DEVELOPER SUBSIDY??????

Miscalculations, misinterpretations, and even mistakes
have impacted Developer subsidies and Reserve funds over the past several years. Now we have an interpretation that no subsidy payment will be made by the Developer despite the substantial operating loss incurred by the Community Association during 2005. This interpretation also may diminish the reimbursement of funds for Reserve accounts if allowed to stand.

To paraphrase former Senator Everett Dirksen--
A million here and a million there, and soon you're talking about real money.

Unfortunately, the real money in the Operating Account and the Reserve accounts is what is being negatively impacted. And guess how it will be restored?? You may want to check your assessment increases!

Why the Developer should benefit from not paying the 2005 subsidy merely because they reimbursed the CA for past errors and underpayments defies all logic.

The open letter to the Board below outlines this issue and calls for Board action to correct the current subsidy issue and to make changes to prevent reoccurrences related to Reserve fund reimbursements.

At the September 28th Board meeting [9 am] the Board of Directors will discuss and vote on the “calculation” of the subsidy for 2005.
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Open Letter to SCTX Board of Directors

Chairman Newman and SCTX Board members.

The Developer reportedly will make NO subsidy payment for 2005 despite a CA operating loss approaching $400,000. A reimbursement of funds by the developer for errors/underpayment of subsidy payments during the years 1995-2004 is reported to be the reason for no developer subsidy payment for 2005 for the operating losses incurred.
The CC&R’s contain no provision for extra-ordinary, non-operating receipts [including reimbursement for prior year underpayments]. Thus, ALL funds received are utilized to offset developer subsidy payments, according to the interpretation apparently being followed.
Does this make any sense?
Why should the Developer benefit from not paying the 2005 subsidy merely because they reimbursed the CA for past errors and underpayments? An objective review of using funds arising from underpayment of subsidies in prior years to eliminate subsidy payments in the current year would be considered double counting and completely illogical. If interpretations of rules are illogical or contrary to intent they are generally set aside. It might be noted, a similar interpretation that caused Charter Club year-end balances [amounting to $195,333 in 1993-94] to be used to reduce Developer subsidy payments was dropped by Board action earlier this year.

Given the subsidy situation, it useful to review the very narrow application of the CC&R language in context with the accounting errors discovered in early 2005 that gave rise to the reimbursement for the Developer’s subsidy underpayments. According to various reports [obtained well after the process was finalized], the errors/miscalculations were discovered in early 2005, an independent Accounting firm review was completed in August 11, 2005 and the Board approved the reimbursement by “Action without a formal meeting” in late December 2005

The independent Accounting Firm’s report found, using agreed upon methodology, the Developer had underpaid the CA $2,194,947 during the period 1995 thru 2004. Under normal procedures and absent errors, funds approximating the $2.2 million would have been credited to the CA’s Operating Account during the years covered. Little is known about issues giving rise to the negotiations that followed because the problem identification and resolution took place behind close doors and without general resident participation, but that is another issue.
See Feb 11 issue http://scinform.blogspot.com/


Only $809,262 ended up in the CA Operating Account. Of that, $300,000 was reserved for Federal income taxes. The CA Operating Account would be further reduced by elimination of the subsidy payment to cover the approximately $400,000 operating loss for 2005. Not a very positive outcome for Residents! It is difficult to fathom that such an outcome was intended by those involved in the decision making process.

More problems ahead?
Importantly, accounting treatment proposed for the 2005 subsidy calculation could continue to adversely impact CA finances if followed. In an earlier accounting problem/misapplication of funds regarding Reserve Funds, a resolution was reached with the Developer. The Developer committed in writing to restore Reserve Fund balances up to 70% of “Fully Funded Balances”. While the precise amount the Developer owes the CA has not yet been determined, prior estimates placed the amount in the $2 million range. The Developer payment is anticipated following a new Reserve Fund Study in 2007. It is important that Reserve Fund payment not be diminished by an accounting interpretation that is contrary to the intent of the commitment.

Board action requested
Because this issue seems to be as much about Business practices and Trust as it is about accounting interpretations, it is requested that the Board follow the “Business intent” regarding prior year[s] underpayment and the 2005 subsidy payment as well as modifying the CC&R’s to alleviate future problems. As noted, current accounting interpretation most likely runs contrary to the intent of those involved and should be set aside. Other accounting conventions can be utilized. The Board of Directors, even though consisting of a majority of Pulte directors, has a fiduciary duty to act in the best interest of the residents. Toward that end, it is requested that the Board

1] Take action to assure that the Developer pays a 2005 subsidy amount, exante the funds received for prior year[s] subsidy underpayment. If necessary, Audited Accounting Statements for year[s] impacted by the underpayment should be restated.

2] Take action to modify the CC&R’s so that Federal income Taxes are minimized and Developer Subsidy payments are not adversely impacted by future extra-ordinary non-operating payments, specifically for reimbursement of Reserve Funds and the interest earned on Reserve Fund Accounts.

Thank you for your consideration
Roby Sloan
116 Saddle
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SC Information Goal

Our goal is to foster transparent discussions and actions regarding the issues confronting our Community Association. We welcome an open dialogue regarding the actions proposed and why they are proposed. And, we would very much appreciate additional input from the many residents that have offered ideas, concepts and details about how to address issues confronting the CA. We welcome comment on the problems outlined as well as the solutions—both positive and negative [hopefully constructive].

SC Information Mission

Our mission is to make Sun City Texas a community with a solid financial base with an active adult environment. If you support our mission please forward this email to your neighbors and friends. If your neighbors or friends do not have access to the internet, make them a hard copy. Only with your support will we be successful with proposed actions. If you wish to have your name added or deleted from the email data base, email jackstro@verizon.net

Future newsletters will focus on the financial aspects of Operations, future Plans and how different approaches may be utilized to address poor financial results. For additional information and past [Archived] newsletters see:
http://scinform.blogspot.com/ Sun City Residents Make Sun City Great