Diving Into The Association’s Budget

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The Association recently gave members a look at where our yearly assessment are spent by releasing the above pie chart. But there’s a lot more going on than this one chart can convey, so this article explains the Association’s finances in more detail.

Golf, Tennis, Osuna

Sharp eyed observers will note that expenditures for the Golf, Tennis and Osuna facilities are nowhere to be found on the above pie chart. That’s because the Association runs these activities, from a management perspective, as independent business units each with their own revenue sources and expenditures.

The Association generally expects each of these three recreational activities to cost $0 from general yearly Association member assessments. Each facility must generate its own revenue and out of that revenue, pay all activity related expenses and also reserve for future maintenance and capital projects.

So let’s look at total Association revenue across all its activities. The chart below comes from the latest 2021/2022 budget.

If you’re wondering why the golf club seems to occupy an outsized amount of Association focus, while Osuna appears an afterthought, this pie chart is why. From a revenue perspective, golf activities are actually bigger than all the other normal HOA activities like issuing permits, reviewing building plans, parks and rec, the Patrol, etc. This one chart shows you roughly where the Association’s focus should be.

Activity Profitability

While each activity generates enough revenue from charging its customers, how much revenue in excess of expenses (“profit”) determines how much the activity will be able to spend on new projects, new capital expenses, new facilities, new improvements.

If you look at the chart below, I’ve broken out operating revenues and expenses and also included two mandatory items that all Association activities must fund – a replacement fund and an allocation for administrative expenses¹.

Golf Tennis Osuna
Revenues    9,173,329    1,318,640      641,333
Operating Expenses   (6,486,743)   (1,203,292)     (533,384)
Replacement Fund     (428,400)      (35,022)      (69,999)
Admin Allocation     (171,380)      (40,421)      (15,378)
$ for New Projects    2,086,716       39,905       22,572
% Revenue 23% 3% 4%

The % revenue number is the real relative indicator. The golf club manages to make almost a quarter of its revenue as profit, while tennis and Osuna basically break even. As you can see, the golf club has a lot of money to spend on new projects, whereas the tennis and Osuna activities have barely any. And you can see this play out in reality, not just numbers on paper. The golf club can self fund big renovation projects as it is doing now, whereas the tennis club looks like it could have used a face lift ten years ago. Osuna is even worse (it doesn’t help that Osuna is also trying to catch up on required Replacement Fund expenses).

Incidentally, I recently played in an interclub pickleball tournament at Scripps Ranch Swim & Tennis club. As we walked through the amazing facilities, one person asked “Why can’t our club look like this?” I quipped “Because Rancho Santa Fe can’t afford it.”

RSF Pickleball courts – Pickleball is a very social sport

Recreation Fields & Trails

Neither the recreation fields nor trails show up on the above revenue pie chart for a simple reason: They don’t generate revenue.

While the trail system is fairly unique, the recreational fields are similar to what other communities have for their residents, like the large sports field complex in Encinitas, or smaller facilities many HOAs maintain for their members.

The trail system appears well maintained (let me know if you disagree), but historically the Association has spent a relatively small amount of money maintaining the recreational fields resulting in them degrading over time. The exception has been the main baseball diamond and the t-ball diamond, but maintenance for those were and are paid for directly by a handful of community members (via the RSF Little League), with no Association money being spent on them for routine maintenance.

Recently, in the last 1 1/2 budget cycles, the Association has opted to spend more money for soccer field maintenance resulting in an improvement of playing field conditions. Both field and trails maintenance expenditures are part of the Parks & Rec budget.

Richardson field baseball diamond.

Internet (Fiber)

Over the past several years, the Association spent approximately $16.7M building a fiber optic backbone network to support the gigabit Internet service we can buy from Race Communications. The Association owns this asset which is composed of conduit and fiber optic cable in the ground and a newly built generator powered central office building.

This was financed by using what is now called the Fiber Optic Fund (FOF)² which had accumulated about $7.8M by project start. The rest was financed via a bank loan, of which there is $5.5M outstanding at a 4.05% interest rate³.

On-going FOF funding comes directly from annual Association wide member assessments and is expected to receive $1.3M from members in the 2021/2022 budget cycle. In addition to this, all RSF Connect customers pay a $65/month surcharge for Internet service. Race charges $70/month for gigabit Internet service, but our Internet bills total $135 inclusive of this surcharge. This nets the Association an additional approximate $720K for 2021/2022.

Both the FOF assessments and the surcharges go towards paying off the fiber construction loan as well as various expenses, the biggest being property taxes (yes we required to pay property tax on underground fiber, ugh). If my calculations are correct this means the loan could be paid off as soon as four years from now (say fall 2025) if the Association decides to pre-pay (the loan matures in 2028).

This could mean that in the 2025/2026 budget year, assuming we stay at a $0.14/$100 assessment rate, we could have about $1.4M per year being accumulated/spent for other projects. Internet customer monthly surcharges could be reduced at that time, but not eliminated entirely, since there are other fiber related expenses. This is all subject to change, of course, depending on specific board policy going forward.

Conduit for Internet fiber being installed in 2018

Restaurant

For the first time, the 2021/2022 budget breaks out restaurant revenues and expenses. In past years, this was folded into the golf club budget. From an accounting point of view, this was always a questionable fit since all Association members have dining privileges at the golf club restaurant, and indeed restaurant patrons are approximately split 50/50 between golf club members and non-members.

The 2021/2022 budget shows the restaurant profitability (loss):

Restaurant
Revenues                   2,994,765
Operating Expenses                 (3,989,794)
Replacement Fund                       (35,022)
Admin Cost Allocation                    (111,817)
Profit (Loss)                 (1,141,868)

Historically losses have been smaller, but the finance committee is probably being conservative here considering the unknown impact of COVID-19 (it certainly reduced restaurant profitability last year).

Starting about two years ago, the Association agreed to split profit/loss with the golf club on a more or less 50/50 basis⁴.

The restaurant could be getting an upgrade in the next few years.

Assessments

A word on assessments/yearly HOA dues. Rancho is unique in California in that assessments are calculated as a percentage of County tax assessed property value. Because prop 13 that became law in the 70s distorts property tax assessments relative to true market value, no other HOA is allowed to compute assessments this way (the Association lobbied for and got an exception back in the 1970s).

Apart from the inequity of this which I’ve written about before, in practice this means that our boards generally don’t have to “raise rates” in their yearly budget cycles. That’s because the even prop 13 distorted assessed property values generally go up every year. The HOA assessment rate has been unchanged at $0.14/$100 for well over 20 years (this currently works out to an average of about $310/month per member).

This is both a blessing and a curse. It’s a blessing for board members since they don’t have to justify a 5% or whatever assessment hike in front of the membership. The headline number stays the same, even though the Association’s budget usually increases every year.

I also call it a curse because the Association’s needs or priorities might not actually match the yearly housing stock property tax value. Indeed it would be quite the coincidence if it did. A hard nosed look at our true budget needs might show we needed less or more money that what the $0.14/$100 brings in.

So we might be wasting a bit of money each year if our assessments end up collecting more than we need, and conversely, the board will feel constrained to not spend money on needed or desired improvements or even regular operational needs because they feel hemmed in by the $0.14/$100 budget number.

Our unique way of calculating assessments likely isn’t going to change, it is what it is. Hopefully current and future boards don’t feel constrained by this “automatic” assessment calculation and do what is right by the Association regardless where the numbers go. We had a bit of a historical accident that allowed us to fund the very much needed $16.7M fiber Internet project (the old open space fund had been left to accumulate funds due to the boondoggle of buying Osuna for $12M at the height of the property boom in 2007). Going forward, we don’t have a big pot of money sitting anywhere anymore, but there’s no reason why Rancho can’t afford other funding mechanisms.

Conclusions

Association finances are very strong. With a minor exception, we are fully reserved against future replacement needs. We’ve also demonstrated that we have financial flexibility to borrow at low rates (meaning that banks agree we are financially strong).

Tennis and Osuna facilities aren’t generating enough revenue to properly thrive. I know for certain that Osuna’s rates are below market. I suspect the tennis club could lift rates and have higher revenues overall, even after a few defections. A well publicized push to gain more pickleball members, which is a much easier sport to get into than tennis (if you can walk, you can play pickleball), would help. As would raising pickleball rates, which are still below equivalent tennis club rates.

The Association is leaving a lot of money on the table. I find it interesting that the Association has allowed individual members to subsidize playing field maintenance. If that can happen, the same should be able to happen for other facilities. We are a very wealthy community, raising money for facility upgrades should be easy to do if the Association were only to try. Naming rights for a bar, court, or field can generate a lot of money. It has been done in the past – Richardson playing field is named after a benefactor.

We need champions. All too often the Association board ends up getting bogged down in the minutiae of drafting some process document that no one is going to read. The fiber Internet project was started as a grass roots community project – initial money was spent by private individuals, not Association money.

What would you like to see the Association do? How can you help?

Footnotes:

  1. This includes extra revenue assessed to golf members used to pay off a loan. If you back this revenue out, profit ends up being around 19%.
  2. The Fiber Optic Fund used to be called the Community Enhancement Fund for the last few years and before that was called the Open Space Fund. It is supported by 2.5 cents of the 14 cents total yearly member assessment per $100 property value.
  3. As of 6/30/2021.
  4. There are many ways to calculate such profit/loss – the 2021/2022 the budget shows the Association paying $470K to cover restaurant losses, with presumably the golf club covering the rest.