OCEAN PINES – A discussion on replacement costs and funding thresholds highlighted a meeting last week to discuss an updated reserve study.
Last week, members of the Ocean Pines Budget and Finance Committee held a work session with Design Management Associates Inc. (DMA) to review a reserve study updated earlier this year.
“At the end of this process we’ll have a valuable financial tool in order for us to manage as well as do the budget process,” General Manager John Viola said. “One of the key parts at the end is to see where we stand with our replacement reserves – bulkheads, etc. – so that we can see, when we do the budget, whether or not we need money for that.”
In 2015, the Ocean Pines Association (OPA) hired DMA to conduct a reserve study, which recommended the necessary level of replacement reserves the association needed based on its assets – buildings, equipment and fixtures. While the study was last reviewed in 2018, DMA staff returned to Ocean Pines earlier this year to begin updating the contents of the study. And in September, OPA officials received a final draft.
“From the last time, we’ve done construction on several buildings – renovations, different equipment was purchased – so we felt like it was a good time, about four or five years out from the last one, for us to update this and fine tune it,” Viola said. “We believe we’ve done that.”
Doug Greene, reserve specialist and partner with DMA, told committee members last week the study was broken down into three accounts: bulkhead reserves, roads reserves and general reserves – with minimum thresholds set for each area.
“The purpose of having a threshold is to develop a funding plan,” he said
Greene noted the updated study included fewer components – capital items at each of the association’s amenities – and recommended an annual increase of 3.8% in reserve contributions.
“The reserve balance was a little higher in 2018 than it is at the beginning of this year,” he said. “All studies were 30-year cash flow studies, looking out 30 years to see what the expenditures are like in that time frame and developing a funding plan to fund those over a 30-year period.”
Greene said replacing each of the association’s components would cost $20 million. He noted, however, that OPA currently held $3.9 million in its reserve accounts.
“You have just under a $4 million reserve account, so the deficit is $17 million,” he said. “That sounds pretty extreme, but when you do a cash flow study it doesn’t mean you have to come up with all kinds of money … We don’t ever recommend that you be 100% funded. You’d actually be putting too much money in that account, letting it sit there. This makes more efficient use of your money.”
Finance Director Steve Phillips said OPA anticipated a projected reserve balance of nearly $4.7 million in the next six years, based on the 3.8% contribution rate. That number, he said, put the association close to its 22-28% funding threshold.
“If you take that as a percentage of the fully funded reserve amount, you can see the percentage comes out to 21% …,” he said, “which is slightly below the 22-28% target that was adopted several years ago.”
The committee last week spent much of the day meeting with department heads in its review of the reserve study. When asked if the study included funding for the replacement of the golf club irrigation system, Viola said it did.
“That’s still up in the air, but right now we are maintaining it and not necessarily replacing it until we find out what happens with that whole situation with the effluent,” he said. “If Ocean Pines decides to go with this wastewater treatment and putting in the irrigation system, this would come off our books … This would come out and obviously that will be a favorable effect, to the tune of $600,000 per year.”
Viola added that numbers presented to committee members last week were just estimates – based on proposed inflation rates – of where the association was headed in the coming years.
“These numbers are a guide, best-guess estimates,” he said. “We are kind of in the ballpark. Obviously, the irrigation has an effect on this study and inflation has an effect.”
