the annual assessment shall be increased as aforesaid, it shall remain at the rate prevailing for the previous year.”
Lofgren said that the Southern CPI percentage will be high while inflation rages. “Historically, the ten-year average is two percent. Two percent doesn’t meet any inflation.”
Lofgren said that CPI lags by a year. “When lagging by a year, we get progressively further and further behind over time.”
Two proposals were being considered for a Declaration vote. One proposal was they could increase assessments by up to five percent. The second proposal is to increase assessments using the Consumer Price Index plus two or two and a half percent. This is to try and keep the Village on par with inflation, said Lofgren [paraphrased]. [A proposal of this type would have to be passed by Property Owners in a Declarations Vote.]
“In reality, we just had three years of $10 increases, so the community is probably going to be resistant, I would think, to such a proposal.”
“Other background: when we had meetings with Cooper last year, we sat down and talked with their CEO, who admitted to us that the metric they established here in Hot Springs Village, they have not used in any of their other communities because they realized it was not a good metric to base assessments on,” said Lofgren. The Board of Directors will decide what needs to be proposed to the community.
Lofgren explained that there are some discrepancies in the Declarations regarding whether items refer to the Developer (CCI) or the POA. At some point in time, these discrepancies should be addressed. Several items concern our liabilities in extending water, sewer, and roads. Based on economics, the current legal opinion is that it is up to the POA to decide when it is the right time to do this.
Lofgren said that FRATF recommended having the Declaration votes simultaneously with the Board of Director election. “That is the way ideally you would do it. Align it with the yearly election vote of new Board Members,” explained Lofgren. Doing the two votes at the same time would save voting costs.
Lopez said it is her understanding that we developed FRATF because we were ten years without an increase. (other than Southern CPI).
Lofgren said that in the fall of 2024, the Board must decide what to do with assessments in 2025. A Declaration vote is permitted every seven years, with the last Declaration vote occurring in 2018. At that time, the Property Owners voted down all 13 proposals. Click here to read about the 2018 Declaration Vote. With no change in the declaration, the Board must use the Southern CPI formula to raise assessments.
The next time the POA will have a possible Declaration Vote will be in 2025.
Emergency reserve levels
The Hot Springs Village POA Emergency Reserve Funds policy was adopted in 2017. The minimum funding levels in the reserve funds are designated by the Board of Directors.
Lofgren stated that if memory serves him, the original reserve policy in 2017 only had one category, which concerned people. The new policy was adopted in 2022 to replace the old Reserve Policy.
Lofgren said there are three categories:
A. Utility Emergency Reserves: Funded through net utility earnings (except as noted in Section 3) and used for Emergency water or wastewater repairs and replacements.
B. General Emergency Reserves: Funded through net earnings (excluding water and wastewater operations) and used for emergency asset repairs and replacements.
C. Operating Emergency Reserves: Funded through net operating earnings and available line of credit access. These funds will be used for priority operational needs during a short-term cash shortage.
The Utility Emergency Reserves account contains $2 M, and $2.5 M is reserved for General Emergency Reserves. The $3 M amount in the Operating Emergency Reserve account is $2 M with a $1 M line of credit. Lofgren said the last time they talked with Regions Bank about the line of credit; they were told it could be increased to $2 M with only a small financial carrying cost. Lofgren said, “The Board has the opportunity to review this and decide whether or not to increase the values.”
Moore explained, “There is a provision in the policy that we should credit any [interest] earnings to these same reserves.” Lopez will adjust the reserve amounts in the $300,000 to $400,000 range if the Board approves.
Lopez said, “I think we should follow policy.”
Moore said there should be a discussion about whether additional funds should be added to the reserve funds. The funds are very restrictive in how they can be used.
The group discussed how to determine what the correct amount in the reserve accounts should be. Two questions asked were, “What is the worst-case scenario?” and “What is not covered by insurance?”
Board Vice Chair Gary Belair said, “This policy was put into place when we were transitioning, for lack of a better word, a new generation, so to speak.” Belair said he is glad the committee is looking at this.
Lofgren said they should set up a meeting with GM Kelly Hale and Public Services Director Ken Unger to talk about the criteria to define what the reserve levels should be.
Fixed Asset Fund
Lofgren asked, “Does everyone know what this fund is supposed to be used for?”
Lofgren continued, “The POA is a cash-flow organization. That means that we collect money, and then once we collect money, we can tell the departments they can spend money. Until we collect the money, they can’t spend money. That is the way we work.” For example, Public Services Director Ken Unger must have the money available before executing a project.
The problem with a cash-flow organization is that completing projects at the beginning of the year could be difficult because the funds have not been collected yet. This means we are restricted in what we can accomplish during the first few months of every year. “In reality, you are constraining the amount of work we can do to a smaller period,” explained Lofgren.
An approach to handle this problem is to use a fixed asset fund. You fund the account so that you can start working on the needed projects at the beginning of the year.
Moore doesn’t see the need to increase funds in the fixed asset fund since it hasn’t been utilized.
Lopez said we are much more advanced in project planning than in the past. “I think our cash projection or forecast would be as beneficial as anything,” said Lopez.
Lofgren said that staff had accomplished many projects for less money because of their approach. “Our overall cash looks pretty good right now, but to Jama’s point, we can look at the mountain [of needed work] in the OMT, which shows us that we will have to spend [in the future]. it won’t be long before that money sitting there that makes us look really good will be scarce. And when it is scarce, there is a high likelihood that we will go right back to where we were before, where we didn’t have any money from year to year.” Previously, Directors had to wait three months at the beginning of the year before starting projects until the assessment money came in.
Lofgren stated that last year, almost everything was completed under budget. “We ended the year with probably more money in the bank than we anticipated. The idea is that all that money should have gone into the fixed asset funds and start using it as planned.”
Lofgren said he brought up this subject because he wanted to make sure everybody understood how it was supposed to be used and that it is not being used today. He also believes there is an education piece that has to go to the staff and make sure they understand the execution of the fixed asset policy and why you would want to do it that way.
Lofgren said the task is to educate everyone and post-audit, the Board should decide what portion of cash goes into the fixed asset funds to set ourselves up for next year.
Investment outlook and policy
Lopez said we have almost $8 M in our T-bills, at a little more than 5%. Our shortest one is due this month, and she will probably suggest we go out further. The longest one is six months. Lopez said she would rather set three months and keep rolling them because she gets a better interest rate. Our sweep account is most beneficial.
Investopedia says, “A sweep account is a bank or brokerage account that automatically transfers amounts that exceed a certain level into a higher interest-earning investment option at the close of each business day. Commonly, the excess cash is swept into a money market fund.”
There may be short education sessions with staff to explain what information is needed when developing the budget.
Amended 2024 Budget
“Why do we have an amended budget?” asked Lofgren. He said that we created the budget using some old departments. The General Manager reorganized some of the departments in 2024. To make sense, Lopez adjusted the previously Board-approved budget to categorize everything into the new 2024 departments. None of the numbers were changed; only the categorization of who owned what in the budget was changed.
Lopez said this was just a reclassification. The amended budget will match the departments.
The committee will create a budget timeline for Lopez to evaluate.
Preparation for operation and Maintenance Tables (OMT) Review
The OMT review is experiencing a slight delay due to the Northstar software conversion. The General Manager will plan a date for the F & P Committee Members to sit down with all the department heads to introduce the OMT again and explain the expectations. It may take two sessions with each head.
Lofgren said they need to develop an OMT policy to use as a reference. While the OMT is referenced in several policies, there is not a separate OMT policy explaining expectations. Lofgren said there should also be an OMT procedural document for POA staff.
Possible change in committee work meeting schedule
Lopez said it would be beneficial for the committee to hold its monthly work sessions on the Thursday before the monthly Wednesday Board of Directors Meeting to review the financial statement going out to the Board Members the next day (Friday before the Board Meeting). This would place the regular committee meeting and the work session four days apart. The committee did not make a final decision on this matter.
The next regular Finance and Planning Committee Meeting will be on March 18, 2024, at 1:00 p.m. in the Ouachita Room at the Ponce de Leon Center.
Hot Springs Village Finance and Planning Committee at Feb ’24 meeting.
By Cheryl Dowden
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Raise it. No sense falling behind inflation. The village still has a lot of needs.