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Penny Wise and Pound Foolish

Penny Wise and Pound Foolish

How the Quest to Reduce Assessments can Harm Rather than Help

The California Civil Code Section 1366 requires Boards to "...levy regular and special assessments sufficient to perform its obligations...under the governing documents and the law."  Meeting its obligations means proper maintenance and governance so as to protect the property values of the community.  At the same time, Boards are under constant pressure from homeowners to keep the assessments (dues) down.

 

Good Boards understand that the legal duty to meet the association's obligation has primary importance, and then work to make sure the goods and services the association obtains provide the best value for the dollar spent.  Basically, they govern the association the same as a good business would be run.  They understand that they have a duty to spend money but to spend it wisely.  They understand that they have an obligation to ensure:

- that all vendors (including management) have the proper licenses, insurance, and knowledge to perform the services for which they are retained.

- that all contracts are reviewed by an attorney to preclude disputes, ensure the association is indemnified from wrongdoing or injury, and the terms and conditions are reasonable.

-  that insurance is adequate and that the policies are reviewed by legal counsel to make sure there are no exclusions and coverage is complete.

- that major construction projects are competitively bid to a professional specification and that work is overseen by a consultant qualified to give advice on change orders, review the work itself, and monitor lien releases.

- that minor work is NOT competitively bid when the cost of doing so would negate the savings gained.

- that rules are enforced and that delinquent homeowners are pursued - in order to preserve property values, and to avoid increasing assessments simply to offset delinquencies.

- that the reserve funding is adequate to prevent special assessments in the future as the common area components wear out.

 

These Boards understand that governing like they are running a business leads to obtaining quality goods and services at the best value, meeting the association's obligations, and minimizing overall costs.

 

Some Boards, however, seem to get it confused.  They mistakenly believe the way you reduce the assessments is by simply going out to bid for every bit of goods and services - and then, of course, selecting the lowest bidder.  The good news is that they can immediately show a savings and a reduction in assessments - becoming instant heroes to the uninformed homeowners.  What really happens, however, to associations when Boards operate with this mindset, no matter how well intended?

 

Low cost vendors (including management) are the low cost vendors only because they keep their own costs down.  Typically that includes not carrying adequate insurance, not indemnifying their clients, not carrying proper licenses, not employing qualified personnel, or making up the original bid through change orders later.  So, the job goods and services often end up costing more because of the change orders - or the association pays more when the work is of inferior quality, or there is resulting litigation, or an accident occurs and there is no indemnification or insurance.  Now, if the Board wants to look for the low cost vendor that meets requirements for insurance, training, some contractual requirements and specifications, and/or other requirements the Board is requiring everyone to bid against and which they understand will ultimately protect the association - great, that is a good plan.  However, if it is just going out to bid with no specification concerning insurance requirements, licensing and/or training requirements and similar matters, the short-term win is ultimately the costly solution.

 

Likewise, not having legal counsel review all contracts leads to evergreen clauses, lack of indemnification, payment disputes, termination battles and often litigation.  That few dollars in legal fees saved "to keep the dues down" can ultimately lead to long-term legal costs to repair the damage later.

 

At the risk of being redundant, not having legal review of insurance policies is risky, risky, risky.  I just heard at a seminar of a Board of Directors who went for the low cost Directors and Officers (D&O) insurance, and then later that year they were sued by a homeowner.  Guess what - almost all reasonable coverage had been exempted and the Board members ended up paying the litigation out of their own pockets.  However, the entire community can be harmed when the fire, fidelity, and liability policies are inadequate.  Simply asking the insurer to lower the cost will generally result in a lowering of the coverage itself.  Worse, just asking for the low-cost insurance policy across multiple insurers can result in a lapse in coverage from previous acts.  Again, not paying for the proper advice may save a few bucks up front - but the risk becomes very high.

 

Entering into major construction without a construction manager is simply foolhardy.  Even if the Board has the expertise to oversee the construction, such oversight is not a Board duty and most likely is not covered by the D&O insurance.  This is a complex issue, so you may want to view a previous article on that issue, but spending what can often be hundreds of thousands of dollars, and sometimes millions, of the homeowners' money without expert advice is simply foolish - yet we see Boards do it far too often.

 

Basically, simply deciding to keep the assessments down by constantly looking for the lowest bidder is bound to leave the association in a situation where the work is poor, the expertise relied upon is weak, the insurance coverage is lacking, and the risk is great.  Looking for the most competitive vendor that meets a well-thought-out set of qualifications, and spending money on expertise when common sense says it is called for, is what ultimately leads to the best value and the lowest cost over the long haul.  Don't be penny wise and pound foolish - do work on keeping your assessments low by ensuring you are getting the best value for your dollar.

 

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