CA's Approved 2024 Budget

Columbia Association’s Board of Directors approved CA’s budget for fiscal year 2024 (which runs May 2023 – April 2024) at the February 23rd Board of Director’s meeting. This article provides a summary of the contents of the budget. In summary the budget should deliver the same level of service Columbia residents are accustomed to next year but it does not demonstrate any forethought by the board of directors to improve CA’s services or position the community for success in the long run.

This article does not describe the process the Board used to approve this budget in detail but, generally speaking, the process was chaotic, undisciplined, and often contentious. In September 2022, the CA Board directed the staff to prepare the FY2024 budget with no major changes in programs and services. Subsequently, most of the board’s conversations in public meetings focused on minor portions of the budget - grants for local non-profits and extremely small capital projects – but did not result in any substantive conversations about large portions or fundamental aspects of the budget. The board’s focus on relatively minor (in terms of dollar size) issues indicates that the staff intuitively understands the board’s intent and requires minimal guidance, the board does not understand the budget well enough to provide more comprehensive input, the board discussed significant portions of the budget outside public meetings, and/or all three of these possibilities.

Major Budget Components

Like any budget, CA’s budget has both revenue and expenses. The primary sources of revenue are the annual charge and membership fees (CA also generates minor revenue from other sources). CA’s expenses can be divided into loan repayments, the capital budget, the operational budget (which includes village funding), an operational cash reserve, and grants to other organizations.

The annual budget is almost balanced between revenue ($77M) and expenses ($79M) – the imbalance can be attributed to excess cash from previous years, the availability of the line of credit (if needed), and potential variances in capital costs. If needed, CA possesses a line of credit it can use for short term borrowing. CA’s cashflow is not dispersed evenly throughout the year with almost two thirds of CA’s annual revenue arriving in the late summer when the Annual Charge is collected and roughly the remainder collected throughout the year as membership fees.

The changes and uncertainties in the national and global economy directly affect CA’s budget. Supply chain difficulties, inflation, and tight labor markets make CA’s operations more expensive than in previous years; memberships declined drastically during the pandemic, but are recovering and nearing previous levels; and the changes in the housing market increase the amount CA collects from the annual charge. The county and state’s minimum wage laws also increase labor costs for CA.

By way of comparison, Annapolis – a city half the size of Columbia – has a budget four times larger than CA. This is because CA, despite frequent misconceptions, is not a government and is not responsible for providing many of the services that governments provide (law enforcement, roads, sanitation, water, schools, etc.).

Annual Charge

CA holds a lien against most properties in Columbia which allows CA to assess an “Annual Charge” (AKA HOA fee) against those properties. There are two aspects of the Annual Charge: the “rate” and the “cap.”

The rate is the percentage of a property value that the owner (whether residential or commercial) must pay to CA each year. The rate is currently set at .0068 of half of a property’s value (or, more simply, 0.34% of the assessed value of the property) and will remain the same for FY24. For example, a property worth $500,000 is assessed at $1,700 annually. CA uses the property value assessments provided by the county.

The cap is a limit on the amount that a property owner’s annual charge can go up each year. Currently they cap is set at 3.5%. This means that, even if a property’s value increases by 10% in year, the Annual Assessment the owner pays to CA can only go up 3.5%. Because of this cap, it can take several years for the Annual Assessment to catch up to the actual value of a property. Importantly, the cap only applies if the property is retained by the same owner. If the property is sold, the cap is not applied and the new property owner pays the full amount determined by the rate.

Importantly, commercial properties also pay the Annual Charge and can have a significantly greater assessed value (and generate more revenue for CA) compared to residential properties located on land of a similar size. The development of commercial real-estate in Downtown Columbia has and will continue to generate increased revenue for CA without generating equivalent expenses. In FY24, commercial properties are projected to generate almost $16M in revenue for CA – about half of what is generated by residential properties even though commercial properties have much smaller geographic footprint.

Because of economic conditions, CA staff recommended and the CA Board agreed to keep the Rate and Cap the same as in the FY-2023 budget. The board accepted the staff’s recommendation and cap were not a major point of discussion for the board this year.

Membership Fees

CA also generates over a third of its revenue from membership fees for its gyms, pools, golf courses, and other amenities. Generally, CA tries to set its membership prices for non-annual charge payers at comparable market rates while providing a modest discount on those prices to annual charge payers. Lower income residents living and CA-assessed property have access to additional discounts on membership fees.

Several years ago, the CA Board adopted a policy on setting membership rates/fees. CA staff follows this policy. The CA Board did not discuss changes to this policy.

Long term Debt Repayment

CA is currently paying off two long term loans and a smaller amount of long-term leases.

The first of these two loans was established in 2014 to refinance debt taken on to fund capital projects. Whether CA should take loans to fund capital projects has been a point of discussion in the past but was not discussed this year. The second loan was established in 2020 to help CA navigate the financial shock of the pandemic. The current balance of those two loans and the leases is $27.5M and will have principal payments of $5M in FY24. The board did not discuss taking out new loans nor the structure of the existing loans during this year’s budget discussions. Because this was a continuation budget and revenue is sufficient, there was no need to take out an addition loan in FY-2024.

Separately, CA has a line of credit up to $20M. The line of credit will expire this summer. According to individuals with first-hand knowledge, a new line-of-credit is being negotiated; however, the details have not been discussed publicly.

Emergency Cash Reserve

To mitigate the financial risk of future unforeseen events (such as the financial shock caused by the pandemic), CA is now in the process of establishing an emergency cash reserve. There is currently $5M in the reserve. The FY24 budget will pay $3M into the cash reserve. Ultimately, based upon analysis of needs, the goal is to establish a reserve of $17M.

The emergency cash reserve was not a major point of discussion for the board this year; however, in previous years, the value of the cash reserve was debated with critics arguing that asking current residents to pay a substantial amount of money to mitigate risks to future generations is not appropriate. On the other hand, proponents of the Cash Reserve believed the pandemic demonstrated the need for Cash Reserves (similar to the rainy day funds at the County and State level).

Capital Projects

The Capital Projects Budget for FY24 will be $11M.

The Capital Projects Budget is the amount of money CA will spend on capital projects – new construction and repairs to existing facilities. It is broken into three categories - creatively named categories (or “Cat”) one, two, and three – for different types of projects. Cat 1 and Cat 2 projects are larger projects that are each individually itemized in the budget (see call out). Cat 1 projects are generally new things while Cat 2 are major reinvestments in existing assets. Cat 3 projects are not itemized in the budget and are not approved individually by the board of directors. These are smaller, repair/replacement-oriented projects that the staff identifies throughout the year (with community input), prioritizes, and executes based on available funds in the Cat three budget.

The methodology used to establish the capital budget is often misunderstood. Specifically, the capital budget is not established using a “bottom up” methodology of identifying all the desired capital projects, totaling their individual cost, and then prioritizing within that amount as the budget allows. This type of approach is infeasible for two reasons: first, the community will always desire more capital projects than it can afford; second, there is no theoretical limit to “what the budget in a given year allows” because the board of directors always has an option take out an additional long-term loan. Instead, the capital budget is established by estimating an amount of money that CA can responsibly afford to spend on capital projects and then taking a “top down” approach of identifying the highest priority projects until that amount is exhausted.

Even though Individual Cat 3 capital projects are not itemized in the budget and do not need to be approved by the board of directors, they were one of the biggest points of conversation during this year’s budget deliberations. Multiple board members wanted to ensure specific projects affecting their respective village’s Community Center. Importantly, they did not seek to understand the relative need for - and importance of - those specific projects compared to the other possible Cat 3 projects nor would doing so be practical for the board given the number - and often reactive - nature of Cat 3 projects.

Importantly, CA is devoting over 12% of its total FY24 budget to maintenance/replacement/upgrades in Cat 2 and 3 expenses and is still not able to conduct all the maintenance that is needed. The longer maintenance is deferred, the more expensive it becomes to complete. Some of CA’s assets (e.g. Historic Oakland) are older than Columbia itself and will only get more expensive to maintain over time. In most industries, 12% would be considered a high percentage of revenue to spend on unplanned maintenance and, because of deferred maintenance, there will be growing pressure to raise this amount as time goes on. The CA board has not had the difficult discussions (raising more revenue, divesting assets, replacing aging assets, etc.) that would be required to lower this percentage and enable CA to devote more income to providing services to residents.

Operational Budget

The Operating Budget for FY24 is approximately $60M. The operating budget covers the labor, materials, and routine maintenance needed to deliver all of CA’s services and amenities, support the board of directors, communications & marketing, and administrative functions.

• “Community Operations” is the department that handles CA’s infrastructure: open space, facilities, capital projects, and sustainment activities. Its budget for FY24 is $17M.

• “Community Programs and Services” is the department that handles CA’s interactive services: pools, gyms, art center, archives, sports, and youth and teen center. Its budget for FY24 is $32M. Importantly, this department also generates revenue for CA through membership fees. With the exception of administrative overhead, membership fees cover the cost of the various sports and fitness programs. On the other hand, the Art Center, Youth and Teen Center, School-Age Services, and Outdoor Pools require subsidies from the Annual Charge.

• “Administrative Services” covers multiple functions including communications and marketing, human resources, acquisitions, IT, legal services, and the office of the president. Its budget for FY24 is $4M.

• “Board of Directors” covers the costs of supporting the board itself. Its budget for FY24 is $1.4M. Notably, the projected cost for legal services in the next fiscal year was substantially increased compared to previous budgets because of the board’s activity in FY23.

• The ten villages receive substantial funding from CA. For FY24 the budget is $5.4M. Importantly, the $5.4M is not distributed to villages equally nor based on the population of the villages. Instead, the plurality of the money is allocated based on the presence of village facilities. Unfortunately, village facilities were not constructed with any sense of equity in mind and are arbitrarily dispersed throughout the community. As a result, two of the largest villages (Hickory Ridge and Kings Contrivance) have amongst the smallest operating budgets of all villages while some of the smallest villages (Wilde Lake and Town Center) have much larger budgets than other villages. It is also worth keeping in mind that the capital projects budget also spends a substantial amount of money on village-operated facilities. This policy for allocation of resources among villages was approved by the CA Board in the past and CA staff is simply following this policy for the F7 2024 budget.

Unlike the Capital Projects Budget, the Operating Budget is developed largely with a bottom-up methodology by calculating and totaling the operating costs needed to deliver the services directed by the board’s requirements. Some of portions of the Operating Budget are more discretionary than other portions such as efforts to plant native plants as stream buffers in open space.

Despite being a preponderance of CA’s total costs, the operating budget was not a major point of discussion for the board of directors.

Grants

The Board approved a $200,000 grant to Inner Arbor Trust.

Despite being a tiny portion of the budget, this grants was possibly the largest focus of the board’s discussion in the entire budget. The $200,000 given to IAT will not be spent on other CA efforts. Much of the discussion focused on IAT’s failure to complete its own financial audit’s in a timely manner, whether it was prudent to reduce CA’s abatement reserve to pay for the grant (which places CA’s budget at risk if annual charge payers request abatements at predicted amounts), and whether board members would recuse themselves from deliberations on the grants because of their conflicts of interest (board members refused to acknowledge their obvious conflict of interests).

Commentary

This budget will fund the variety of amenities and services that make Columbia such a nice place to live. At least for next year. By funding the emergency cash reserve, this budget also helps mitigate the risk of the community having to take another costly loan in the event of another financial shock.

On the other hand, this budget does not address endemic problems the community has. Specifically, this budget does nothing to 1 - develop future leaders and improve diversity in leadership positions in the community and 2- this budget does nothing to critically evaluate the assets owned by CA. Both of these are objectives the board identified in their strategic plan; although, to the community’s detriment, adherence to the strategic plan was scarcely mentioned (if at all) during budget discussions this past year.

• Future Leaders and Diversity: CA has no systematic plan to increase the number of candidates for both the CA Board and Village Board who are equipped with the knowledge and understanding required to effectively govern these organizations. Additionally, engagement in Columbia’s governance – whether that is the CA board, village boards, advisory committees, and residents participating in residents speak out (including those who have been most vocally critical of the board recently) – is not representative of Columbia’s diversity. The CA Board could dedicate portions of the budget towards building a pipeline for potential future community leaders with a goal of ensuring that pipeline is representative of Columbia’s diversity. The board has chosen not to do so.

• Asset Evaluation: CA owns a large number of amenities: gyms, tot-lots, bridges, pools, art center, etc. Each of these assets is beloved by at least some people in Columbia; however, each and every amenity does not deliver an equal amount of value on the dollar to the community. Additionally, each amenity has a total cost of ownership (design, procurement, operations, maintenance, disposal) that varies widely. The CA board does not have any systematic way to evaluate, whether the amenities and services they direct the staff to provide, are delivering an adequate return on investment and are sustainable for years to come. Relevantly, CA’s Chief Financial Officer recently emphasized that CA owns an “unsustainable inventory of assets” meaning CA owns more amenities than it can afford to properly maintain. By insisting that CA provide these amenities in the short term, the board is simply kicking the can on hard decisions (reduction of services or increase in rates, cap, and membership fees) down the road for future Columbia residents to address. And the further that problem gets kicked down the road, the harder and more expensive it will be to solve.

Columbia is a great place to live and this budget will help ensure it remains a great place in FY24. But this budget also demonstrates that the CA board of director’s dysfunction is not limited to publicly visible spats with its former president but instead inhibit the community from addressing systemic issues impacting CA and the community.

Notes: The draft budget the CA staff first provided to the board in October and has been available sense then can be seen here. Except for the grant money approved in February, the board did not make substantial changes to this budget.

About the author: Michael Golibersuch is a Columbia resident and believes increased awareness of CA Board activities can benefit the community. He appreciates the time all CA board members spend volunteering on behalf of a community they love. It brings him no pleasure to publicly highlight anyone’s shortcomings; however, he believes his neighbors deserve to know whether their representatives are effectively serving them. He does not believe that being a poor board member reflects poorly on an individual’s character and he encourages everyone to be kind to all their neighbors. His participation in this effort does not indicate he agrees with all opinions expressed in The Merriweather Post.