State Parkway’s Board of Directors Look to Reinvent the Wheel in 2017!

It doesn’t look like this year – State Parkway’s 25th year – will be a watershed year. At tonight’s board meeting, I struggled to make sense of the board’s grandiose plan to implement assessment reform later this year. Specifically, the board wants to pass most or all of the net garage operations expenses to deeded parking space owners. In theory, it’s an excellent idea worth considering, but putting it in practice, will be difficult if not impossible. First, assessments are tax exempt. Parking fees, on the other hand, are not.* Second, I’m not keen on the idea of owning a deeded parking space and paying $250 a month for deeded parking privileges, especially if I can rent a parking space at a neighboring garage for the very same monthly amount or less.

As I’ve explained in my blog, State Parkway’s garage operations business model has been broken for quite some time. It needs to be turned around without the use of smoke and mirrors (fraud and deceptive business practices). Meanwhile, State Parkway’s board of directors admitted they outright failed to maintain intergenerational equity with respect to the annual reserve contribution to the point current unit owners have been left holding the bag. Assessment reform will not happen until (and only until) these two line items (net garage operations and annual reserve contribution) have been addressed.

So get ready for State Parkway’s town hall and special meetings later this year. It’s going to be one very bumpy ride!

*Private Letter Ruling 8216056 stated, however, that parking fees received from members of a condominium association for assigned parking spaces are exempt function income because each owner owned a portion of the common area garage, and all were charged based on their pro rata share. Thus, income was derived based on their capacity as owners, not as customers receiving services.

Who is Ron Neville?

UPDATE: MARCH 27, 2017

At tonight’s board meeting, President Robinson clarified that Ron Neville is no longer State Parkway’s general counsel, and added Neville was just hired for some short term work.

 

UPDATE: FEBRUARY 9, 2017

This morning I received an email from Ron Neville of Neville and Mahoney which said, contrary to the first three resolutions passed at the board’s December 8, 2016, board meeting, that he is not general counsel for State Parkway and does not represent State Parkway in any matter. The property manager has since confirmed Levenfeld Pearlstein, LLC, is still State Parkway’s general counsel.

 

ORIGINAL POST

Today I looked up State Parkway’s new attorney Ron Neville in Sullivan’s Law Directory. Here’s what the 140th Edition (2016-2017) had to say:

Neville, Ronald, F. Neville and Mahoney 221 N La Salle St Suite 2150 Chicago 60601 312-236-2100 Fax: 312-236-3613 silver-ii@att.net (Adm IL 71) Genl Practice, Lit, Legal Malpractice, Crim Defense, Govt Law – Muni, Comm Lit

As you can see there’s no mention about cooperatives, condominium and homeowner’s associations in all aspects of governance and litigation, including declaration and bylaw amendments and enforcement, assessment collections, owner bankruptcies and foreclosures, evictions, injunctions, covenant enforcement, and developer and construction defect litigation.

However, Mr. Neville’s specialties are intriguing: general practice, litigation, legal malpractice (Levenfeld Pearlstein, LLC, and/or Litchfield Cavo LLP?), criminal defense (IRS and/or Illinois Department of Revenue for tax evasion?), Government Law – Muni (Violations of Chicago Condominium Ordinance for failing to make State Parkway’s books and records available for inspection?), and commercial litigation.

This looks like a match made in heaven!

Reserve Advisors, Inc.’s Alternative Funding Plan in State Parkway’s 2016 Reserve Study Update is Bogus!

For the second straight Reserve Study Update, State Parkway’s professional reserve study consultant, Reserve Advisors, Inc., included an “Alternative Funding Plan” for the Association. The problem is Reserve Advisors actually does not advocate this approach because they know it is a more expensive option. To make matters worse, the “Alternative Funding Plan” presented in both the 2012 and 2016 Reserve Study Updates are bogus. The purpose of this blog post is to show you how.

First and foremost, the purported “Alternative Funding Plan” in the 2016 Reserve Study Update, unlike the 2001 Reserve Study Update, conveniently ignores the material fact that any and all carrying charges related to the replacement of tower windows will be incurred. For example, taking out a $2.8MM loan for the windows, will incur depreciation (or loan principal) and interest payments. State Parkway’s 2001 Reserve Study Update, which did not have any such “Alternative Funding Plan” included principal and interest payments related to the payoff of the loan related to the purchase of the Engineer’s Unit. Again, I must stress that any loan the board takes out for the replacement of tower windows, the resulting principal and interest payments will be passed along to unit owners. So if the “Alternative Funding Plan” does not include any carrying charges related to the financing of the tower windows, it should be dismissed as a bogus funding plan that was prepared to skew the “Alternative Funding Plan” as a very attractive alternative.

Second, as the attached Excel spreadsheet demonstrates, adding the carrying charges related to the replacement of tower windows in the latest “Alternative Funding Plan” will actually cause State Parkway’s unit owners pay the equivalent of a one-time special assessment of $474K on June 30, 2017, as compared to the latest Reserve Funding Plan. So if the board members are going to do their due diligence, they need to, at the very least, demonstrate to the unit owners that taking out a loan for the replacement of tower windows is the feasible alternative. Meanwhile, if the board elects to waive any or all of its reserve funding requirements, it will be required to disclose this material fact, in bold, in State Parkway’s Annual Financial Statements.

Third, the two funding plans (Reserve and “Alternative”) only has the former setting aside funds for the replacement of tower windows in 2065. Consequently, the “Alternative Funding Plan” assumes replacement of tower windows will always be funded via the more expensive financing option.

THIS PAGE IS STILL UNDER CONSTRUCTION

 

Nine Major Dilemmas Facing State Parkway’s New Board President

UPDATE: MARCH 26, 2017

The board agenda distributed in advance of tomorrow night’s board meeting (something we haven’t seen for more than 10 years) lists “Garage Issues (User Charges Note 6.08 of Declaration and Violation Notice” (sic?) (I think it meant to say Declaration and By-Laws.) This suggest the board is seriously contemplating allocating some or all garage charges (direct and/or indirect) to deeded parking space owners instead of all owners (condo owners and parking space owners). I’m pleased to see the board thinking out of the box. However, I’m not quite sure this approach would work, especially since it would mean a unit owner, who paid approximately $30K or for a deeded parking space, would be asked to pay almost $300/month, if not more, in parking fees. Such a change, which I believe requires 100% unit owner approval, would cause deeded parking spaces to become almost worthless. I will provide an update after tomorrow night’s board meeting.

 

ORIGINAL POST

Now that the Santangelo/Marta Dynasties are officially over, it remains to be seen if new President Howard Robinson will continue the old policies or steer State Parkway in the proper direction. Robinson is well qualified for the post, especially since he is the developer that converted State Parkway to condominiums more than 24 years ago.

The way I see it, President Robinson has nine major dilemmas facing him. They are as follows:

  1. State Parkway continues to either underreport gross non-exempt income and/or claim falsely inflated deductions on its federal and state tax returns. This is criminal tax evasion.
  2. State Parkway currently has approximately $500K of deferred assessment increases, or 30% of 2016 assessments, in direct response to the 2016 Reserve Study Update, which the board approved earlier this week, the 2016 Operating Fund Deficit; and the projected 2016 Garage Operations Losses. See my blog post regarding Deferred Assessment Increases.
  3. State Parkway still has a barebones maintenance budget ($94K in 2017), which is still insufficient to properly maintain the building and grounds.
  4. Garage Operations Losses, which was more than $50K over budget in 2016, continues to soar out of control. The 2017 Operating Fund Budget, for at least the second consecutive year, budgeted $50K less than what garage vendor SP+ budgeted.
  5. Due to the tax evasion and fraud issues, State Parkway still cannot rent out the Engineer’s Unit. The unit has been vacant for more than 18 months.
  6. State Parkway is spending thousands and thousands of dollars on attorneys and accountants in defending the board of directors in administrative actions filed by the City of Chicago for not making its books and records available for inspection.
  7. State Parkway’s Rules and Regulations need a massive overhaul.
  8. State Parkway needs to resurrect its finance committee.
  9. State Parkway still needs to replace at least three officers and/or directors and have all officers and directors participate in Condominium Training For Directors and Officers.

The first thing President Robinson should do is request a full audit by a new independent CPA firm, including but not limited to garage operations and past federal and state income tax returns. Robinson can seek and obtain a full audit via an email vote before Picker and Associates gets too far in the 2016 financial review.

Robinson should then appoint a committee to review and recommend changes to the Association’s Rules and Regulations, and, of course, welcome unit owner input.

Robinson should then develop a comprehensive maintenance program that covers the entire building and grounds. It will be money well spent.

Robinson needs to turnaround the garage operations. In addition, Robinson needs to make sure the Association receives the proposed garage budget from SP+ early in the budget cycle.

Robinson’s idea to convert the party room is a good idea. It’s probably the only option he has remaining. But Robinson should also consider moving the management office somewhere else so the property manager can work without too many interruptions.

Robinson has to commit to complete transparency, including responses to records inspection requests. In addition, he needs to resurrect the finance committee, which can make sure there are no accounting irregularities and/or the board of directors are not voting with their pocketbooks when they prepare and adopt the budget.

Last, but not least, Robinson should recruit several more competent officers and directors and ensure they receive the proper training as condominium directors and officers. The board, of course, should adopt a code of conduct, policies on conflicts of interest, confidentiality, redaction, anti-discrimination, records retention and whistleblower.

Good luck Mr. Robinson!

Treasurer Cleavenger Denies State Parkway’s Operating Fund is Insolvent

UPDATE: MARCH 27, 2017

At tonight’s board meeting, Treasurer Cleavenger falsely stated that all bills have been paid. Before one can state all bills have been paid, he/she must confirm all bills the Association received by the end of the month has been recorded into the monthly financials. Treasurer Cleavenger made no mention of the official 2016 Operating Fund shortfall.

 

UPDATE: JANUARY 24, 2017

CORRECTION: Cleavenger is still Treasurer.

ORIGINAL POST: JANUARY 24, 2017

At last night’s board meeting Treasurer Michael Cleavenger denied State Parkway’s Operating Fund is insolvent. Surprised to hear this I reminded him that State Parkway’s current assets and current liabilities were $100K (really $115.2K) and $200K (really $200.3K), respectively, and the operating fund’s equity balance was negative. And that’s without some $63K of invoices and an $8K write-off (see blog post regarding scavenger rebates wasted) that didn’t get accrued in the Association’s year-end financial statements as prepared by LMS. Vice President Robinson denied that State Parkway lost $56K (really $56.8K), but later admitted the LMS’s financials show the Association lost $56K. The board then went into executive session and when they met again in open session, the board promoted Vice President Robinson and Treasurer Cleavenger to President and Vice President, respectively.

State Parkway’s year-end interim financials shows the Association has $53,858 of cash in the Operating Fund, but this amount includes $46,556 of prepaid assessments (2017 assessments), or $7,302 net cash balance.

Board Fails to Transfer 2015 Operating Fund Surplus to Replacement Reserve Fund

At the July 25, 2016, board meeting, I asked the board why the association didn’t transfer the 2015 Operating Fund Surplus to the Replacement Reserve Fund as was done the year before?

It wasn’t until September 14, 2016, that my wife and I finally received an email with the answer to my question to the board on July 25, 2016. The Association’s full response said, “In response to your question to the Board at the last meeting: Reviewing the December 2015 Financial shows the ending 2015 Income as $1,672,990 and expenses $1,679,037 leaving a net deficit of $6,047.00. No transfer was completed.”

The problem with the above response is the Association used the 2014 Financial Review, which reported a $46,332 Operating Fund Surplus, to transfer $46,332 to the Replacement Reserve Fund in 2015. The reported 2014 Operating Fund Surplus per the 2014 interim financial statements as prepared by LMS was $31,224. The 2015 Financial Review reported a $4,964 Operating Surplus but LMS’s financial statements reported a $6,047 deficit. That is, the association used the official financial statements for the 2014 transfer but now “elects to use the interim financials” for 2015. Consequently, the board’s September 14, 2016, email response is lame, especially since one of my blog posts made it clear that LMS’s interim financial statements are pure garbage.

The truth is the board got caught making improper transfers between funds for so long. The board even went as far as to say, under oath, the unit owners approved them, which they didn’t.

At the September 2016 annual meeting of the unit owners, board President Mary Marta did not ask the unit owners to transfer the 2016 Operating Fund surplus, if any. I believe this is because the board knows full well they haven’t been following the procedures as defined by IRS’s revenue rulings.

Looking ahead, the association is expected to report a very large Operating Fund shortfall for this current year (2016). How and when will this shortfall be funded? The answer to the surplus/shortfall question was clearly spelled out in the Association’s Declaration and By-laws, but last year the board repealed this language via Declaration fraud.

Old Past Due City of Chicago Invoices Unloaded

Since 1959 State Parkway has had a permit for the No Parking Loading Zone in front of the building’s main entrance. The loading zone is 45 feet long and the current annual fee, payable to the City of Chicago, is $1,360.00. However, upon inspection of the most recent payment for $4,080.00, or exactly three times the normal amount, made in October 2016, my wife and I noticed the Association was not one but two years past due.

State Parkway recorded and charged the full $4,080.00 invoice to the 2016 budget. Most likely the association’s independent accountant will reclassify at least $1,020.00 (9/12ths of the current annual charge) as a prepaid expense.

History of State Parkway’s Legal Expenses

How much has the Association assessed in legal expenses and/or incurred in legal expense overruns since 2005?

a) $25,136

b) $66,997

c) $95,000

d) over $550,000

 

The answer is d) and the breakdown by year is as follows:

  • 2005                    $2,136
  • 2006                    $4,158
  • 2007                  $32,529
  • 2008                  $47,758
  • 2009                   $51,305
  • 2010                  $30,405
  • 2011                   $66,997
  • 2012                  $66,927
  • 2013                   $55,485
  • 2014                  $95,000
  • 2015                   $55,631
  • 2016                  $18,000 (2016 Budget)
  • 2017                  $26,000 (2017 Budget)

 

Good luck in finding explanations for the aforementioned $550K+ of legal expenses in board meeting minutes, notes to annual financial statements and 22.1 disclosure letters.

Understanding State Parkway’s 2017 “Repairs and Maintenance” Expense Category

State Parkway’s 2017 Budget has $441,287 budgeted for “Repairs and Maintenance” expense. The purpose of this blog post is to take a closer look at this category, which comprises 23.5% of State Parkway’s total assessments.

There are sub-accounts: garage operations losses, $280,000, and cable tv expenses, $69,507, improperly buried in the “Repairs and Maintenance” category because they clearly are not repairs or maintenance. Excluding these two sub-accounts reduces the “Repairs and Maintenance” category expenses to $91,780, or just 4.9% of State Parkway’s total assessments.

The $91,780 budgeted for 2017 is broken down as follows:

  • Maintenance Supplies ($10K);
  • Plumbing Repairs/Supplies ($18K); rodding 2x/year ($6.6K), rod garage floor drains ($1.5K) and repairs ($9.9K);
  • Electric Repairs/Supplies ($1.5K);
  • Lights, Bulbs, and Tubes ($.9K);
  • All HVAC Expenses ($32K); maintenance on boilers ($23K), building automation and control systems ($5K), and various repairs ($4K);
  • Hot Water System Expense ($1.85K); chemical purchase 3x/year;
  • Doors, Locks and Keys ($.6K);
  • Key Income ($.4K credit);
  • Window Repairs/Supplies ($.43K);
  • Fire System Maintenance ($.5K);
  • All Painting & Decorating ($.4K);
  • Roof Repairs and Supplies ($1K); and
  • Other Building Repairs ($25K);* fountain lights, chute repairs and other miscellaneous repairs.

 

A close review of the above list shows only $36.1K, or 1.9% of total assessments, is actually budgeted for preventative maintenance,** with rest, $55.68K, or 3.0% of total assessments, budgeted for repairs and/or supplies when something needs maintenance (reactive maintenance).

 

* This sub-account increased $23K over 2016 Budget, or 1150% increase.

** Elevator maintenance ($25K) is excluded because it is included in “Building Services” category.

 

 

Lack of Transparency About State Parkway’s Participation in Multiemployer Pension Plans

UPDATE: JANUARY 13, 2017

This morning I learned that the doorstaff pension plan is in its 50th year of existence. The question I have is if State Parkway joined the pension plan in 1968 (some 25 years before it became incorporated and converted to condos), is State Parkway, as successor corporation, liable for unfunded pension liabilities related to vested plan benefits that go back to 1968? I will ask the board this question at the January 23, 2017, board meeting.

 

ORIGINAL POST

[Note: This post was created after State Parkway refused to make a letter it had received ABOMA (Apartment Building Owners and Managers Association) regarding the doorstaff pension fund available for mine and my wife’s inspection. My wife and I were able to inspect some of the requested materials after we filed yet another complaint (number 6 of 12 complaints) with the City of Chicago.]

Beginning with the 2014 Financial Review, the first prepared by independent accountant Picker and Associates, State Parkway stopped making the required disclosures with respect to its participation in multiemployer pension plans.

Accounting Standards Update (ASU) 2011-09 was issued by the Financial Accounting Standards Board (FASB) to address concerns from users of financial statements regarding the lack of transparency of financial statement disclosures regarding an employer’s participation in a multiemployer pension plan. Multiemployer plans are unique in that the assets of one employer may be used to provide benefits to other participating employers’ employees. As such, if one participating employer defaults on its obligations, the unfunded obligations of the plan become the responsibility of the remaining participating employers.

ASU 2011-09, which went into effect for non-public entities for annual periods ending after December 15, 2012, requires the following quantitative and qualitative disclosures:

  •  List of significant multiemployer plans the employer participates in, including the plan names and identifying number.
  • The level of the employer’s participation in the significant plans, including the employers’ contributions made to the plans along with an indication as to whether the employers contributions represent more than 5 percent of the total contributions made to the plan.
  • The financial health of the significant plans, including the funded status, whether funding improvement plans are pending or implemented, and whether the plan has imposed surcharges on the contributions to the plan.
  • The nature of the employer commitments to the plan, including when collective bargaining agreements that require contributions to the significant plans are set to expire and whether those agreements require minimum contributions to be made.

 

ERISA § 4209 states if an employer’s withdrawal liability is less than $100,000, the employer will receive a $50,000 deductible toward its withdrawal liability account. If the employer’s withdrawal liability is over $100,000, De Minimis is reduced dollar for dollar for amount owed over $100K. If the employer’s withdrawal liability is over $150,000, no deductible — the employer must pay 100% of the withdrawal liability. (Payment options are lump sum, quarterly payments for up to 20 years, interest accrues at 7.5%.)

To put the preceding paragraph in perspective, last summer NIPF gave estimates of the withdrawal liability for a sample building that has 24/7 doorstaff with 1 employee on duty. The gross withdrawal liability estimate in 2013 and 2016 were $99,342 and $115,649, respectively. The De Minimis deductible in 2013 and 2016 were $50,000 and $34,351 ($50,000 – $15,649), respectively. And the net withdrawal liability due in 2013 and 2016 were $49,342 and $81,298, respectively. As you can see from this example, the net withdrawal liability in 2016 is 64.8% higher than in 2013 because of the reduction in the De Minimis once the withdrawal liability exceeded the $100K threshold.

The final ASU does not require separate disclosure of the potential withdrawal liability, but requires that multiemployers continue to follow the loss contingency guidance, FASB ASC (Accounting Standards Codification) 450, for any withdrawal liability that is probable or reasonably possible of being incurred. Notwithstanding, the board has a fiduciary duty to keep an eye on the withdrawal liability estimate every year and exercise due diligence in making the decision whether or not the Association should withdraw from NIPF. Otherwise the board could end up being penny wise and pound foolish, especially if State Parkway’s withdrawal liability crosses either the $100K or $150K threshold as demonstrated in paragraph that follows the table below.

Why is this disclosure important? Well, for starters, one of State Parkway’s multiemployer pension plans, the one for union doorstaff, the S.E.I.U. National Industry Pension Fund (NIPF) (Plan 001 for Doorstaff, Employer Identification Number: 52-6148540), according to its Form 5500 filing with the United States Department of Labor, dated October 14, 2016, is currently in critical status because a funding deficiency was projected in the Funding Standard Account within three years. (Funded percentage for the 2015, 2014 and 2013 Plan Years were 73.2%, 76.9% and 80.8%, respectively.) The rehabilitation plan calls for a supplemental surcharge at $.406 to $.469 per hour (over and above the base $.65/hour). This means the association is paying approximately an additional $4K each year to make up for past funding/investment income shortfalls.

But employers like State Parkway have options. One option is to remain in NIPF – and pay base contribution ($.65) plus Supplemental Contribution ($.409 to $.469) for a total of $1.06 to $1.12/hour. Or withdraw from NIPF, pay withdrawal liability that is due, and go into the 401(k) savings plan (hourly contribution $.65).

 

Below is a table showing the number of employers that withdrew from the plan during the preceding plan year, and their aggregate and average withdrawal liabilities as reported on NIPF’s Schedule R (Form 5500):

Year         Number of Employers      Aggregate Liability      Average Liability

2015                           9                                    $6,412,421                    $712,491.22

2014                       105                                  $13,784,673                    $131,282.60

2013                          11                                    $7,613,966                   $692,178.73

2012                         20                                    $8,327,538                   $416,376.90

2011                          13                                   $15,188,367                 $1,168,335.92

2010                           3                                    $3,386,005                 $1,128,668.33

2009                          8                                     $1,830,115                    $228,764.38

 

The ParkShore Condominium Association, a condominium high rise in Chicago’s lakefront, which was built in 1991 and has a doorstaff budget similar to State Parkway’s, elected on December 1, 2013, to withdraw from the NIPF as it pertains to doorstaff and eventually recorded a total withdrawal liability of $187,509. State Parkway was built more than several decades earlier than ParkShore, and its lead doorman celebrated his 35th anniversary at State Parkway last May.

State Parkway’s board, at the November 7, 2016, board of directors’ meeting, made the decision not to withdraw from NIPF and switch to a 401(k) savings plan. However, this appears to have been done without the board obtaining an estimate of State Parkway’s withdrawal liability. If the withdrawal liability is less than $100K, the association is squandering a $50K deductible, not to mention exposing the association to significantly higher underfunding risks. It only costs the association $750 to obtain a withdrawal liability estimate.

I will continue to follow the Association’s withdrawal liability for doorstaff pensions with interest. Other State Parkway unit owners and prospective buyers should do the same.