Our community is under-reserved. Everybody knows this including our leadership, who has developed a grand 5-year plan that brings our level of reserves up to acceptable levels.
But the plan is not being carried out. Our Board, instead of adding to our Discretionary Reserves, is withdrawing and reducing the balance in the Reserve Accounts.
The amount invested in CD’s as of September 30, 2024 is only $1,250,000, and the sweep account, as of the same date, is only $224,037. In total, our Discretionary Reserves have dropped below $1.5 million.
As of May 31, 2024, our Discretionary Reserves account balance, including accrued interest income, was $1,795,404.95. Again, now it is below $1.5 million.
How could this happen given the concern and importance the community has placed on increasing our level of Discretionary Reserves? How could our reserves drop from approximately $1.8 million down to less than $1.5 million in four months?
We can contribute the drop in balances to “What didn’t happen during 2024.” And “What did happen during September of 2024.”
What Didn’t Happen in 2024
The Board allocated $450,000 to Discretionary Reserves for fiscal year 2023. This contribution should have occurred at the latest, during the first quarter of 2024 when the HOA’s books are closed for the year and then audited. This did not occur.
Cash started to build up in the Reserve Sweep Account from CD’s that had been redeemed. Instead of investing the funds right away, cash accumulated, and by March 1, 2024 had reached $696,228.87. An additional $250,000 par value of CD’s, matured on March 4th, bringing the balance to almost $1 million in cash.
At that time, management purchased $750,000 of CD’s, bringing the cash down to approximately $200,000. This was described to residents as the 2023 Contribution. But it was not a contribution. It was simply re-investing the proceeds from CD’s that had matured. There were no deposits made to the Reserve Account. There was no new money added or deposited to our Reserve Account.
Reserve Brokerage Account:
December 31, 2023 Account Value $1,767,133.24
March 31, 2024 Account Value $1,776,196.99
Difference (interest) $9,063.75
From the end of 2023 to March 31, 2024, our Discretionary Reserve account at the Reserve Brokerage firm only increased in value to $9,063.75. Therefore, we can conclude, a $450,000 contribution was not made for fiscal year 2023.
What Did Happen During September 2024
During September 2024, the Board liquidated Discretionary Reserves and withdrew funds, transferring the cash to the HOA Operating Account. Our reserves were reduced by $341,057.20.
To “free up” the funds to transfer, the Board made early withdrawals from time deposits and paid $15,156.38 in penalties. The penalties included $5,742.00 from the early redemption of a $100,000 par value CD, and $9,414.38 from the early redemption of Brokered Deposits.
The Reserve Sweep Account still holds $224,036.84 of cash according to the HOA’s September Balance Sheet. Why would the Treasurer pay a (5,742/100,000) = 5.74% penalty for early withdrawal of a CD when there is cash available? This will be answered shortly.
Our Treasurer stated that the transactions that resulted in $15,156.38 in penalties were performed at the behest of our Operating Bank (OB). According to our Treasurer, OB wants us to buy CD’s through them. Furthermore, our Treasurer assured us our community would have to take our banking business elsewhere if we did not do as instructed. Additionally, residents were informed that a 1.2% return in a Reserve Account CD was traded for a 4.2% return from an OB CD.
Is this the truth? No, I believe not.
The CD, prematurely redeemed, had a maturity of July 2026. In September 2024, there were 21 months left until redemption. The issuer was a Bank, and the CD was known as a “Step Up” CD. The coupon increases over time based on a predefined formula. The coupon had increased to 1.2% which is what our Treasurer was referring to. But the price was 94.25, which promised an additional 5.742% return in price appreciation.
There were two coupon payments due till maturity plus 5.742% price appreciation. We can easily calculate the “Yield-To-Maturity” promised by the CD by taking the “Nth root”, where N is the number of months till maturity:
Total Return = .05742 + .012 +.012 = .08142 ‘ price appreciation + two coupons
Annual Yield-To-Maturity (YTM) = [ (1 + .08142)^(1/(21/12)) – 1 ] = .04574 = 4.574%
In summary, our Treasurer sold at a $5,742 loss, a CD that was providing a 4.574% YTM, instead, investing in a security that was offering a 4.2% return. The community lost on this trade.
What motivated our Treasurer do this? The Board must have needed cash, $341,057 worth. But why did they redeem a CD at a loss instead of just taking the cash from the sweep? I believe the Board needed $225,000 of cash to be in the Reserve Account and available for withdrawal.
It is my belief, and this is speculation, that the Board will make their promised $225,000 contribution to Discretionary Reserves for fiscal year 2024. They will do so with great fanfare.
But they do not have the cash to do so. Instead, they will repeat what they did with the 2023 contribution, as described previously, they will simply move cash from the Reserve Sweep account into a CD and call it the 2024 contribution.
No deposit will be made. It is just a shell game. But to our Board, it is becoming apparent, that perception is much more important than reality. That is my opinion.
Be safe, keep your head down, and elbows in, and enjoy the holidays.
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