Management Discussion and Analysis of 2017 Results of Operations and Financial Position

By Tyler Ingle, Controller

The following is intended to be read in connection with a review of the 2017 and 2016 audited financial statements.

 2017 Audited Financial Statement

Purpose

My objective in writing this article is to provide the reader with a summary of the significant items:

  • Comparing the 2017 statement of revenues and expenses of the Association with the 2016 statement of revenues and expenses of the Association
  • Comparing the actual 2017 statement of revenues and expenses of the Association with the 2017 budget
  • Comparing the December 31, 2017 balance sheet to the balance sheet as of December 31, 2016

2017 as compared to 2016

2017 monthly assessment was $255 per unit.  2016 monthly assessment was $217 per unit.  The $38 monthly increase per unit was equivalent to $1.4M in additional assessment revenues in the operating fund and $162K in the replacement fund.

Total golf revenues were $106K more than 2016.  Green fee revenues were $56K more than 2016 despite adverse weather conditions during portions of January and February 2017 resulting in approximately $90K of lost revenue and closing the south course during the renovation of the bunkers resulting in approximately $39K of lost revenue.  Total rounds played in 2017 were 59,798 as compared to 61,256 in 2016.

F&B revenues were $264K more than 2016 reflecting a full year of management by Troon in 2017 as compared to six months in 2016 including a transition from prior management.

Additional 2017 replacement fund revenue included settlement agreement proceeds received from the developer in the amount of $300K.

Golf expenses, including depreciation, were $3.9M in 2017 as compared to $3.7M in 2016.  2017 included certain non-recurring or “one time” costs of approximately $200K including:  inception to date recording of cost for loyalty program in the amount of $142K; write off of prepaid workers compensation deposit not realized upon final audit of policy expiring in April 2017 in the amount of $38K; additional Federal Unemployment (FUTA) tax in the amount of $20K in 2017 as a result of the State of California not being able to benefit from a reduction in the FUTA tax rate on wages subject to unemployment insurance.

Golf depreciation expense (including golf carts and maintenance equipment) was $260K in 2017 or $148K more than 2016 because of the purchase of the new golf cart fleet in Q4 2016.  Lease expense on golf carts and maintenance equipment was $216K in 2016.

Landscape expenses were $956K in 2017 or $199K more than in 2016 primarily due to the Association contracting with the landscape maintenance vendor to trim all trees in the community including all the trees on the two golf courses in 2017.

Administrative and general expenses were $252K in 2017 or $117K less than in 2016.  In 2016, the Association incurred $70K, or $33K more than in 2017, in printing and copying expenses; bad debt expense in 2016 was $80K more than 2017.

Fitness expenses were $149K in 2017 or $82K more than in 2016.  In 2017, the Association increased the number of fitness classes.  This expense was offset by additional fitness income.

Common area improvement expenses were $3K in 2017 or $418K less than in 2016.  In 2016, the Association completed certain improvements to the common area including:  expansion of the lobby, offices, and add a new conference room in the HOA management building; and, North Course golf central station irrigation system.

Capital expenditures expenses were $22K in 2017 or $89K less than in 2016.  In 2016, the Association acquired certain additions to property and equipment including:  HOA conference room TV and furniture; facilities’ trailer to haul scissor lift; Montecito Ballroom speakers.

2017 as compared to budget

Total golf revenues were $294K less than budget.  Green fee revenues were $263K less than budget.  Total rounds played in 2017 were 7,677 less than budget due to adverse weather conditions in January and February and closure of the south course during the bunker renovation project.

Golf expenses, including depreciation, were $3.9M or $239K more than budget.  2017 included certain non-recurring or “one time” costs of approximately $200K which were not budgeted including:  inception to date recording of cost for loyalty program in the amount of $142K; write off of prepaid workers compensation deposit not realized upon final audit of policy expiring in April 2017 in the amount of $38K; additional FUTA tax in the amount of $20K in 2017 as a result of the State of California not being able to benefit from a reduction in the FUTA tax rate on wages subject to unemployment insurance.

Food & Beverage expenses were $1.4M or $253K more than budget; expanded restaurant hours during the summer resulted in increase in cost of sales and personnel expenses.

Replacement fund expenses were $2.26M or $425K less than budget.  This favorable variance was principally the result of the 2017 budget “classifying” the forecasted payment to the vendor for the acquisition of the golf carts as a replacement fund expense in 2017 vs. an inter-fund transfer to the operating fund.  The inter-fund transfer from the replacement fund to the operating fund is a reduction of replacement fund balance and not a replacement fund expense in 2017 as further described below.

Total operating fund revenues were $30K less than budget.  The net unfavorable variance was the result of:  an error in the compilation of the budget which had incorrectly forecasted other income of a prior year operating fund surplus of $260K; this unfavorable variance was substantially offset by newsletter and advertising revenues of $38K more than budget; and, other income was $190K more than budget.  Other income includes $94K due from Desert Resort Management, Inc. (DRM) and identified as a forecasted recovery of amounts expensed in 2015 and 2016 due to the financial discrepancy.  An additional $29K is due from DRM (for a total of $123K included in other receivables) and such has been reflected as a reduction of operating fund expenses incurred in 2017.

Salaries and related expenses were $301K less than budget; mostly due to vacant positions which was partially offset by temporary employee’s expense of $139K.

Landscape expenses were $163K more than budget; mostly due to increased monthly contract for tree trimming a portion of which was originally allocated to the golf course landscape maintenance budget.

Security expenses were $89K less than budget due to a corrected billing rate for flex officers and less transponder expense than anticipated.

Maintenance expenses were $27K more than budget; this partially due to temporary employee expenses of $48K which were offset by less expense in general repair and maintenance.

Utilities expenses were $44K less than budget; usage was less than anticipated.

Fitness expenses were $54K more than budget; increase in fitness contractor fees that were completely offset by additional fitness revenue; temporary employee expenses due to vacant positions.

Capital improvement funding and common area improvements were $246K and $186K less than budget, respectively.

General and Administrative expenses were $88K less than budget due, in part, to the following: the special election (proposed revisions to the CC&R’s) was delayed to 2018 resulting in savings of $23K; bad debt expense resulted  in a $29K favorable variance to budget; office supplies were $19K less than budget; postage was $21K less than budget; education and training was $7K less than budget; and, Emergency Preparedness Center was $16K less than budget.

2017 Balance Sheet as compared to 2016 Balance Sheet

Cash and cash equivalents were $3.1M or $1. 3M more than prior year.  A replacement fund investment in the amount of $1M matured at the end of 2017 which was invested in January 2018.

Certificates of Deposits and Investments were $10.3M or $900K less than prior year.   A replacement fund investment in the amount of $1M matured at the end of 2017 which was invested in January 2018.

Other receivables at December 31, 2017 include a receivable in the amount of $123K from DRM related to the financial discrepancy as further described above.

In 2017, the Association collected $206K from Western Golf Properties which had been recorded as a deposit in the balance sheet as of December 31, 2016.

In 2016, accrued expenses included $550K for the acquisition of the new golf cart fleet delivered in Q4 2016 with the cost thereof not payable until Q1 2017.

In 2017, accrued expenses included $381K for services furnished by a vendor to the Association which had not been invoiced or payment approved until an amendment to the contract and insurance for the vendor were modified by the vendor to meet requirements of the Association.

Assessments received in advance were $294K, an increase of $98K from the prior year.

Operating fund balance was $897K or $1.13M more than prior year because of the excess of revenues over expenses for the year of $472K as well as the $550K inter-fund transfer from the replacement fund for the payment of the vendor who furnished the new golf cart fleet in 2016.

Replacement fund balance was $11.2M or $429K less than prior year because of the excess of revenues over expenses for the year of $121K less the inter-fund transfer from the replacement fund to the operating fund in the amount of $550K as described above.