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Study suggests OP reserves could run out within decade

Doug Greene from Design Management Associates last Friday leads an informational meeting on Ocean Pines reserves.

By Josh Davis Associate Editor

(July 19, 2018) No formal recommendation was made, but the consensus of the members of the Ocean Pines Board of Directors at last Friday’s meeting on the association’s reserves was more money needs to be set aside.

Ocean Pines hired Richmond, Virginia firm Design Management Associates Inc. in 2015 to conduct a reserve study, but differences of opinion, incomplete and outdated information, and several changes in association leadership stymied the effort.

The model being used by Doug Greene, reserve specialist and partner with DMA, suggests a 2.75 percent overall increase in assessments, or about $26 per year, per homeowner.

Greene on Friday explained Ocean Pines has three reserve accounts. General reserves are the largest and include “potentially all of the amenities and facilities that provide services to the community.” Roads and bulkheads each has separate accounts.

He said software developed by DMA to track association reserves would be an ongoing tool, “not a statement from God.” It includes more than 2,500 components that each has different replacement costs and life expectancies, Greene said.

“It’s intended to change as new information becomes available and, obviously, what we’re projecting here changes every day,” he said. “They’re doing replacement work and repair work all the time, and so it is intended that we can, let’s say on an annual basis, update this study pretty easily with what actually has been happening.

“That helps us use this to guide your planning for each subsequent budget year,” Greene added.

If Ocean Pines were to fully fund its general reserves, there would be about $19 million in the account, Greene said. He added the association has currently put aside about $4 million, or roughly 24 percent.

This year about $1.67 million was added to general services through assessments.

Asked what the average percentage of reserves a large homeowner’s association keeps, Greene replied, “I would say it varies from 50 to 75 percent.”

“It does suggest to me that the account is being funded slightly below where it should be, annually, right now,” he said. “If you didn’t increase your contribution over time, you’ll stay above zero for 10 years and then the account will go in the red.”

The DMA model uses a 2.49 percent inflation rate based on a 10-year average of construction costs, which Greene said was preferred over other models because those fees would affect about 90 percent of replacement items.

“Aside from the fact that whether the account is well funded or not well funded, the reality is inflation eats the money,” Greene said. “And you have to keep up with it, just as we all do in our own lives every day.”

He recommended increasing the annual contribution 3.5 percent.

“What it’s saying is that’s all it takes [is about] a percent higher than the inflation rate to resolves those questions, those issues, to fully fund all these components when they need to be funded,” Greene said.

He said bulkhead reserves currently has a balance of about $2.5 million, with bulkhead lot owners contributing close to $663,000 each year and all homeowners adding about $160,000 for common areas.

Greene recommended a roughly 4.6 percent increase per year.

The question of road reserves was more complicated, Greene said. The roads reserve fund has an $800,000 balance with annual contributions from casino revenues of about $380,000 each year. That amount was “not being increased at the inflation rate,” Greene said.

“What that says, very simply, is that’s not enough money to maintain the roads,” he said. “Our task here was to come up with some recommendation, [but] … that all comes down to how you want to maintain the roads, essentially, and whether you want to create a funding line for that or not.”

Ocean General Manager John Bailey said the community had about 84 miles of roads and the average cost to maintain those was around $400,000 per mile.

Greene added the average life expectancy of a road was 20-25 years.

“If we just keep doing what we’ve been doing … we don’t have enough money going into the road reserve to accomplish that,” Bailey said.

What the association must now decide is what inflation rate to use in the final calculation, what the minimum account balance should be for each of the three reserve accounts, and how much, if at all, each fund should be increased.

Director Ted Moroney said Ocean Pines would not use a percentage funding model, but rather set thresholds and “a five-year cash flow need.”

“We’re not going to say, hey, we’ve got to be at 75 percent,” he said. “What we’re talking about here is setting that threshold so that we protect ourselves in the event that there are sudden, unknown things that occur.

“Threshold, inflation rate, contribution increase rate, that’s how we get there, in five-year increments,” Moroney added.

Association President Doug Parks also promised Ocean Pines would not fund its reserves anywhere close to 75 percent.

“In our model, it’s about a 2.75 percent increase in the assessment,” Greene said.

Up next, Bailey said the association budget and finance committee would meet to discuss the DMA recommendations.

“After the budget and finance committee does that, they will forward those recommendations to the board of directors and then the board of directors will adopt them,” Bailey said.

DMA would then finalize the reserve study, Bailey said.

Reached for comment on Monday, he added he was not sure if the committee would be able to meet before the next scheduled regular board meeting, July 27.