Finance Advisory Committee – Introduction of Robert O. “Bob” Jester

Bob and his wife Emilie purchased their home in our community in 2014 while Bob was still practicing law full-time in Kansas City, Missouri, with his firm, Ensz and Jester, P.C. He semi-retired in 2016 and moved to Sun City Shadow Hills in December of that year, and continued to practice remotely until 2019. Bob’s law practice began in the field of insurance defense litigation in the Claims Department of the United States Fidelity and Guaranty Company while he attended law school. He went on to defend cities and counties in Missouri and Kansas. Bob subsequently became a member of the Missouri Bar, and the Federal Bars in the 8th and 10th Circuits. He was also admitted to practice before the United States Supreme Court.

As the firm’s practice expanded, Bob created and managed the business practice section which encompassed commercial litigation, contracts, real estate, employment claims, insurance issues, business entity sales and purchases, and corporate restructure and finance.

During his years of practice, Bob was also active in Sertoma International which is the third oldest civic service organization in the United States, formed in 1912 in Kansas City. He rose to the office of International President and spearheaded the organization’s charitable activities in the field of speech and hearing as well as individual areas of civic need.

Emilie and Bob have adapted quickly to their life in our community and are very active in numerous clubs. Bob would like to contribute to our community by helping to fulfill our financial and legal needs through the Finance Advisory Committee.

The Committee welcomes Bob and looks forward to his participation.

Finance Advisory Committee – February 2020

By Bill Wethe
Finance Advisory Committee Chair

As you may have already read or heard, FAC has three openings on the Committee. We would love to hear from you if you have an interest in serving on the FAC. The estimated time commitment is 15 to 20 hours per month.

Work Completed

During the month of January, the FAC continued its work with the Board as well as with DRM and Troon management on behalf of the Association including:

  • Review and recommend Board approval of the unaudited December 2019 Association financial statements including the:
    • financial statements prepared by DRM/Associa, Troon, and the Controller.
    • combining and combined financial statements included in the Association Treasurer’s report prepared by the Controller.
    • summary financial information on financial position and results of operations included in the Controller’s report to the Board.
    • condensed Association financial information to be published in The View magazine.
  • Review of the monthly and year-to-date variance analysis prepared by the Controller on the 2019 Operating Fund revenues and expenses.
  • Review of the year-to-date variance analysis prepared by the Controller on the 2019 Replacement Fund expenses and interfund transfers to the Operating Fund.
  • Review of the 2019 annual results of the Operating Fund and Replacement Fund as compared to the 2019 Forecast (11+1) prepared by the Controller.
  • Regular meeting of FAC on January 24, 2020.
  • Preparation of the FAC monthly written report to the Board for its meeting on January 27, 2020.
  • Review of December 2019 bank statements, bank reconciliations, and Replacement Fund investment account statements.
  • The Board approved the FAC proposed revisions to the Charter and Mission for the FAC and the Charter and Mission for the FAC Subcommittee on the Replacement Fund and Reserve Study (Subcommittee).
  • The Board approved the written recommendations from the FAC and the Subcommittee in the preparation of Board Action Forms requesting expenditures from the Replacement Fund for replacement or major repair of common area real and personal property components.
  • Conference call with Comerica Securities, the Investment Manager for the Association’s Replacement Fund, including review of the portfolio performance report as of December 31, 2019, and investment recommendations for 2020.

Work in Process

FAC has several items we are working on including:

  • The 2019 Audit is underway. Interim work was completed in December. We plan to issue the 2019 audited financial statements by Friday, February 28, 2020.
  • Interview of candidates for FAC who have prepared and submitted an Advisory Committee Interest Form.

Further Information

Please review minutes of our monthly meetings and written reports to the Board included in Board meeting packages on the Association’s website.

Additional FAC Members: Larry Anderson, Steve Proia, Carey Thompson, Bob Giovannettone, and Bill Ferstenfeld.
FAC Subcommittee Members on the Replacement Fund and Reserve Study: Chris Stevens, Don Salvatore, Steve Proia, Carey Thompson, and Bill Wethe, Chair.
Contact the author at finance@scshca.com.

Finance Advisory Committee – January 2020

By Bill Wethe
Finance Advisory Committee Chair

The members of FAC want to thank John Deshaw for his 2-1/4 years of service to the Community and to the Committee! Well done!

FAC now has three openings. We would love to hear from you if you have an interest in serving on the FAC.

Work Completed

During the months of November and December, the FAC continued its work with the Board as well as with DRM and Troon management on behalf of the Association including:

  • Review and recommend Board approval of the Associaton’s unaudited November 2019 financial statements including the:
    • financial statements prepared by DRM/Associa, Troon, and the Controller.
    • combining and combined financial statements included in the HOA Treasurer’s Report prepared by the Controller.
    • summary financial information on the HOA’s financial position and results of operations included in the Controller’s report to the Board.
    • condensed Association financial information to be published in The View.
  • Review of the variance analysis prepared by the Controller on the 2019 Operating Fund revenues and expenses to assess impact, if any, of the 2019 Forecast.
  • Review of variance analysis prepared by the Controller on the 2019 Replacement Fund expenses and inter-fund transfers to the Operating Fund.
  • Review of the 2019 Forecast (11+1) of the Operating Fund and Replacement Fund as compared to the 2019 Budget and the 2019 Forecast (10+2) prepared by the Controller.
  • Regular meeting of FAC held on December 13, 2019.
  • Preparation of the FAC monthly written report to the Board for its meeting on December 16, 2019.
  • Review of November 2019 bank statements, bank reconciliations, and Replacement Fund investment account statements.
  • The Board approved the revisions proposed by FAC on the Association’s Investment Policy for 2020.
  • The Board approved the revisions proposed by FAC on the Association’s Procurement Policy.
  • The Board approved the increase of $1 million to $16 million in the Fidelity Bond proposed by FAC as of January 1, 2020, to comply with California Civil Code Section 5806.

Work in Process

The FAC proposed revisions to the Charter and Mission for the FAC and the Charter and Mission for the FAC Subcommittee on the Replacement Fund and Reserve Study (Subcommittee). The proposed revisions were approved by the Board for posting to allow for comments.

The FAC and Subcommittee prepared written recommendations for the Board’s review in the preparation of Board Action Forms requesting expenditures from the Replacement Fund for replacement or major repairs of common area real and personal property components.

Further Information

Please review minutes of our monthly meetings and written reports to the Board included in Board meeting packages on the HOA website.

Additional FAC Members: Larry Anderson, Steve Proia, Carey Thompson, Bob Giovannettone, and Bill Ferstenfeld.
FAC Subcommittee Members on the Replacement Fund and Reserve Study: Chris Stevens, Don Salvatore, Steve Proia, Carey Thompson, and Bill Wethe, Chair.
Contact the author at finance@scshca.com.

Finance Advisory Committee – December 2019

By Bill Wethe
Finance Advisory Committee Chair

Work Completed

Yes! The 2020 Budget and the 2020 Reserve Study are complete, and the Board approved them on October 28, 2019. A BIG “thank you” to all those responsible including:

  • the DRM management team.
  • the Troon management team.
  • the members of FAC and the FAC Subcommittee.
  • our Board of Directors.

The FAC continues to work with the Board as well as with DRM and Troon management to:

  • review and recommend Board approval of the unaudited October 2019 Association financial statements including the:
    • financial statements prepared by DRM/Associa, Troon, and the Controller
    • combining and combined financial statements included in the Treasurer’s report prepared by the Controller
    • summary financial information on the financial position and results of operations included in the Controller’s report to the Board
    • condensed financial information to be published in The View magazine
  • review the variance analysis prepared by the Controller on the 2019 Operating Fund revenues and expenses to assess the impact, if any, on the 2019 Forecast
  • review variance analysis prepared by the Controller on the 2019 Replacement Fund expenses and interfund transfers to the Operating Fund to assess the impact, if any, on:
    • the 2019 Replacement Fund annual cash flow forecast
    • The 2019 Replacement Fund liquidity and investments
  • review the 2019 Forecast (10+2) of the Operating Fund and Replacement Fund as compared to the 2019 Budget and the 2019 Forecast (9+3) prepared by the Controller
  • hold a regular FAC meeting on November 15
  • prepare the FAC monthly written report to the Board for its meeting on November 18
  • review October 2019 bank statements, bank reconciliations, and Replacement Fund investment account statements
  • prepare articles posted on the Association website with information about:
    • depreciation expense recorded in the financial statements of the Operating Fund
    • services provided by Troon in the management of the Association’s golf and F&B operations
    • services provided by DRM in the management of all other Association operations.

Work in Process

The FAC has several initiatives in process including reviewing and proposing revisions for the Board to consider on the:

  • Association’s Investment Policy
  • Association’s Procurement Policy
  • Charter and Mission for the FAC
  • Charter and Mission for the FAC Subcommittee on the Replacement Fund and Reserve Study

Further information

Please review minutes of our monthly meetings and written reports to the Board included in Board meeting packages on the Association’s website.

Additional FAC Members: Larry Anderson, John Deshaw, Steve Proia, Carey Thompson, Bob Giovannettone, and Bill Ferstenfeld.
FAC Subcommittee Members on the Replacement Fund and Reserve Study: Chris Stevens, Don Salvatore, Steve Proia, Carey Thompson, and Bill Wethe (Chair).

Contact the author at finance@scshca.com.

Management by Desert Resort Management, Inc. (DRM)

By Bill Wethe
Finance Advisory Committee Chair

Purpose

The objective in preparing this memo is to provide further details of what DRM currently provides to the Association for the management fees (Fees) that are paid by the Association to DRM.

Please note this is a summary of many items in the executed Management Agreement (Agreement) that the Association has with DRM as well as other information provided by DRM. Please refer to the Agreement which is posted in the Residents Only section of the Association website.

Further Discussion

Let us review what management “goods” and services are provided by DRM to the Association to understand how those services relate to the management fees that are being paid by the Association.

DRM provides the following “goods” and services for the Fees paid to them:

  • Application software and related infrastructure for:
    • General ledger accounting
    • Financial statement reporting
    • Vouching of vendor invoices
    • Electronic approval of vendor invoice (Strongroom)
    • Accounts payable subledger
    • Payment of vendor invoices
    • Billing of assessments and other amounts due the Association
    • Accounts receivable subledger
    • HRIS
    • Payroll (ADP)
    • Benefits
    • COBRA
    • Affordable Care Act (ACA) compliance and reporting
    • Timekeeping (ADP)
    • Workplace monitoring (Safeline)
    • Online employee training
    • Employee performance
  • Accounting and financial reporting including:
    • Escrow disclosure fulfillment and changes of ownership
    • Delinquency tracking
    • Monitoring of bankruptcies foreclosures
    • Lien processing and tracking
    • Production of and distribution of the homeowner associations’ assessment billings
    • Receipt of and tracking of all owner assessment payments
    • Administration of bank accounts for the Operating Fund and Replacement Fund including approved account transfers and bank reconciliations
    • Processing of vendor invoices and payment of Association vendors
    • Preparation of the monthly general ledgers and related financial statements including general ledger account reconciliations
  • Executive oversight and supervision in offsite office space:
    • Mark Dodge of the General Manager
    • Keith Lavery of the Controller
  • Administration including:
    • Support for operations of on-site Association management office
    • Support for preparation and distribution of all Association written communication including annual mailers
    • Customer Service interface with owners on billing and Association maintenance issues
    • Attendance at and support for Board of Director (Board) meetings and relevant Advisory Committee meetings
    • Oversight of and attendance at annual meetings and elections including support for preparation of election
    • Updates to the Board as to new laws/regulations affecting the Association
    • Rule enforcement support through use of mobile application
    • Homeowner dispute mitigation and escalation
  • Emergency services program; 24 hours a day, 7 days a week for communication with unit owners in the Association
  • Human resources and personnel in offsite office space:
    • Recruit, hire, pay, train, supervise, investigate and discharge the on-site employees of DRM
    • DRM pays for all recruitment costs of on-site employees of DRM and the Association does not reimburse DRM (please note, the Association has used certain job posting websites to advertise open positions and has paid the costs of such directly to the vendors)
    • Employee onboarding, including background and drug testing
    • Employee Training and Development (please note, the Association did budget for additional education, training and development in 2018; the 2018 expense was $1,876 as compared to the annual budget of $8,000; the 2019 annual budget is $0)
    • Benefits administration
    • Workplace compliance and monitoring
    • Support of monthly safety training program
    • Processing and monitoring of workplace injury and harassment complaints
  • Defend, indemnify and hold the Association harmless from and against claims as specified in the Agreement with DRM
  • At DRM’s sole cost and expense, provide the insurance coverage as specified in the Agreement with DRM:
    • Fidelity insurance with coverage for all DRM’s employees
    • Commercial general liability, including automobile liability, insurance and the Association is additional insured under both policies
    • Umbrella liability insurance
    • Employment practices liability insurance

In addition, two additional benefits are provided to the Association without charge including:

  • Associations, Inc. (Associa), the parent company of DRM, has arranged for a Private Depositor Bond issued by a Surety naming the Association as a beneficiary covering Association Operating Fund and Replacement Fund checking and money market accounts maintained at MUFG Union Bank, N.A. (Union Bank) which have account balances that are in excess of the FDIC insured limit of $250,000.
  • Associa has arranged for implementation of positive pay on Association Operating Fund and Replacement Fund checking accounts maintained at Union Bank.

The Private Depositor Bond is significant to the Association in terms of operational and administrative efficiency. If the Private Depositor Bond was not in place, then the Association would have to maintain multiple Operating Fund checking accounts so that the average balance in each of the accounts was less than $250,000. The Association would need approximately eight to ten checking accounts which would take substantial more resources and time to manage and administer.

Positive pay is an automated fraud detection tool offered by the Cash Management Department of most banks, including Union Bank. In its simplest form, it is a service that matches the account number, check number and dollar amount of each check presented for payment against a list of checks previously authorized and issued by the Association.

Additional FAC Members: Larry Anderson, John Deshaw, Steve Proia, Carey Thompson, Bob Giovannettone and Bill Ferstenfeld.

Contact the author at finance@scshca.com.

Management by Troon Golf, L.L.C. (Troon)

By Bill Wethe
Finance Advisory Committee Chair

Purpose

The objective in preparing this memo is to provide further details of what Troon currently provides to the Association for the management fees (Fees) that are paid by the Association to Troon for management of the two, eighteen-hole golf courses and the F&B facilities in the common areas owned by the Association.

Please note this is a summary of many items in the executed Management Agreement (Agreement) that the Association has with Troon as well as other information provided by Troon. Please refer to the Agreement which is posted in the Residents Only section of the Association website.

Further Discussion

Let us review what management “goods” and services are provided by Troon to the Association to understand how those services relate to the management fees that are being paid by the Association.

Troon provides the following “goods” and services for the Fees paid to them:

  • Centralized promotion and marketing services
  • Utilize centralized purchasing programs to obtain national pricing from all vendors providing goods and services to the Association at discounted pricing
  • Corporate based shared employee services including the accounting function as well as a Regional Controller and an Area Retail Manager
  • General Manager oversight and supervision by Darrell Morgan, Troon VP, Operations
  • Accounting and financial reporting
  • Application software and related infrastructure for:
    • General ledger accounting (Jonas)
    • Financial statement reporting
    • Point of sale (Jonas)
    • Inventory tracking
    • Vouching of vendor invoices (Jonas)
    • Accounts payable subledger (Jonas)
    • Payment of vendor invoices (Jonas)
    • Accounts receivable subledger (Jonas)
    • HRIS (Oracle EBS)
    • Payroll (Jonas)
    • Benefits
    • COBRA
    • Affordable Care Act (ACA) compliance and reporting
    • Timekeeping (Oracle, biometric)
    • Workplace monitoring
    • Employee performance
  • Access to approximately 200 corporate Troon resources with expertise in:
    • Agronomy
    • Accounting and financial reporting
    • Human resources
    • Information technology
    • Operations
    • Sales and marketing
  • Defend, indemnify and hold the Association harmless from and against claims as specified in the Agreement with Troon.
  • Provide the following insurance coverage as specified in the Agreement with Troon:
    • Fidelity insurance with coverage for all Troon’s employees
    • Liquor liability insurance
    • Commercial general liability, including automobile liability, insurance
    • Umbrella liability insurance
    • Employment practices liability insurance
  • Human resources and personnel in offsite office space:
    • Recruit, hire, pay, train, supervise, investigate and discharge the on-site employees of Troon
    • Employee onboarding, including background and drug testing
    • Employee Training and Development
    • Benefits administration
    • Workplace compliance and monitoring
    • Support of monthly safety training program
    • Processing and monitoring of workplace injury and harassment complaints

Additional FAC Members: Larry Anderson, John Deshaw, Steve Proia, Carey Thompson, Bob Giovannettone and Bill Ferstenfeld.

Contact the author at finance@scshca.com.

Is Depreciation Expense a Real Cost and a Real Expense?

By Bill Wethe
Finance Advisory Committee Chair

Is Depreciation Expense a Real Cost and a Real Expense?

Answer

Yes, it is!! For more information, please continue reading. Caution – reading this article may put you to sleep.

Background information – Fund Accounting

The Association is a statutory homeowner’s association organized as a non-profit mutual benefit corporation for purposes of maintaining and preserving common property within the residential development consisting of 3,450 residential units.

The Association’s governing documents provide certain guidelines for governing its financial activities. To ensure observance of limitations and restrictions on the use of financial resources, the Association maintains its accounts using fund accounting in accordance with Generally Accepted Accounting Principles (GAAP). Financial resources of the Association are classified for accounting and financial reporting purposes in the following funds established according to their nature and purpose:

  • Operating Fund – This fund is used to accumulate financial resources and to account for the financial resources available for the general operations, the chartered clubs, and for the property and equipment (i.e., there are three “sub-components” of this fund). General operations include the operation, maintenance, repair, property protection, and management of the common areas owned by the Association. This fund is also used to account for the financial resources utilized for the creation of new (i.e., not a replacement) real and personal property additions in the common area. The property and equipment sub-component of this fund is to account for the personal property placed in service in the common area. The personal property includes fitness equipment, golf course maintenance equipment, and furniture and equipment in the clubhouses and management offices.
  • Replacement Fund – This fund is used to accumulate financial resources and to account for the financial resources available for future replacements of real and personal property owned by the Association. These items are referred to as common area components.

Accounting for common area property in accordance with GAAP

Real property and common areas acquired from the developer and improvements and additions to the real property owned by the Association (such as new pickle ball courts) are not recognized as assets in the balance sheet of the Association in conformity with GAAP and industry standards. The financial resources expended to create improvements and additions to the real property owned by the Association are recognized as an expense of the Operating Fund at the time the expenditure is incurred. These items appear as a common area improvement expense in the statement of revenues and expenses of the Operating Fund.

Expenditures for replacements of common area real property components are accounted for as an expense of the Replacement Fund at the time the expenditure is incurred. These items appear as a replacement fund expense in the statement of revenues and expenses of the Replacement Fund.

Expenditures for replacements of common area personal property components are not recorded as an expense in the statement of revenues and expenses of the Operating Fund nor in the statement of revenues and expenses of the Replacement Fund at the time expenditure is incurred. The cash expenditure is recorded as an addition to Property and Equipment in the balance sheet of the Operating Fund of the Association. So, how does the Association and its members recognize the cost or expense of this cash expenditure?? Please read on.

Background information – Recording Expenses

As you know, assessment income paid by members of the Association, and collected by the Association includes monthly amounts allocable to the Operating Fund and the Replacement Fund. The assessment income is recognized as revenue in the statement of revenues and expenses of the respective funds.

The common area personal property components are recorded as an asset in Property and Equipment in the balance sheet of the Operating Fund at the time the expenditure is incurred and are stated at cost. Unlike replacement of common area real property components, the expense for personal property cash expenditures is not recognized until future periods (i.e., after the cash expenditure). The personal property assets are depreciated using the straight-line method over the estimated useful lives of the various classes of assets. Depreciation expense is computed over the following estimated useful lives:

  • Vehicles, carts and equipment: 4 to 10 years
  • Furniture and office equipment: 5 to 7 years

So, the “expense”, the depreciation expense, for the total cost of the common area personal property components is recognized over a period of years in the statement of revenues and expenses of the Operating Fund as opposed to at the time of the expenditure of funds by the Replacement Fund. Depreciation expense of common area personal property is a real cost, a real expense. It is recognized over the estimated useful life of the asset acquired vs. at the time of the expenditure.

The Replacement Fund provides the cash accumulated for these common area personal property expenditures to the Operating Fund which then uses the cash owned by the Association to pay the third-party vendors. The cash transferred from the Replacement Fund to the Operating Fund appears as an inter-fund transfer in the statements of Fund Balance (i.e., it is not recognized as an expense at time of transfer; it is a transfer of cash between funds owned by the Association).

You may ask why a difference in accounting and financial reporting for Replacement Fund expenditures. Expenditures for both real and personal property component replacements have future value to the Association. Why does the Association recognize an expense for the replacement of a common area real property component at the time of the expenditure but does not do the same for the replacement of a common area personal property component? The industry standard and GAAP answer is - common area real property components cannot be sold by the Association at any time; common area personal property components can be sold, exchanged or traded in by the Association at any time (subject to Board approval). As a result, the cost of the common area personal property components is recognized as an expense in the Operating Fund over the estimated useful live of the component versus at the time the expenditure is incurred.

Additional FAC Members: Larry Anderson, John Deshaw, Steve Proia, Carey Thompson, Bob Giovannettone and Bill Ferstenfeld.

Contact the author at finance@scshca.com.

Finance Advisory Committee – November 2019

By Bill Wethe
Finance Advisory Committee Chair

Work Completed

Wow. September and October 2019 have been very busy months for the FAC and the FAC Subcommittee! Thanks to the members of both committees for their time, review, and discussion. The FAC continues its work with the Board as well as with DRM and Troon management on behalf of the Association including:

  • Review and recommend Board approval of the unaudited September 2019 financial statements of the Association including the:
    • financial statements prepared by DRM/Associa and Troon.
    • combining and combined financial statements included in the Treasurer’s report for the Association prepared by the Controller.
    • summary financial information on financial position and results of operations included in the Controller’s report to the Board.
    • condensed Association financial information to be published in The View.
  • Review of the variance analysis prepared by the Controller for the 2019 Operating Fund revenues and expenses to assess impact, if any, on the 2019 Forecast.
  • Review of variance analysis prepared by the Controller for the 2019 Replacement Fund expenses and interfund transfers to the Operating Fund to assess impact, if any, on the:
    • 2019 Replacement Fund annual cash flow forecast.
    • 2019 Replacement Fund investments.
    • 2020 Reserve Study.
  • Review of the 2019 Forecast (9+3) for the Operating Fund and Replacement Fund compared to the 2019 Budget and the 2019 Forecast (8+4) prepared by the Controller.
  • Regular meeting of FAC held on October 21, including meeting with the Investment Advisor for the Replacement Fund (Comerica Securities) to review portfolio performance for the nine months ended September 30 plus investment recommendations.
  • Preparation of the FAC monthly written report to the Board for its meeting on October 28.
  • Review of September 2019 bank statements, bank reconciliations, and Replacement Fund investment account statements.

Work in Process

The FAC has several initiatives in process including:

  • Reserve Study for 2020.
  • Budget for 2020.

On the 2020 Reserve Study:

  • The FAC and the FAC Subcommittee have reviewed the third and fourth drafts of the Reserve Study prepared by the Reserve Consultant and provided input and feedback on them.
  • The FAC Subcommittee updated the financial analysis for the draft Reserve Studies.

On the 2020 Budget:

  • The FAC has reviewed copies of the draft budgets prepared by DRM management and Troon management and provided input and feedback on them.
  • The FAC attended the Board budget review meeting held on October 23 and provided input during that meeting.

Further Information

Please review minutes of our monthly meetings and written reports to the Board included in Board meeting packages on the Association website.

Additional FAC Members: Larry Anderson, John Deshaw, Steve Proia, Carey Thompson, Bob Giovannettone, and Bill Ferstenfeld.
FAC Subcommittee Members on the Reserve Study and Replacement Fund: Chris Stevens, Don Salvatore, Steve Proia, Carey Thompson, and Bill Wethe, Chair.

Contact the author at finance@scshca.com.