Chapter 2 MVF Financial Condition-Fact or Fiction

Chapter 2 MVF Financial Condition - Fact or Fiction

Fiction: The Gazette’s March 28th 2012 edition headlined Montgomery Village boast budget increases, investments; Foundation Administrators say income has never been higher.  “At the Montgomery Village Foundation’s annual membership meeting Dave Humpton, Executive Vice President of the Foundation, stated at the 2012 MVF “the organization is in its best financial condition in its more than 40-year history with more than 10 million in reserves and investments”. Humpton credits the work he and his financial department has done to cut personnel and other operating costs, and the surplus will be used for capital expenses, such as new pools and upgrades to recreation facilities.

 MVF 2012 Annual Report reported, “where the Village was five year ago finances are now in order, budgets are detailed, financial reporting transparent, administration streamlined and reserves has grown”.

MVF Foundation Board member Scott Dyer’s Patch.com blog pronounced during his recent successful re-election campaign MVF is in the “best financial condition of its 47 year history”.

In the MVF 2013 proposed budget cover letter Dave Humpton and Greg Snellings stated “The 2013 Budget proposes no assessment increase per the 5- Year Plan for the third year in a row. With the recent years accumulation of operating reserves resulting from numerous cost saving efforts, organizational changes and revenue surplus, this budget proposes to continue to utilize a portion of these operating reserves to fund programs and capital improvements to cover general operating cost increases in lieu of raising assessments”.

Facts:  Through the MVF Financial and Budget reporting system the Foundation has,

1. Manipulated cost allocations between and among operating fund types.
2. Capitalizes the original donated common property and improperly established false fixed asset and equity values.   
3. Treated Contribution to Reserves as a discretionary expense instead of an income component of the assessments, and
4. Arbitrarily transferring funds between and among operating, reserve and property assets accounts.
5. Charged a disproportion of direct expenses to the MVF fund to the benefit Designated User funds.

The net result of these practices has,

1. Understated of the continuing loses in the fee for services operations the Maintenance Activity and Community Management funds at the expense of the Reserve Fund.

2. Allocated of Montgomery Village Foundation Inc (MVF) and Designated User (DU) assessment revenue and operating and reserve expenditures to favors Designated User facilities and services over MVF’s.

The Foundations financial reporting continues to be opaque, misleading and depicts a false positive improved state of the Village’s financial affairs as well as the condition of its buildings, parks, lakes and recreation facilities.

Background Financial Reporting & Auditing As reported in The Nature of Montgomery Village blog of May 8th “Montgomery Village is a Planned Unit Development type of Common Interest Realty Association (CIRA) and is required to maintain its financial records, prepare and present it financial statements and require the fiscal year audit be prepared in accordance with the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Common Interest Realty Associations (CIRA).

Fund Accounting The CIRA audit guide states fund reporting is the most appropriate and informative method of accounting by presenting revenue and expenditure of various separate activity. For example, financial statements using non-fund reporting often do not disclose whether assessments have been used for purposes other than those for which they were designated. If non-fund reporting is used, a user of financial statements may be unable to determine whether assessments for future major repairs and replacements have been used in current operations.

Budgeting Governing documents of CIRAs require that assessments be based on budgets. The budgets are the monetary expression of their goals and objectives and emphasize the stewardship responsibility of their boards of directors. Budgets are used to allocate and control the use of resources and are pivotal in establishing levels of assessments, taxes, and fees to be imposed.

The boards of directors use the budgeting process to determine the required assessments from owners to fund current services and to provide for future major repairs and replacements and deferred maintenance needs. Unit owners use budgets to evaluate, in part, the performance of boards of directors. Other users, such as creditors, realtors, and potential buyers, may use budgets to compare CIRAs with other CIRAs and to monitor the ability of CIRAs to provide acceptable levels of service.

The fundamental principal of Funding Accounting is the financial accounting, reporting and auditing must be faithful to the approved annual operating and reserve assessment budget, so that,

1. Budgeted revenue and expenditures are charged to the appropriate general ledger account category and fund type.

2. Designated reserve funds and assessments are not used for operating expenditures.

3. Designated operating revenue and expenditures are not used for Fee for Service funds.

4. Deficits within any fund type are appropriately dealt with and not at the expenses of other fund types or the total fund balances.

Fund Accounting as applied to MVF means,

1. Once the annual budget is approved individual line item cannot be changed or rearranged within the financial records and/or reporting to actual reporting comparisons.

2. Contributions to the Reserve Fund from Assessments, Interest on Reserve investments, Capital Contribution Fees and Capital Grants must be deposited into Reserve Investment Accounts each fiscal year and recorded as Reserve Fund Income. Accumulative under funding for each assessment based fund are required be recorded on the Balance Sheet as a current asset Accounts Receivable from Operations to Reserves, and a current liability Accounts Payable to Reserves from Operations.

3.    Accumulative operating deficits in any assessment base fund must be included and restored in subsequent years budgeted assessment type.

Comments on Fund Accounting as applied to MVF

The Foundation’s practice of offsetting year end Operating Fund deficits against other Operating and/or Reserve Fund balances has no basis in Fund Accounting as it understated the continuing loses in the fee for services operations the Maintenance Activity and Community Management funds at the expense of the Reserve Fund.

The pattern of accumulating losses in the fee for services funds, CMF & MAF from 2003 indicated that such services were not competitive on price or service, and should have been discontinued at that time.

The accumulative deficits of the Maintenance Activity and Community Management funds from 2004 to 2012 were $4,426,917 and $1,087,198 respectively, totaling $5,348,115 at the expenses and detriment of the condition of its buildings, parks, lakes and recreation infrastructures. See the “MVF Balance Sheet 2004 to 2013” schedule included in the complete PDFS version of this blog post located at the beginning over “Upload Photos & Videos”.

The “MVF-DU & MAF-CMF Comparison” schedule compares revenue and expenses for fiscal years 2007 to 2013 for Reserves and Operations for Assessment based MVF, Inc and Designated User fund types, and Fee for Service Maintenance Facilities and Community Management fund types.

Reserves During this seven year period Reserve fund revenue from assessments totals $4,414,300, 44.4% from MVF and 55.6% Designated Users, while Reserve expenditures of $5,727,000 34.3% for MVF and 65.7% for Designated Users resulting in an accumulated deficit for MVF fund of $1,019,113 and a surplus of $104,830 for Designated Users fund.

Operations Operating Income of $35,626,000, 34.3% for MVF and 65.6% Designated Users with Operating expenditures of $33,791,000 70.3% MVF and 29.5% for Designated Users resulted in a deficit of $3,079,800 for MVF and $4,916,500 surplus for the Designated Users fund.

Fee of Services Operating revenue of $11,515,000 5l.1% Maintenance Activity fund and 48.9% for Community Management fund with expenditures of $13,530,000 resulting in a $2,366,300 deficit in MAF and a $351,400 CMF surplus.

Accrual Accounting Generally accepted accounting principles (U.S. GAAP) requires the use of the accrual basis of accounting. Financial statements presented on an accrual basis are allows users to compare actual to budgeted amounts. Financial statements presented on a cash basis, and the amounts differ materially from those in statements presented on an accrual basis.

Accrual Accounting recognizes economic events by matching revenue to expenses at the time in which transaction occurs rather than when payment is received. Best practices and principles in preparing monthly financial statements on an accrual bases are,

1. Written internal accounting procedures for end of account period records closing should be in place to ensure accurate, timely, consistence preparation of financial reports.

2. Based on historical occurrences prepare a 12-month schedule of income and expenses of the approved annual budget and entered into the financial record keeping system or program as appropriate at the beginning of each fiscal year.

3. The Financial Statements as indicated below should be completed 10 to 15 days after the end of the month closing and be available for distributed the Friday before monthly Board of Directors meeting.

Accrual Accounting as applied to MVF – “Matching the Revenue to Expenses MVF Style”.

Assessment Income 8,480 Resident Home Corporation owners are invoiced/billed quarterly on the first of January, April July and October in the amount of $1,120,812. Instead of adjusting Assessments-Homeowners (4100) the extra months to show on the Balance Sheet as Deferred Revenue Assessments-Current Liability, to product monthly Financial Statements on an accrual basis the MVF Treasurer’s Report can claim as it did in October 2012, “MVF’s undesignated operating reserves exceeds $1.8 Million”.

Payroll MVF has 26 bi-weekly pay periods each year, 10 months with 2 and two months with three. Pay days are one week after the end of a pay period so that Payroll salaries, taxes, benefit and vacation estimates for the seven to 10 days to the end of the month can be adjusted for the remainder of the month so the monthly payroll cost will reflect 28, 30 or 31 days of the current month. MVF’s Financial Reports are prepared on a case basis where the monthly budget is “annualized” where each budget line item category is equal to one-twelfth of the annual budget. Consequently, the March 2013 payroll “budget-to-actual comparisons” in the Treasurer’s Report had to be explained as such “Personnel cost budget variance is due to lower than expected temp wages but offset partially by greater than budgeted full-time wages (unbudgeted General Counsel position) and higher payroll taxes due to federal and state unemployment tax which are capped early in the year but are annualized in the budget”.

Utility bills have a 45 to 60 day span between the meter reading date and the required payment date. Utility cost for the month should be adjusted as personnel cost to accurately reflect monthly seasonal usage variance caused by weather conditions facility use and recreation activity.

MVF monthly financial statements have not been prepared in accordance with the Accounting Guide for Common Interest Realty Associations (CIRA)., prepared on a “Cash Basis” instead of “Accrual” accounting, lacks Operating and Reserve revenue and expenditure fund accounting presentation and by themselves are difficult to understand by owners, community volunteers, buyers, sellers, Realtors and lenders.

The MVF Accrual vs. Cash schedule shows the 2012 Budget Summary of Revenue and Expenses by month on an Accrual and a Cash basis to demonstrate why accrual presentation of financial reports is preferred.

Comments on A disproportion of direct expenses are being allocated and charged to the MVF fund that by all rights should be charged to the Designated User fund.

Architectural Standards Department (ASD) The 11 Condominium Associations establish and enforce their own covenants standards. The Apartment communities occasionally request approval for exterior renovation or capital project that requires ASD resources.  Condominium and Apartment communities MVF Architectural Standards requirements constitutes of less than one percent of the Architectural Standards work load and cost. The 2013 MVF fiscal budget for Cost Center 31 ASD is $563,439, $522,586 for personnel and $40,853 for operating cost. The Architectural Standards department employs eight full-time and one part-time employee. Cost Center 31 and hourly charges for covenant enforcement by Foundation’s new Legal Counsel should be charged to the Designated User fund. 

Delinquency Collection Expenses The 11 Condominium and Apartment communities pay their annual assessments fees monthly for all units. The entire collect effort by Cost Center 14, Collections, is recording 15 payments for 3,613 residential units each month. A late payment or collection dispute with a Condominium Association or Apartment owner is a rarity. A substantial portion of the personnel, operating, bad debt and legal collection cost rightly should be a direct expense of the Designated Users fund. In fiscal year 2012 it would include Personnel cost for a Collection Manager (grade 9) and Collection Administrator (grade 8) and Operating expenses including Legal Collection expense $80,000 (est.)(5521) and Bad Debt expense $98,708 (5527) and the hourly rate charges on collection matters of the Foundation’s in house Legal Counsel.

Full presentations of financial statements for CIRAs presented in conformity with U.S. GAAP should include a,

Balance Sheet Presentation of assets, liabilities, and fund balances specifically associated with the CIRA’s normal maintenance and service activities.

Statement of Revenues and Expenses should present information about all assessments, other revenues, and expenses compared to the approved budget.

Schedule of Replacement Fund activities and balances corresponding to the replacement reserve fund balances on the balance sheet.

Schedule of Investment activity and balances corresponding to the Reserve investment totals and balances in assets and fund balance portions of the balance sheet.

Presentation of financial statements as it applies to MVF.

The presentation of MVF’s monthly financial statements which are difficult to understand by owners, community volunteers, buyers, sellers, Realtors and lenders. To understand MVF financial statements readers are at the mercy of Management’s “Foundation’s financial statement narrative overview, highlights, MVF Stats and analysis of financial activities” which make unsubstantiated claims of financial health and adequacy as noted in the opening paragraphs of this post.

Instead of a “Statement of Revenue and Expenses” there is a “Statement of Activities and Changes in Net Worth”.

Instead of a Balance Sheet that includes an “End of period schedule of Operating and Reserve Fund Balances and Equity” presented is a “Statement of Financial Position” with a “Net Asset” equity line. The “Schedule of Replacement Fund” and “Schedule of Investment” do not exist or if some version of these reports do exist they have never been included as part of the MVF monthly financial statements.

MVF Summary of Operations 2011 to 2013 and MVF Year End Balance Sheets 2009 to 2012 schedules included in the complete PDFS version of this blog were prepared using the general ledger account detail from the Board of Directors approved annual fiscal year budgets and audits in accordance with the Accounting Guide for Common Interest Realty Associations (CIRA).

It shows that MVF has an Operating deficit as of December 31 2012 of ($236,000) and a deficit 2013 Operating budget of ($316,573).

This blog posting is the second one in a series on MVF Financial History, the first one being The Nature of Montgomery Village. In the coming weeks The Montgomery Village Observer will post Chapter 3 Capitalization of Assets, Chapter 4 Safety of Investment Funds, Chapter 5, Replacement Reserves, Chapter 6 Budgeting, and Chapter 7 The Annual Audit & Internal Controls.

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