Living Without Reserves

Living Without Reserves

The residents at my condominium voted last night, as they do every year, not to put money aside for the big-ticket repairs and renovations we will someday have to undertake.

I am always part of the minority that thinks we should put money into reserve funds, even though it would raise our monthly condo fees – which are not cheap to begin with – by 5 to 10 percent. But every year, the Board of Directors recommends foregoing the reserves, and every year, my neighbors outvote me by a lopsided margin.

Our building is a sparkling 31-story tower that was completed in 2004, just as the South Florida condo craze was hitting its stride. Ours was the first of more than a half-dozen high-rises to open in a three-year period in downtown Fort Lauderdale.

I love the building and I like my friendly neighbors. They range from 20-something professionals and athletes to relatively young retirees. Collectively, we enjoy the Miami-standard pool, gym, club rooms and 24-hour door attendants, plus perks like a concierge and parking valets. Did I mention that our condo fees are not cheap?

I don’t mind. The building is well-tended, fully occupied, and – unlike so many other recent projects in the region – not burdened by many foreclosures and defaults. It helps a lot that our building was first on the market, before the boom hit its peak.

A 31-story tower has a lot of expensive infrastructure. Elevators, roofs and air conditioning systems are big-ticket items that wear out, especially in the Florida heat. We get more than five feet of rain annually, which takes a toll on the building’s exterior. So does the soot from the diesel engines of the ships on the New River and nearby Port Everglades.

The infrastructure was brand new for the first generation of buyers at our building. Over time, it will wear out. Every time I ride the elevators or turn down the temperature in my apartment, I use up a little bit of that machinery’s service life. So it makes sense that my neighbors and I should pay for what we use by setting aside a reserve for eventual replacements and repairs. Florida recognizes this by requiring condo associations to collect reserves unless a majority of owners votes to do without.

By not funding reserves, we are sticking future owners with a large bill for the equipment and amenities we enjoyed. Those future owners might face a special assessment that could run into thousands, or tens of thousands, of dollars per apartment. Or our decision could force the condominium association to borrow money to make repairs, which will force future owners to repay the loans through their monthly assessments.

Does the situation sound familiar?

As I pondered this topic, I realized that my condo’s decision not to fund reserves reflects an attitude that has become ingrained in America, and in some other countries. We take whatever we can. We think of costs as being the cash that leaves our pockets every month, and our goal is to minimize that monthly cash cost. We ignore the long-term consequences of our choices.

Rather than save to buy a car, we borrow – or we lease the car, never owning anything, just paying a minimum amount every month.

Rather than put money aside in individual accounts to fund our own retirement, we construct an elaborate transfer scheme. Our Social Security is based on the assumption that our kids and grandkids will pay for the benefits we promised ourselves.

Rather than tax everyone except the truly poor to finance government services, we tell the majority of Americans that their struggles are so burdensome, their needs so great, that they should view government as a net source of benefits, to be funded by someone else, known variously as “corporations,” “the rich” and whoever it is that lends money to Uncle Sam.

We scorn corporate managers for looking no further than next quarter, or next year, or to whatever criteria their deferred-comp plan requires them to meet. We claim those managers should maximize value for the long term. But what is the long term for a corporation that can, legally, survive anyone who is alive today? Should managers try to maximize value five years from now? Ten years? Fifty? Who decides?

Though I disagree with my neighbors about funding reserves, I do not assume they are being stupid, or short-sighted, or greedy, or irrational. There are some good arguments in their favor.

For one thing, if we boost our monthly payments, our building will have to put that cash in a bank that pays virtually no interest these days. My neighbors and I could have used that cash to pay down our own higher-interest debts, ranging from mortgage balances to credit cards.

Having a big pool of cash held by the building association creates the opportunity for mismanagement, or worse. What if some future treasurer invests the money unwisely? The fear of the next Bernie Madoff is irrational and exaggerated, but that does not mean people don’t have such fears. And it isn’t just a Bernie Madoff one must worry about, in a post-Lehman, post-AIG world where politicians pledge no more “bailouts” of financial institutions and their creditors.

Then there is the simple fact that people move, people die, and many – probably most – of the people who bought apartments in my building in 2004 and 2005 just won’t be there when the elevators need to be replaced. Quite a few are already gone. When Linda and I bought our apartment in 2005, we became its third owners, just 18 months after the building opened.

Can we expect people to tax themselves for the benefit of a future generation of strangers who will live in our building? Can we expect future prospective buyers to study the building’s financial statements so closely that they understand they should reduce their offering price to account for the lack of reserves? It would be nice to think buyers will be so careful, and it is the kind of thing an economics professor might teach business students to expect, but it would not be realistic.

The reality is that unless the law actually demands that we fund our reserves, we aren’t going to do it. Today’s generation of owners will not look out for the next, and cannot be expected to. Not when we, as a society, don’t look out for the financial interests of our own children and grandchildren.

I didn’t set out to make an argument for a balanced budget amendment to the Constitution (an idea I oppose, incidentally), or to convert Social Security to a privately funded savings scheme. I just wanted to tell you about my condo. It’s funny where these trains of thought can take us.