June 28, 2018 GHI Work Session-Review of Replacement Reserves Report

On June 28, 2018, the GHI Board, Finance Committee, and the Addition Maintenance Taskforce met to review the results of the Replacement Reserve Analysis completed by Design Management Associates (DMA).  DMA President Doug Greene attended the meeting to make a presentation on the Replacement Reserve Analysis and was available to answer questions. As the meeting began, the GHI Board room was filled to capacity with GHI members filling the available seating for members, in addition to the Board, Finance Committee, Addition Maintenance Taskforce members, and GHI Management and staff.

The Board President Steve Skolnik presented an overview of the purpose of the work session. It has been five years since the last Replacement Reserve Analysis was updated. The purpose of the Replacement Reserves Analysis Report is to look at component assets, a group of assets for which repairs or replacements are paid for out of GHI’s Replacement Reserves.  During the process:

  • The GHI staff and the Board identify any components that need to be added to the replacement reserves or removed to the operations budget.
  • GHI worked with DMA to provide actual expenses related to components in the replacement reserve and informed them about any changes in maintenance operations that would affect the study.
  • Once the components to be studied are complete, DMA derives costs estimates for the replacement of each of the components over the next 30 years. Some items will be replaced sooner and others may last beyond the 30 year period.
  • DMA’s cost estimates are based on historic indices of construction costs using both national and regional data.
  • DMA also asked GHI for their actual costs, including administrative and labor costs, for replacing certain components.
  • In addition, GHI provides DMA with the rate of return on investments and GHI’s expectations concerning future investment returns.
  • DMA makes assumptions about what inflation is likely to be over the period of the analysis.
  • DMA  examines any unexpected component failure rates if identified by GHI management when determining lifespans of components. For example, a retaining  wall failed earlier than two similar ones in different locations. The fact that the retaining wall that failed was replaced in the same location resulted in that individual retaining wall having a shorter lifespan.
  • Mr. Greene was also asked about why some items weren’t being looked at over a longer period of time, such as sewer replacements which are projected to last for 50 years and were not included in this 30 year plan.
  • Mr. Greene responded that normally you would wait until the replacement was 30 years out and then you would add it to the replacement reserves.
  • Mr. Greene also stated that DMA’s reserve modeling software could project for a lifespan longer than 30 years, but with the caveat that the longer out you go in time, the more speculative the estimates become.

As is standard with any financial assessment at GHI, the results of the analysis are completed and reported by GHI building types which include:

  • Frame Homes;
  • Masonry Homes – This category includes brick homes and block homes;
  • Larger Homes -This category includes the larger brick homes constructed in the 1960’s. It also includes four standalone homes.

There is also a Shared Components category in the analysis which covers assets or components that are shared across all building types.

Additions under the GHI Addition Maintenance Plan are in a separate category for analysis.  As was explained during the meeting, DMA  conducts an Addition Maintenance Study looking at 40 representative units selected by GHI.  While different units have been used over the years, Mr. Ralph stated that it is his plan to ensure that the same 40 units are used each time going forward. An examination of each addition provides a detailed assessment of the condition of each addition which then informs the Addition Maintenance Analysis. Another difference from the rest of the reserve analysis is that the Addition Maintenance Plan also includes operating expenses.

As Mr. Greene started to provide highlights of shared components, questions were raised almost immediately. This is also when the power of the smodeling software used by DMA  became apparent. Mr. Greene was able to make changes on the fly so everyone could see the impact of these changes to the GHI Reserve Model.

Graphs also were quickly generated based on a number of data points that suggest when the reserves will accumulate and when there will be periods of spending. A constant threshold for the 30 year period of the analysis can also be entered. The idea being that GHI would use the threshold as a guide when using reserve funds in years when large components are not replaced.

The graph of the Reserve Model data showed accumulations of funds and expenditures by year, making it easy to identify times when there would be large component(s) that needed to be replaced. It also indicated the amount of annual escalation. An annual escalation is the percentage of increase in member fee contributions to the Reserves required to ensure there are adequate reserves when major components need to be replaced, for example, the next HIP.

The Audit Committee members noticed that for a large component item there would be a steep increase in member fees for one year. They also asked that members be notified when large increases occur. Members of the Board asked Mr. Greene if one time large increments could be avoided. Mr. Greene  showed how adding an additional small increase each year could avoid a steep increase in any one year.

For larger components, it appeared that delaying a project for a year could keep annual escalations lower while insuring that the money would be there when needed.  Board members decided that they wanted to eliminate these one-year steep increases wherever possible.

Some highlights about the specific components that were discussed:

  • The Board President thought that some of the replaced larger components could have a longer lifespan than reflected in the Report.
  • Mr. Greene stated that lifespans were based on data and information about current failure of these components to determine the lifespan.
  • The fact that new frame roofs will have a 50 year shingle warranty was discussed. Board members felt that the lifespan of the new roofs might be longer as a result of this warranty.
  • Mr. Greene stated that the warranty was limited and only covered defects in the shingle itself. A limited warranty means that the amount GHI would receive even in the event of a defect would continue to drop over time. The warranty would have no impact on the lifespan of the roof which is affected by a number of other factors.
  • GHI has decided that the electrical components to be replaced in our homes will be limited to outlets and switches.
  • No electric breaker panels will be replaced.
  • According to the Board President, no GFI outlets will be placed in kitchens as this will trigger GHI being required to bring our homes up to current code.
  • There was some discussion of doors and whether the lifespan of the fiberglass doors will last as long as wood doors.
  • Mr. Greene stated that this should start to be apparent over time and adjustments can be made going forward.
  • The Board President thought that the remediated crawlspaces should last longer than 30 years.
  • Mr. Greene suggested that also will become apparent over time. If GHI has concerns, the lifespan and costs can be adjusted as needed.
  • The upcoming replacement of the pipes in the masonry homes also was discussed. The cost for the masonry pipes’ replacement currently includes actively replacing the pipes rather than lining the existing pipes. (An error in the Report was also discovered. The projection of $21,000 per unit for the masonry pipes was not a complete estimate as it only covered replacement of the supply pipe.)
  • The Board President responded that the Board and staff will be doing all they can to identify another way of taking care of the pipes to lower the cost of the project while taking into consideration environmental and health concerns.
  • In the early 2000’s, two units in GHI, 62 A and B Crescent Road,  needed all their pipes replaced. Instead of replacing the pipes, the decision was made to line them with epoxy.  The Board President asked staff how this approach has held up.
  • Mr. Ralph responded that so far it has worked out well.

As the work session was ending, Mo Hamilton asked when the membership would have the opportunity to see the numbers again. The Board President stated that it would be at a future GHI Board meeting.

 

 

 

 

 

 

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