Masters Thesis

Thesis Data

Chapter 1

 Introduction to Common Interest Realty Associations

 

     There are many risks associated with Common Interest Realty Associations (CIRAs) and contrary to popular belief, they are not exempt from bad debt issues. As members of privatized communities, property owners in a common interest development share in the benefits associated with community life as well as the risks associated with partnering that cost with others.

     In the extraordinary economic times of a debt-deflationary period, risk associated with housing price level changes and the ability of homeowners to meet mortgage debt rises. This report will explore a brief history of the theory behind life in a common interest development, and discuss how our lifestyle choices combined with factors described in selected tenets of Irving Fisher’s Debt-Deflation Theory of Great Depressions have come together in our contemporary mortgage and banking crisis to create an environment in which CIRAs are subject to increased bad debt exposure.

     There have been, and are projected to be, many layers of loss associated with this crisis, and this study will establish models for projecting losses in common interest realty associations resulting from the mortgage and housing market crisis.  The 177 sample CIRA financial reports used in this study were compared with the results of actual 2008 events occurring in a tightly controlled CIRA collections environment, and assessing the results provides a position from which industry standards can be established for estimating CIRA bad debt allowance arising from mortgage failure risk.

     Finally, projections of potential lost CIRA revenues in the United States and the state of California will be made, based on a standard risk value derived from the study of the total sample data population.

 

Brief History of Common Interest Realty Associations

     CIRA locations, demographics, and sizes vary greatly across the nation, within states, and throughout the counties and cities in which they reside. Some cities, such as the city of Irvine, CA and Sun City, AZ, are in reality large common interest realty associations. Some CIRAs have been around for many years; for example, San Francisco’s South Park was established around 1852 and New Jersey’s city of Radburn was modeled after Ebenezer Howard’s idealistic Garden City and dates back to 1928.[1] Early community associations were modeled around a concept of rented use whereas modern CIRAs in the United States conform to our cultural propensity for private ownership. The early English version embraced a concept of one owner with many renters and as such placed all risk in the hands of one owner. It is when we engage in the many owners to one association model that we introduce the concept of partnership risk.

     Our society is not foreign to this type of socialized partnership risk and in fact it is integral to our social structure.  In essence we live in one national association and pay our annual assessments in the form of income and other taxes. Our modern infrastructure is built within and across the boundaries of the states, counties, cities, and for some, CIRAs, in which we reside.

     Like the managers of our local governments, those responsible for directly managing the day to day activities of common interest realty associations have a responsibility to maintain the safety and well-being of resident members in addition to a fiduciary duty to all constituents of the CIRA entity. Unlike the managers of our local governments, the Boards of Directors and other members who are engaged in CIRA management are often volunteers with minimal understanding of their responsibilities.

 

The Board of Directors and CIRA Governance

     The Board of Directors of a common interest realty association is the top level of the management team. California common interest realty associations that are established to conduct business as a non-profit mutual benefit corporation are required to elect a board of directors to run the affairs of the association.[2] The board ultimately sets the ethical tone for the association and through its policies and the actions of its members affects overall CIRA goodwill. A well-run board sets the boundaries within which management functions, and through regular board meetings, can increase CIRA goodwill by emphasizing timely attention to significant policy matters. The board of directors has three key areas of decision making:

1. Business
2. Governance
3. Community[3]

     It is management’s responsibility to run the day-to-day business activities of the association according to the policies and procedures established by the board of directors.

     The management accountant may be the highest internal financial representative of the CIRA and is charged with keeping an open door policy regarding communication. An unbiased perspective of risk is also critical, and willingness to communicate with the appropriate persons at relevant times is a vital function of the management accountant in any business. In the CIRA environment, employing a proficient management accountant who strives to act in the best interest of the CIRA will build goodwill and effectively hedge the CIRA against risks resulting from personal greed and other ethical behavior choices of members, vendors, and other constituents with opportunity for personal gain.

     The appropriate persons for a management accountant to communicate with are not always evident. In many circumstances, the accountant reports directly to the general manager. This could be a grave mistake and a more appropriate arrangement may be for the management accountant to report directly to either an audit committee or finance committee, or if either of those do not exist, then to the board of directors. This is a very important internal control for the CIRA, and is in alignment with the guidelines issued by the Sarbanes Oxley Act for publicly traded companies where top financial representatives report to the audit committee and are independent from general management. Governments also exhibit this reporting hierarchy, and in the state of California, the State Controller is independent from the general management of the Governor.

 

Public Policy and Common Interest Realty Associations

Because a CIRA is in essence a privatized form of government, it is subject to the rights and responsibilities thereof. CIRAs are not governed at the national level but they are required to file an income tax return with the IRS. In January 1989, The CPA Journal published newly established guidelines for accounting and auditing CIRA financial records, addressing issues deemed significant, such as capitalization of common properties and disclosure of major repairs and replacements. Despite the appearance of reasonably simple operating characteristics of CIRAs, the AICPA acknowledged that the major accounting issues arise from the form of ownership, not the operations of a CIRA.[4] The risk to CIRA members associated with partnering CIRA operational costs also arises from the form of ownership, and may be exacerbated by operations of the CIRA, regardless of whether the CIRA operates with a profit or non-profit motive. A CIRA may be established with a non-profit motive subject to unrelated business income tax at the federal and state levels. Because CIRAs have become numerous in our society and house a large percentage of our population, they are becoming increasingly regulated at the state level.

The methods in which CIRA activities have been conducted in past years have given rise to a tainted reputation for CIRA entities, and that has driven state legislators to step in and establish guidelines designed to protect homeowner interests.  Public demand in California resulted in the Davis-Sterling Act of 1985, which is encompassed in California’s Civil Code §§ 1350 – 1378[5]. The Davis-Sterling Act has been amended many times since its inception. The Davis-Sterling Act was enacted to clarify CIRA and member rights and responsibilities and to consolidate the many areas of law in which CIRAs are subject to compliance. The Act gives potential owners the right to review CIRA governing documents before a property is purchased, to know what the rules and regulations are and how they are enforced, and to review the CIRA’s financial reports including audits and budgets. Also, this legislation limits the increases in assessments that can be made in a single year, and requires that the CIRA engage in a reserve study to help ensure enough money is being set aside annually to fund future repairs and replacements without the need for large, unexpected, and often financially debilitating, special assessments.

     In California, all CIRAs are subject to the legal stipulations outlined in the Davis-Sterling Act, regardless of size or revenues generated. With CIRA assessment revenues of approximately $41 billion annually in the United States, $6.3 billion in California, and investment accounts of nearly $35 billion[6], common interest realty associations are big business. CIRAs are in many ways similar to publicly held companies, and like stockholders, CIRA members risk personal loss if the CIRA does not perform optimally. Accordingly, all members should demand open and honest dialogue and management accountability in order to protect their highly valuable investments from the risks associated with corrupt practices, public greed and general ineffectiveness resulting from inefficiencies.

 

Ethics in Common Interest Realty Associations

Ethics is a major facet of contemporary business thought, and those responsible for CIRA management are not exempt from the need for ethics awareness and education. Because CIRAs are self governed business entities in charge of the personal well being of their membership, and because they operate at a level not subject to peer review or public scrutiny, opportunity exists for ethics based risks arising from corruption, fraud, and embezzlement. As with any other business entity, there are steps that can be taken to reduce these risks, including equitable and consistent enforcement of the covenants, conditions and restrictions (CC&Rs), articles of incorporation, declarations, bylaws, board policies, and board established rules and regulations of the CIRA. All members are equally subject to the rules, including board and committee members. Though volunteers, board members and other owners who participate in CIRA management are held to a high level of fiduciary responsibility and can be penalized if found to be acting for their own personal greed and well being. As volunteers, members can not be compensated for their services. CIRAs with established wealth are most at risk from fraud, theft and embezzlement, though no CIRA is exempt.  Often it is the most trusted representatives who seize the opportunity to make personal use of funds belonging to all of the CIRA members through the association partnership. The risk of corruption, fraud and embezzlement are among the many risks related to common interest realty associations. It was with the goal of minimizing the risks associated with the billing and collections processes that unknowingly set the stage for this thesis by providing a tightly controlled environment.

Recognizing the increasing risk of loss associated with unethical behavior is just one facet of understanding the business climate of the CIRA. Today, recognizing increasing risk of loss associated with foreclosures is another. It is the process of understanding the correlation between events leading to risk, the control activities in place to minimize risk, and the effectiveness and efficiency of controls that exposes options available for deferring loss. Many risk factors must be considered in estimating bad debt, and gaining that understanding requires a thorough analysis of the internal and external risk environment.

 

 

Chapter 2

debt, deflation and the mortgage crisis

 

A critical factor in the impending bad debt losses facing CIRAs across the United States in 2008 is related to the mortgage crisis, and evolves from the tenets Irving Fisher discussed in his paper “The Debt-Deflation Theory of Great Depressions.” Written in 1933, Fisher identifies what he calls 49 tentative conclusions that correlate to the economic booms and depressions associated with Great Depressions. Just what constitutes a Recession from a Depression and a Depression from a Great Depression is open for discussion, but Fisher’s theory on the levels of debt as associated with the national wealth of the nation provides insight into why we may have experienced our contemporary mortgage crisis. Understanding why it happened will not likely offer any suggestions of how to individually avoid being impacted, but it will go a long way in helping us work through the repercussions as the national and global economies work toward equilibrium.

Consumer debt and the wealth of the national economy came together in a spectacular manner in recent months, and the outcome on October 10, 2008 was like watching an oven door slam closed with a delicate cake baking inside. The result was rapid deflation![7] Leading up to this October 2008 market adjustment, our economy was burdened with over-indebtedness and surpassed the limits within which it can operate effectively and efficiently. When the structure could no longer support the weight, it plunged. We have tested the limits of our national economy’s strength in fractional banking, and the following graph depicting United States consumer debt as a percent of GDP for the years 1922 to March 2008 provides a glimpse into the delicate balance our economy was teetering on leading up to October 10, 2008.[8]

Figure 1- Total Credit Market Debt as a % of GDP

The above graph provides a visually stimulating perspective of the potential enormity of the mortgage crisis bailouts. It illustrates how low everything must drop to be in equilibrium, and suggests the challenges and opportunities that must arise as a result of the necessary adjustment.

The debt-income level at 1929 was a mere 55.25%; and at 1933 106.6%. In March 2008, we approximated a ratio of 350% with national debt at $49.014 trillion and GDP at a relatively mere $14.19 trillion. It only takes knowing the outcome of the Great Depression while looking at this graph to sound an alarm in the mind of anyone comparing our economic events to those of the Great Depression. While there were many variables at play in the 1930s Great Depression, Irving Fisher’s conclusion #19 states that “In great booms and depressions, there are two dominant factors: over-indebtedness and deflation.”[9] If the above graph is representative of the real relationship between consumer debt in the United States and GDP as of March 2008, then clearly we were in a state of over-indebtedness.

Deflation is the process of falling price levels of a product or commodity. According to Fisher, price level change and over-indebtedness are the two most significant factors of great booms and depressions.  He further concludes that “if debt and deflation are absent, other disturbances are powerless to bring on crises comparable in severity to those of 1837, 1873, or 1929-33.”[10]

Leading up to and in the years after The Great Depression of the 1930’s there have been many economic dips. The graph below provides insight into the price level changes in housing as a percent of the prior year, in the United States between 1920 and 2008. Clearly, in 2008 there has been a tremendous fall in price levels in the US housing market. With an estimated 47 million people, or 1 in 6 Americans living in common interest developments in 2001[11], it stands to reason that the impact of the mortgage crisis will extend to CIRAs in the coming months and years as property owners contend with and resolve their personal financial crises, estimated by the bailout plan approved by Congress in October 2008[12] to be in the billions of dollars, and perhaps in the trillions, if the circumstances are as represented in the debt-GDP graph in Figure 1[13].

Figure 2 – US House Prices % Change on Previous Year

 

Why Does Combined Debt and Deflation Represent Risk to the CIRA Business Model?

Fisher provides some reasoning for consideration. His conclusion # 24 states that given an economic state including over-indebtedness, there will be a tendency to liquidate, driven either at the alarm of the debtors or creditors.[14]  Looking at our contemporary mortgage crisis it is easy to imagine the push for liquidation on the part of the creditors. Figure 1 also supports this conclusion. In September 2008, the California Research Bureau (CRB) posted a document indicating 5.0 million homeowners will lose their home due to the crisis in the 2007-2010 cycle.[15] Predominantly, this will be related to creditor driven foreclosures. These foreclosures affect housing prices and the fiscal solvency of homeowners in all states, all counties, all cities, and all CIRAs. If the homeowner’s failure to pay is related to factors beyond intent to not pay, given the levels of debt leading up to the market crash, there is a real likelihood that payment will not be made to the CIRA.

Personal factors leading to foreclosure and CIRA delinquencies could include job loss and other personal financial conditions of the homeowner. Pressures exerted on homeowners by all creditors, including the CIRA, to pay accruing debt effectively works to push price levels down; falling price levels contribute to increasing foreclosures as owners succumb to collections efforts.

“Falling home prices are … contributing greatly to foreclosures. Homeowners who owe more on their loan than their homes are worth are more likely to default if they encounter financial distress …”[16]

 

Hence, the downward spiral begins. As this frenzy driven by distress selling continues, and as the economy contracts and currency becomes scarcer, Fisher’s conclusion #32 states that “Each dollar of debt still unpaid becomes a bigger dollar,”[17] thereby making the ability to meet the debt even more difficult. This is what has happened in our economy to those caught up in the mortgage crisis. Many of the loans that have defaulted, and are projected to default, were purportedly issued to borrowers who would be unlikely to obtain a prime rate loan due to credit insufficiency. With the rise in availability of subprime loans offering low teaser interest rates to already cash-strapped borrowers who, being true Americans are driven by the desire to experience the obsession in America called home ownership, and an even greater desire for the flippers, brokers and bankers to reap enormous profits, the economic bloodstream was drugged with the first of the major dominant factors Fisher projected were needed to fuel a great depression: over-indebtedness. As we experienced the weight of our over-indebtedness and foreclosure counts began increasing exponentially, the values associated with our housing markets began falling at rates exceeding the ability to liquidate the debt. The result was

“Increasing numbers of Americans…simply walking away from their houses and mortgages, increasing pressure on banks and the economy[18].”

It remains to be seen what the outcome of this crisis and the associated bailouts will cost us nationally and globally. Without any central public database being available for tracking CIRA performance, it is difficult to measure the financial impact the mortgage crisis will have on common interest realty associations, let alone the extended communities that the CIRAs reside in: the cities, counties, and states, layered within the infrastructure of the US economy. As Enron and many other corporate failures showed us, easy money is a driving force that affects economic stability throughout our country. As a nation driven by capitalism, subprime loans, combined with ethics related behavior, contributed greatly to our current economic downturn.

It is certain that easy money, in part, led to this crisis. A focus on low interest rate policies driven by a desire to fuel American GDP and boost Wall Street wealth allowed the debt disease to take over while everyone was sleeping. Now, we as a nation must absorb the costs resulting from the write-downs of all those layers of debt incurred by our friends, neighbors and family members. The end result, as has already been seen by the stock market fall of October 10, will be a loss of trillions of dollars in equity, a loss driven by greed accompanied by allegations of corruption in the bailout of many lending giants, among them Fannie Mae and Freddie Mac. This exemplifies the enormity of the problem, considering that Fannie Mae was established in the 1930s in response to the mortgage issues of The Great Depression. We will never know what the outcome of these lending giants would have been had we not bailed them out. Some believe that we should have allowed them to crumble under the destruction caused by our social greed and the frenzy of our times, that this would be the proper way to maintain and preserve a free market economy. The troubles with Freddie Mac added insult to the secondary mortgage industry injuries, and as we have heard tales of enormous bonuses being issued while financial pillars crumble around us, we are left knowing, once again, that we are a susceptible society, which leads us to Fisher’s conclusion # 47: the “… public psychology of going into debt for gain passes through several more or less distinct phases .. [including] … the development of downright fraud, imposing on a public which …[has]…grown credulous and gullible.”[19] Through our gullibility and our self-fulfilling endeavors, we incessantly allow corruption to ensue, a corruption that seems to invade all aspects of the lives of many of the people whom we depend on and are charged with trusting the most, people who by their status in life are responsible for our protection and well-being. Corruption and greed are great motivators for the participants:

“It is a very corrupt system, there are a lot of political contributions that flow out of these two institutions, and there are a lot of incestuous relationships between the politicians and businessmen.”[20]

As the circumstances involved in this market crisis become more evident, and we as a nation work our way back toward an economy in equilibrium, we are challenged with keeping a positive attitude about our opportunities. It is paradoxical how fortunate we are to live in a nation that allows so much freedom and flexibility in the choices that we as individuals can make, that events of this magnitude can occur before our very eyes, with our participation and our blessings. We hold these truths to be self-evident, we say, that all men have an equal opportunity to partake, for the good of and the destruction of the whole. Without taking a pessimistic outlook, we must assess the factors that led to these economic events, and attempt to integrate what we have learned into our practices by developing tools that may help guide us in the future toward spotting warning signs well in advance of trouble, if we should be alert and concerned enough to be in search of the truth.

Though in inflationary economies CIRAs have little concern about risks associated with bad debt, in deflationary times that threat is heightened and real. According to the California Associations Institute, as of 2008 there are over 300,800 common interest development communities in the US comprised of approximately 24.1 million housing units and 59.5 million residents[21].   These units are equally at risk to foreclosure as a result of being owned by someone experiencing mortgage default.  Thus, the risks associated with this mortgage banking crisis are very real to the CIRA business model. The unit owner may file bankruptcy or experience foreclosure before the CIRA realizes there is a problem. More likely, however, the account will become delinquent, and no matter what attempts are made at collection, the account will remain unpaid, growing in size, increasing the pressure on the owner to pay a debt from a cash source that does not exist. The CIRA will likely not be able to eliminate these kinds of market risks.  However, knowing that they exist and having metric tools such as a standard risk value measurement and a daily sales outstanding measurement, the CIRA management team may asses risk and subsequently take actions that will help minimize loss to the CIRA’s members. Metric tools will help measure levels of bad debt, and by making reasonable estimates of the accounts that will be uncollectible as a result of mortgage foreclosure, bankruptcy, or any other market based risks, the CIRA will better be able to maintain financial well-being.

Budgeting for losses through the allowance for bad debt and bad debt expenses will help to offset forthcoming losses; properly assessed late charges in essence fund write-offs arising from uncollectible accounts. Late charges will not stop impending foreclosures, and in reality will likely just add to the already overburdened financial condition of the owner. But, those homeowners who are chronically late, those encompassed in the failure to pay factor, will likely pay the late charges they incur, and in so doing provide a cushion for the CIRA against the losses that can’t be avoided, thereby effectively helping to minimize the burden on those members who do pay in a timely fashion, in compliance with the law and CIRA rules.

As has been shown, deflationary periods reoccur in economic cycles. That means future write-offs should be planned for and quality collections processes implemented as soon as management becomes enlightened.

Chapter 3

 Understanding the business environment

 

When finances are tough for homeowners, the CIRA usually knows it by virtue of the account balances accumulating from unpaid CIRA assessments.

“Often overdue assessments indicate general financial difficulties. Owner’s mortgage payments also are in arrears. When the mortgage company forecloses, the HOA receives outstanding assessments only after first and second mortgages are paid.”[22]

Estimating an allowance for bad debt during uncertain economic conditions is a challenge for anyone, and CIRAs are not always equipped with people possessing the depth of knowledge necessary to estimate financial conditions and outcomes. Therefore, easy to understand and implement metrics is vital for the CIRA management team to have in the toolbox.

Knowing when to take action and what action to take is critical. Adequately assessing risk, and sufficiently hedging[23] against that risk is the means to achieving that knowledge.  Using financial tools in conjunction with an understanding of the CIRA’s environmental conditions will strengthen the CIRA’s financial health and well-being.

 

 

 

The External Business Environment

Integral to understanding the CIRA’s business environment today is an understanding economic conditions related to the mortgage crisis. Knowing what kind of economic cycle the CIRA is operating in will help the CIRA management team assess CIRA risks, thereby leading the CIRA to the best possible financial future. Inflationary cycles bring built-in growth; fair value seems to increase simply as a result of the passing of time. Inflationary economic conditions are not likely to result in high costs to the CIRA in the form of uncollectible accounts or collection costs. If the CIRA is faced with being the foreclosing agent on a property, the likelihood that a gain will be realized is high during inflationary economic cycles, but it is not likely that homeowners will want foreclosure to occur during inflationary times since the value of their property is increasing, and along with it, their own net worth.

Unexplainable, extraordinary economic growth by any industry or industry leader should raise a warning flag and suggest caution with regard to impending risk. Inflationary bubbles generally must burst to allow the market to move back toward equilibrium, and though they are not frequent, as suggested by the graph in Figure 2, housing market bubbles such as we have experienced in our current market crisis are not new to the American economy.

“Between 1996 and 2006, house prices rose by more than 70%, after adjusting for inflation. In the previous century, from 1896 to 1996, house prices had just kept even with the overall rate of inflation.” [24]

As witnessed in our economy many times in many corporate failures, large phenomenal increases almost always lead to large phenomenal failures. Our contemporary mortgage crisis fits in the category of phenomenal economic events and while the inflationary cycle leading up to these events may have served CIRAs well, the following deflationary cycle does not offer such a secure outcome. Deflationary economies build in equity loss, and fair value simply vanishes with the passing of time. CIRAs can face potential high costs associated with assessments receivable in deflationary times as homes lose value and homeowners walk away from personal debt that cannot be serviced. In conjunction with owner financial distress, indicators arise in CIRA financial records pointing toward threat of compromised financial health. It takes understanding of both external and internal conditions to fully asses the significance of CIRA financial indicators.

 

The Internal Business Environment

CIRA managers must understand the internal business climate to adequately assess and implement well designed internal controls. In difficult financial times the risk of error or fraud resulting from lack of controls over CIRA billing and collections processes can contribute greatly to CIRA financial success or failure. 

Assessing the risks associated with assessments receivable involves understanding the billing cycles of the CIRA as well as the budget process. In accrual basis accounting, association revenues should be equivalent to budgeted revenues. Many associations bill monthly, others use a quarterly billing cycle, and still others bill every six months or annually. The billing cycle used is important for assessing risks, including whether or not accounts are collectible, and who is responsible for the debt when a property forecloses or an owner files bankruptcy. Billing cycle regularity should be enforced and managed consistently. Doing so aids in cash flow projections for the CIRA as well as the homeowner, and avoids confusion related to timeliness of payments and delinquency penalties.

Establishing adequate segregation of duties is often challenging in the CIRA environment when the CIRA manages its own business functions and employees conduct the work. Many tasks must be spread between few employees. Segregating billing processes from those of payment processing and deposits are important internal controls to the CIRA. By implementing sound internal controls related to these important business functions, the CIRA will go a long way toward not only preventing errors in accounting, but also toward minimizing losses related to theft and embezzlement. Adhering to these controls does not guarantee success, however.

“Associations that are managed well aren’t bulletproof…But they’re ahead of those that are going along on a shoestring.”[25]

The CIRA should have a strong collections policy that is enforced against all homeowners consistently and equitably. There should be no favoritism or bias in a well run collections process, but there should be an established routine for contacting delinquent members to advise them of their delinquent status and how to resolve it. The Davis-Sterling Act in California requires the CIRA to offer alternative dispute resolution for disputed charges. The CIRA should seek out ways to effectively communicate what homeowner responsibilities are with regard to assessments payments so that homeowners are educated to the risks they assume when they fail to pay on time. Proactive communication accompanied by routine processing can help avoid the ill feelings that arise when owners fail to pay. Having good intent during bad times is only as good as the communication that relays the intent.

 

Understanding CIRA Demographics

Knowing how to interpret the indicators of CIRA financial reports also involves understanding the demographics that make up the CIRA. This means, in part, assessing the age grouping of owners as well as their financial strata. With regard to the subprime loan mortgage crisis, there are allegations of loans being issued to individuals who did not possess the economic where-with-all sufficient to fulfill the assumed debt obligations, and many of those loans, it is suggested, were made to poor blacks. The following table, taken from the Public Policy Institute shows a breakdown of ethnic characteristics in planned unit developments[26].

Table 1 -  Percent of Ethnic Characteristics in Planned Unit Developments

 

	Central City		Suburb
Characteristic	PD	Non-PD	PD	non-PD
Black	4.2	9.8	2.7	5.1
Hispanic	20.1	33.5	18.8	32.6
Asian	11.7	12.3	10.3	9.2
White	60.2	40.8	64.6	49.5

Planned unit developments (PUDs) are one type of CIRA, usually comprised of single-family houses. It has been reported that the mortgage crisis has mostly impacted condominium associations, therefore knowing what type of CIRA is being reported on is important to understand.

Knowing what kind of CIRA is being reported on is a risk factor consideration, and so is the age of the CIRA itself. An aging community comprised of financially secure members could be well-funded and have cash reserves sufficient to weather economic downturns. The CIRAs that have been most affected by the current mortgage crisis are reported to have been newer ones developed in the last decade or so, that had not yet built up enough cash. For CIRAs, falling short of cash means cutting line items out of the budget. For some, this may only mean fewer flowers this year. For others, it could mean eliminating activities that impact member health and well-being, such as snow removal, and building maintenance. As the mortgage crisis continues to unfold and defaults increasingly result in foreclosure, CIRA budgets are becoming strained, and the remaining members of the CIRA are left to pick up the uncovered costs of running the CIRA.

“... growing numbers of foreclosures and late payments have begun biting into monthly dues that pay for supplies and labor. That’s especially true in associations created earlier this decade…It’s much less the case at older HOAs, those inhabited by the wealthy and people over 55.”[27]

With increasing delinquencies associated with the mortgage crisis, the CIRA management team will benefit from an understanding of the demographics of the association. An awareness of the economic events affecting the CIRA business model combined with the use of financial metrics to assess risk levels will help the CIRA management team cut losses associated with bad debt arising from bankruptcy and foreclosure in our mortgage crisis.

 

Understanding Bankruptcy and Foreclosure in the CIRA Environment

     If the CIRA can file a lien against the property, why do delinquencies associated with bankruptcy and foreclosure represent risk to the CIRA? If the association is successful in filing a lien against the property before bankruptcy is filed, the association will be represented in the bankruptcy claim as a secured creditor. The association then “stands in line” with other creditors. The amount of recovery, if any, depends on the number of creditors, the priority of creditors, and the association’s position in line, as well as the market value of the assets involved.  If no lien is filed, or if a lien is attempted to be filed after bankruptcy is initiated, then the association is an unsecured creditor and does not stand in line. According to James Judge[28], an attorney who specializes in bankruptcy and common interest developments, there is a chance in Chapter 13 restructuring bankruptcies that unsecured debt could be recovered, however, the recovery rate could be pennies on the dollar.

 

Bankruptcy: Chapter 7 - Discharge of Unsecured Debt

     If a Chapter 7 bankruptcy is successful, resulting in the discharge of unsecured debt, the association likely will not be able to pursue additional collections activity against the owner. If the owner maintains ownership of the property after a bankruptcy is finalized, a new cycle begins and the owner/member/association relationship picks up anew at the date of discharge. Because responsibility for paying assessments runs with ownership of the property, delinquent assessments arising after the bankruptcy petition are the responsibility of the same owner who filed bankruptcy, if ownership is maintained. If pre-petition debt is secured and ownership of the property is maintained post-petition, foreclosure remains possible on the old debt as well as new debt. According to James Judge, this is a change arising out of the bankruptcy legislation of 2005, and certainly appears to be in favor of associations.

Bankruptcy: Chapters 11 and 13 - Reorganization of Debt

Chapter 11 and 13 bankruptcies rearrange debt rather than discharge it. This means the owner must comply with terms outlined in the restructuring plan rather than the delinquency policy of the CIRA. The outcome is dependent on the claimant’s ability to adhere to the requirements of the payment plan. CIRA #1 experienced one bankruptcy during the control period that was not finalized. The townhouse property was purchased in July 2006 at the peak of housing prices and likely served as a wonderful summertime retreat. Incredibly, before the end of the year we had received notice of bankruptcy; the owners never made one payment on the assessments.  The property subsequently foreclosed by the lender leaving the association with a $7,700 bad debt. My October 2007 Controller’s Report summarized the situation this way:

“Bankruptcy account fell out of bankruptcy. Property has foreclosed. Currently pursuing collections…”[29]

With the exception of the enlightenment provided by Mr. Judge, my perception has been that recent legislation limiting bankruptcy may have had a negative impact on CIRAs in a debt-deflationary cycle. The reason is that with filing bankruptcy being much more difficult to accomplish, in the face of an economy with factors of over-indebtedness and falling price levels, the only other option for cash-strapped mortgagees is to allow foreclosure to occur. Between foreclosure and bankruptcy, the association seems to be in a better position of securing its interest with regard to unpaid assessments with bankruptcy.

 

Foreclosure in Debt-Deflationary Periods

As Fisher’s paper on Debt-Deflationary economies projects, our state of over-indebtedness has led us to a deflationary period. We are experiencing record numbers of foreclosures in the housing market, and by osmosis, delinquencies in CIRAs. Owners who are not able to meet their CIRA assessment demands are likely not meeting their other financial demands related to the CIRA property, and therefore just who forecloses is a matter of timing. Once foreclosure occurs, the owner is no longer responsible for any debt accruing after the foreclosure date as ownership is transferred to the foreclosing party. The options for collection on the old owner at this juncture are via the courts, subject to small claims limitations on amount and number of claims that can be filed per year. Even if judgment in favor of the CIRA is obtained, the chance of collection is limited. If the CIRA files a lien or subsequently the mortgage holders file liens, a lining-up situation occurs once again, similar to that of bankruptcy. Mortgage holders tend to file first and take first position in line, with taxing agencies also taking priority. The association has low priority in settling the debts when there are lenders and taxing authorities involved.

Depending on the age of the CIRA, there may or may not be a mortgage protection clause in the governing documents. According to Karen Conlon, President of the California Association of Community Managers, California’s Department of Real Estate (DRE) requires the language of these clauses to be included in the CIRA’s governing documents of newer common interest developments. These subordination agreements allow encumbrances by interested parties with a senior position, such as the lender, to take an inferior position to later encumbrances, such as the CC&Rs of the CIRA, thereby ensuring the association is paid for assessments incurred should the property foreclose. Fannie Mae loans related to condominium associations require a mortgage protection clause. The argument given in favor of these clauses is that they increase the value of CIRA properties by increasing the potential pool of owners by opening the door to the “best” loans. In June 2008, Fannie Mae announcement #08-16 disclosed new requirements for loan eligibility and approval that included assessing minimum credit scores. Also, credit score requirements were revised and loan-to-value ratios were modified. As was proven by the October 2008 bailout, these steps were too little too late. Perhaps in foresight of the pending price level plunge, in the same document Fannie Mae announced modified policies on approving borrowers with prior bankruptcies and foreclosures on their records[30].  Theoretically, if the bank forecloses on a property located in a CIRA, the borrower foreclosed on remains responsible for the balance outstanding up to the date of foreclosure and the bank becomes responsible from the date of foreclosure (recording of deed). CIRA managers should verify with an attorney what the CIRAs responsibilities are under the governing documents with regard to foreclosure.

In California, the Davis-Sterling Act requires that non-judicial foreclosure cannot occur until the outstanding debt has either accumulated to $1,800 or is one year old. The CIRA may still file a lien during this time and secure the association’s position in line should a bankruptcy or foreclosure occur, but it will not guarantee recovery and there will be costs associated with those actions. There are decent collections agencies available to assist in the process, and unless CIRA management knows the law in this regard, use of an agency is recommended. Some agencies will conduct all collection efforts at no cost to the CIRA[31], and the only thing the CIRA does to comply is to not directly accept any payments from the. An agency operating in this fashion is charging the homeowner directly, and in an inflationary market, this almost insures the CIRA and the agency will collect and prosper. It is likely that agencies operating this way also lost revenues in this crisis market, and they also are left to collect by way of the courts.  If the CIRA is going to push the collection efforts to foreclosure, then it should do so knowing the rights and responsibilities of the CIRA as the foreclosing agent. Theoretically, if the CIRA forecloses, it assumes all rights and responsibilities related to the property. The likely outcome in a deflationary cycle will be the mortgage is greater than the value of the home. This means that the CIRA will suffer lost cash flow associated with assessment revenue and may have to pay up to hundreds of thousands of dollars to settle the mortgage debt. If the economy recovers quickly, gain may be recognized, and when the market reaches a fair price level, the association could sell the property. In addition, the association could rent the property during the time the property is held. This opens the door for other issues, however, such as unrelated business income tax. CIRA managers should consult an attorney to gain clarification as to the impact on the CIRA related to these types of transactions. The outcome of these “legal minefields”, as Karen Conlon of the CACM calls them, depends on factors including the type of foreclosure taking place. If faced with a certain uncollectible account, the short-run costs of foreclosure may benefit the CIRA tremendously in the long-range picture. [32]

 “If the member does not have the ability or desire to pay assessments, the community association may be better off by pursuing a foreclosure for the purpose of replacing the delinquent homeowner with a new member capable and willing to pay assessments.”[33]

A strong, well enforced collections policy incorporating late charges would have helped to minimize the losses facing many CIRAs with a high concentration of mortgage risk. In a high risk CIRA, that being defined in this study as one with a high concentration of owners who are likely to have taken advantage of subprime or Alt-A loans and defaulted, late charges would likely have provided ample cash flow reserves for weathering the mortgage storm. If a CIRA loses 10% of its annual assessments to this crisis, it will likely be proven that there were many factors that could have been controlled to reduce that risk.

Chapter 4

 Establishing a standard risk value for estimating bad debt

 

Currently, there are no standard metrics established for measuring CIRA financial health and well-being. The mortgage crisis has provided an opportunity for assessing CIRA financial trends and establishing a series of baseline factors for measuring levels of bad debt even if the only number known is either assessments receivable (AR) or assessments income (AI). A CIRA reporting under AICPA industry audit and accounting guidelines would be presenting financial data on an accrual basis, which means that the income statement would reflect revenue approximating the amount of revenue budgeted for the fiscal year. In addition, under the accrual basis of accounting, the balance sheet would reflect an assessments receivable balance, potentially a prepaid assessments balance, and often a bad debt allowance value for anticipated write-offs.

If a CIRA presents financial data on a cash basis, finding the assessments receivable balance is much more challenging. Revenue expectations can be derived from budgets and compared to the revenue recorded on the income statement. Material differences are likely to reflect differences between cash basis and accrual basis accounting. In a cash based system, because revenue is recorded as the cash is received versus when the assessments were billed, last year’s balance outstanding and paid would be included in this year’s revenue. Likewise, this year’s balances billed and unpaid will not be reflected in assessment income.

Assessments income or receivables must be known in order to estimate potential loss based on industry standards established in this study. Having both assessments receivable and assessments income values provides an opportunity for projecting a range of potential loss.

 

Understanding Financial Metrics – Standard Risk Value & Daily Sales Outstanding

     The financial measurement tool daily sales outstanding (DSO) provides insight into how many days worth of assessments have not been paid by CIRA members. A CIRA generates revenue by billing assessments to the members based on budgets. In California, the Davis-Sterling Act deems assessments delinquent if they are not paid by fifteen days after they become due, with the date due being established by the CIRA board of directors. Members have an obligation to pay assessments according to board policy by virtue of ownership in a property that is bound to the CIRA by covenants, conditions and restrictions that “run with the land.” For every day that the owner fails to pay, according to the time value of money, the metric represented as DSO grows in value. The higher the average value, the greater the risk associated with the CIRAs assessments receivable accounts.

     Another valuable measurement tool that can be used in conjunction with the DSO in estimating the financial health and well-being of the CIRA as relates to bad debt is the ratio of assessments receivable (AR) to assessment income (AI). This study focuses on establishing a standard risk value to be used in measuring the collections health of the CIRA through the ratio of AR/AI, and should be used in conjunction with an analysis of daily sales outstanding to assess bad debt expense and adjustments to bad debt allowance. Risk must first be identified, and then correlated to specific accounts so that action can be taken to protect the CIRA’s interest in uncollected assessments. This involves notifying homeowners of delinquency status, filing liens on those delinquencies meeting policy requirements, and potentially proceeding with foreclosure if doing so would strengthen CIRA financial well-being. Taking these steps does not insure protection, however and may lead to a false sense of security if the process is not understood well.

As will be described later in this report, a standard risk value (SRV) of .0599, derived from the 2007 sample data, has been established for measuring assessments receivable (AR) balances for potential bad debt write-off. This collections risk value correlates to the daily sales outstanding (DSO) value of approximately 22, and any standard risk value between zero and .0599 represents a zone that includes risk factors associated with error or fraud, ordinary failure to pay debtors, the mortgage crisis, and other potential risks that are unidentified but may be present in the sample data.  A standard risk factor of .0599 or less is projected to mean that the threat of loss resulting from the mortgage crisis is estimated to be no less than .64% of assessments income (AI). Values above .0599 move into the moderate risk zone, with anything above .1198 being suggestive of a CIRA with high concentrations of mortgage risk property owners. The standard risk value is easy to calculate, easy to use and understand, and could help all constituents of common interest realty associations feel more confident in their estimations of CIRA bad debt.

Chapter 5

 Method of Investigation

 

The process began unknowingly when in November 2005 I went to work as the Controller of a large CIRA with 1,529 billable units. This association has been established as CIRA #1 in the sample data used in this study. The base projections for the standard risk value (SRV) and the daily sales outstanding value (DSO) are derived from CIRA #1 knowing first hand that tight internal controls were implemented, adhered to, and monitored. There is a financial history for CIRA #1 dating back to 1991 that is included in the sample data, and the data for the time between November 2005 and October 2008 provides the base from which all projections in this study are made.

When I arrived at CIRA #1 as Controller, I embarked on implementing a new accounting system, and in so doing naturally incorporated the CIRAs delinquency policy, only to find out it was not being enforced. There was discussion with the management team about how to interpret and enforce the policy, and we began educating the membership and enforcing the rules. The delinquency date was defined as the date payment was received (not date postmarked), thereby allowing the accounting department to be accurate in recording dates received. We had measurable, consistent cutoffs that could be enforced equitably. Everyone learned that there would be no write-offs unless circumstances were extreme.  This consistency earned the CIRA a hedge against the mortgage crisis of approximately $35 - $40,000 per year. Through time, the regulars appeared on the revolving collections list, and those accounts represent this model’s failure to pay factor (FPF), which is comprised of those owners who are always paying their debt at some point in the collections efforts but never on time. Between 2005 and 2008, we had steadily been tightening our collections processes, and the key value that CIRA management looked to for determining collections health remained around 2%. But, between July and August 2008, the statistics for CIRA #1 changed when 8 or 9 foreclosures arose and the accounts became uncollectible. This created a defining point for establishing a market risk factor (MRF) for estimating loss related to the mortgage crisis. Through this study, two market risk factors were established, one based on assessment income and the other on assessments receivable.

In conjunction with enforcing the billing cycles, we also tightened controls over receipting, using a cash clearing account to be sure all payments receipted were deposited. Duties were segregated wherever possible for appropriate internal controls. Credit and zero balance statements were always mailed to homeowners and each account balance was verified along with verification that every property had a statement printed and ready to be mailed. Following that process, certified letters were generated to be mailed to all homeowners who had one quarter of assessments in arrears (it was a quarterly billing cycle) plus the current cycle’s assessment balance due and payable. Any account with a balance greater than two quarters was already in the collections system. This policy was strictly enforced and adhered to, with determination to minimize CIRA loss. I was the person responsible for these tasks as well as communications regarding bankruptcy and foreclosure issues.

Because almost all homeowner payments were made by check, there was limited concern over theft related to cash. Because a cash clearing account was used, and a month-end deposit cutoff date was used in recording funds that had not yet been deposited, there was little opportunity for kiting. When deposits were receipted into the homeowner’s account, reference was automatically made in a system function called “deposit selection”. If lapping were taking place, it would show here, especially if the transactions rolled over into a new period. During the education process, we advised homeowners that we were stamping the face of their check with the date checks were received, and that the date stamps would appear either on the original check returned to them, or on the copy sent by the bank. We also provided payment vouchers to be returned with their checks, which added another backup source document. For payments issued online, we either photocopied the check or printed a voucher to include with the batch backup. Payment vouchers were thrown away when received when I first arrived at this CIRA and was among many sloppy processes in place. In revamping the processes, we kept the vouchers, date stamped them, and recorded the check number if the homeowner did not do so for us. We then batch posted so that the vouchers could be maintained and matched with deposit batches. The final step was to record deposits into the general ledger using the deposit batch numbers as the journal reference number which allowed for ease in tying the batched voucher to the bank receipts to the general ledger. This proved to be highly rewarding at audit time.

The risks included in the standard risk value that are associated with internal controls have been identified as the error or fraud factor (EOF). Because internal controls were so tight, and the risk of loss in CIRA #1 so low, the model sets the risk from error or fraud to zero.

There may be other factors relating to collections risk that have not been identified in the model, and unless such risks fall into one of the already defined categories, will be recognized as being in the other risk factor (ORF) category for purposes of this study.

Each CIRA financial report that presents an assessments receivable (AR) value and an assessments income (AI) value provides the reader of that report with an opportunity to calculate the standard risk value by dividing assessments receivable by assessments income. Any resulting value that is greater than .0217 implies a risk of mortgage related debt that is at least .64% of assessments income and possibly more. For those results with values greater than .1198, the model assumes that there is a high concentration of mortgage risk in the CIRA books.

The other risk factor category may include risk factors associated with CIRA location and size as well as risks related to the local economy. CIRA #1 is an aged association, and its collections risk climate includes other risk factors associated with being located in a mountain vacation city that has experienced a mass exodus of business and residents, and generally has a high transient population. The owners within CIRA #1 would likely be considered affluent, a characteristic that early CIRAs were modeled around and for. The resident membership population of CIRA #1 was estimated in 2008 to be around 27%. That suggests that over 70% were transient renters. But, because the nature of the area in which this CIRA community resides is a summertime boating and wintertime skiing community, it is likely that the year round residential non-member population is no greater than 50% of the 70%, or approximately 35% of the total livable CIRA units. This would leave about 38% of the units unoccupied at certain times of the year. Within the 38% accounted for as unoccupied at certain times of the year, it is estimated that during the occupied times, it is either the owners, their personal guests, or vacationing renters who stay for a week to a month, who are living in the units. These are important CIRA risk factors that should be considered in assessing CIRA collections health, which is directly and indirectly affected by circumstances in the greater economy.

An estimated 70% of the members of CIRA #1 live in the greater economy, in areas outside the local CIRA community. These are the other risk factors that are recognized for CIRA #1, and likely there are other unrecognized factors. While developing this model, some or all of the collections risk factors may have been over -or understated. If they are, that is to be discovered, and each can easily be adjusted based on facts that become known.

The standard risk factor (SRV) developed in this study has been set to a value of .0599 and encompasses the base risk factor of .0217 established for CIRA #1, increased by the average unknown additional risk factors of .0382 implied in the sample database results. The standard risk factor of .0599 suggests that given the standard conditions in a CIRA, if it is operated as CIRA #1 was operated, and if the other risk factors are similar in context to the entirety of the risk of CIRA #1, then approximately 5.99% of the CIRA’s assessment income will be reflected on the balance sheet as accounts receivable with some component of the balance being uncollectible as a result of the mortgage crisis, but not less than .64% of assessments income, and possibly as high as 4.46% of assessments income if the additional  other risk factor of 3.82% is related entirely to the mortgage crisis.

Below, Table 2 shows the factors making up the standard risk value for ranges between .0160 and .0723.

Table 2 – Standard Risk Value (SRV) Component Factors and Values

MRF = Market Risk Factor; FPF = Failure to Pay Factor

EOF = Error or Fraud Factor; ORF = Other Risk Factors

 

If the ratio of AR/AI derived from a CIRA financial report reflects a value of .0599, that would suggest that at least .0064 was estimated to be directly related to market risk, .0153 was estimated to be related to normal cyclical delinquencies, and that .0382 was either related to some unidentified risk, or that the market risk, failure to pay risk, or error and fraud risks were understated. Calculated standard risk values that exceed .0723 are considered to be entirely related to the mortgage crisis in this study, and could be materially incorrect given other serious risks such as theft or embezzlement. Such extraordinarily high risk factors should be explored in depth.

Now we have developed the components of the standard collections risk value (SRV) as being comprised of market risk factors (MRF), failure to pay factors (FPF), error or fraud factors (EOF) and other unidentified risk factors (ORF), and we further establish that MRF, as a factor of market risk, is out of the CIRAs ability to directly control. It relates to events occurring in the market economy, specifically in this study as relates to the mortgage crisis. A CIRA with an effective collections policy and efficient collections procedures will still have a failure to pay factor, likely with a value greater than zero. The failure to pay factor represents the regular failure to pay percentage of the population, or a regular type who are habitually late regardless of circumstances. The error or fraud factor is a factor under the control of the CIRA and is a very important one, both in this calculation and for other CIRA purposes. If there are high numbers of cash payments accompanied by loose controls and opportunity for controls override, this factor should be set high.

Chapter 6

 Obtain Financial Reports For Data Analysis

 

Gaining access to financial reports in order to assess risks in other CIRAs was the first challenge. Due to privacy issues, CPAs who provide services to CIRAs are not willing to allow access to client financial reports. The only option available to me, given time and distance issues, was to search for financial reports on the internet. In so doing, I recognized that there was the possibility that the reports I found could be more representative of a wealthier or larger CIRA. In reality, I found a variety of reports for 52 CIRAs in 15 states, with the largest concentrations in Arizona (5), California (17), Colorado (11), Florida (4), Texas (2), and South Carolina (4). All of the South Carolina reports were for four related entity CIRAs, in a sense one CIRA with four divisions, and the reports numbered 28 out of the 177 representing the total sample database. All of the South Carolina reports were also audit reports, and represented the years from 2001 to 2007. There are nine single state reports included in the total sample database of 177.  The 177 CIRA financial reports compiled in the sample database may not be considered random in the sense that they were only drawn from the selection of CIRA financial reports that were made available on the internet. As the CIRA representative posting these reports may have been biased in how the information was presented, such data could be considered unreliable. Of the 52 CIRAs whose financial reports were analyzed, approximately ½ presented reports that were audited. CIRA #1, the control CIRA, contributed 17 audit reports to the total database, in addition to a high quality control environment in which to conduct a study for estimating bad debt write-offs in the current mortgage crisis.

 

Assessing the Validity of the Sample Data

Included in the total sample data are reports for a major ski area recreational-type CIRA, but only the data related to the CIRA assessments were included in the sample database for purposes of this study. Also included is a dismally uninformative report for a CIRA in the Los Angeles region of California with 361 units. This CIRA’s financial report provided only one year of information, and then only total cash and total equity. The unit count was calculated by reading a newsletter indicating that 241 units was the equivalent of 2/3 of the membership. This CIRA’s assessment income (AI) is reported as approximately $200,000, which is immaterial to the assessments income of the total sample, and as there was no way to determine an assessments receivable (AR) balance for this CIRA, the assessment income value in the sample total does skew the standard risk value somewhat.

Of the 177 CIRA financial reports, 11 had zero assessments receivable balances with corresponding assessments income sums of $171,653 for the total sample data and $910,289 for 2007 sample data. The majority of the difference in the assessments income values between the 2007 sample data and the total sample data is related to one CIRA, and clearly the inclusion of this CIRA in the 2007 sample data skews the results. Since there are so many unknown factors, it was decided to keep the data raw in this study. All known balances contribute to the equation and are therefore considered relevant. Based on stated assessments income of $691,790 for this one CIRA, and a standard low risk value of  .0217, an estimation of assessments receivable would be $14,984. Stated 2007 sample assessments receivable is $1,499,176, and the minimal understatement of $14,984 represents approximately 1% of the total stated AR. Including assessments income from this CIRA could produce materially significant errors.

 

CIRA Size and Retained Equity

The sizes of the CIRAs in the study ranged from a minimum of 11 units, a maximum of 6,464, and a mean average of 722. CIRA #1, the test CIRA, has 1,529 billable units. Knowing the errors that existed in the financial reports of CIRA #1, it is projected that there are likely errors in the unit counts stated in many CIRA reports. As an example, during the 1990s before all lots were built out in CIRA #1, and when price values encouraged such, many lot consolidations occurred. The CIRA’s board at that time decided to charge a single lot assessment on a consolidated lot. This left gaps in lot numbers when reviewing accounts being billed, and in establishing the legitimacy of the number of units billed, I went through every lot file and confirmed that the lot had been consolidated. From that information, a database was established, recording all original lots and the billable status of each lot. As a result of this process, it was discovered that one property was not being billed that should have been, and that the audit reports reflected a count of about ten units more than the actual number of billable units. In conducting this study, and considering the possibility of unit misstatements, I believe the information used in this analysis to be reliable enough to be used as variables in performing calculations based on units. One CIRA’s web site did not provide a discernible reliable unit count as there were various layers of units noted that related to different divisions of the CIRA. It was very confusing, so a number was chosen, and may not be representative of the true count for this CIRA, or of the total unit count of 35,375 in the database. As the models in this study are based on dollars, unit count is of little significance.

The wealth of the CIRAs, measured in total equity, ranged from a minimum negative equity position of ($3,293,826), a maximum of $36,048,928 and reflected a mean value of $1,220,512. CIRA #1 wealth in terms of total equity as of December 31, 2007 was $6.9 million. While in this study equity was not used as a major factor in determining CIRA financial health, in the analysis of the CIRAs with financial reports that reflect standard risk values in the high risk zones, discussion is included regarding the overall CIRA wealth including equity position.

Chapter 7

 prepare the data for analysis

 

Compiling CIRA Data Into a Usable Format

For each sample CIRA a line was entered in an Excel worksheet, and each CIRA was issued a number for data control purposes. The name of the CIRA, state of location, and if a California CIRA, the county of location, the number of units in the CIRA, and the year incorporated or established were data items included in the worksheet. Other information collected includes whether the financial reports were audited, reviewed, compiled or generated in-house, and if the CIRA reported using fund accounting and accrual basis accounting. Notes that might help sort through variances were also added as appropriate.

 

Compiling CIRA Financial Data Into a Usable Format

For each sample CIRA financial report, a line was entered in an Excel worksheet designed to reflect the amount of cash, assessments receivable, bad debt allowance, other assets, total assets, accounts payable, prepaid assessments, other liabilities, total liabilities, cumulative excess(deficit) equity and current year excess(deficit) revenues. Assessments income is also entered for purposes of calculating the standard risk value. Assessments revenue was assumed to include any ongoing and regular billings to CIRA members for the purpose of operations and reserve contributions. Other member charges such as late charges are not included in assessments income, though any unpaid assessments receivable balances resulting from such charges are likely included in AR as those amounts are not readily available for adjustment. It is not anticipated that these values would be material to the outcome of this study. Some newer CIRAs developed in the last 10 – 20 years collect low ongoing maintenance assessments in conjunction with a high transfer fee when properties sell. In this study, these transfer fees were included in the assessments income value in order to make the data comparable. There could be material errors in the assessments income calculations in some reports, but most CIRA reports clearly identified assessments income.

From this database, many financial ratios were calculated. The ratios that were determined to be relevant in this analysis were the standard collections risk value (SRV = AR/AI), and the daily sales outstanding value (DSO= AR / (AI/365)).

Chapter 8

 analysis of cira #1 control data

 

In September 2008, after over two years of highly enforced, strong collections efforts, 5 out of 1,529 billable properties completed the foreclosure process. There were 2 out of 1,529 properties that experienced foreclosure in the 2006 – 2007 time period, one of those after falling out of bankruptcy. The estimate of 6 uncollectible accounts out of 1,529 total billable units was established to represent the present cycle and is presumed to be representative of the lowest risk of units uncollectible. This study does not include an analysis of collectible accounts based on units.

      In September 2008, the total assessments receivable (AR) for CIRA #1 was $64,979 out of approximately $3,000,000 billed (AI). AI is slightly overstated in that it does not take into account the 2% discount allowed in 2008, which if taken advantage of by all homeowners would approximate $80,000. Approximately 25 – 30% of the membership applied the discount to their annual payment, and so failure to include this reduction of assessments income would tend to understate the ratios slightly. This understatement is not considered material to the projections, but may in fact be. Within the AR balance of $64,979, $19,073 was determined to be uncollectible AR (UAR) resulting from foreclosure or bankruptcy related to the subprime mortgage crisis. Also, within the remaining estimated collectible balance of $45,906, comprised of 19 units, approximately 11 were “repeat offenders”, those homeowners who were habitually late, approximately every other billing cycle. This group represents the failure to pay factor (FPF) in the model. 

Using the above information, the following risk factors were established and used throughout this study:

Table 3 – Base Standard Risk Value Factors

* rounded

If assessments income is the only known value from the CIRA financial reports, assessments receivable (AR) can be calculated by multiplying the standard risk value by the assessments income value. An estimate of uncollectible assessments receivable (UAR) associated with the mortgage crisis can be calculated by multiplying assessments income by the AI market risk factor of .0064. If assessments receivable is known, uncollectible amounts may be estimated by multiplying the AR value by the AR market risk factor of .2935. These calculations give results that can be compared to the base data, but may not be reflective of the true uncollectible amounts represented in the CIRAs assessments receivable balance.

The last measurement calculated that was used in this analysis is that of daily sales outstanding (DSO).  The DSO measures how many days worth of sales are in the AR balance as compared to annual revenues recorded. Because CIRAs vary in their billing cycles and amounts assessed, use of this metric should take into consideration those CIRA variances. CIRA # 1 billed quarterly and required payment to be received within 30 days to be considered timely. Using this information as a guideline, any DSO score over 30 days would be considered excessive. The mean DSO for CIRA #1 over the periods 1991 – 2007 is 15, with the 2007 DSO score being 6. For CIRA #1, the 2006 DSO score was 7, having jumped from 2 in 2005, likely indicating the changes in market forces and impending foreclosures. While not used in assessing CIRA #1 financial well-being, the DSO is a general performance measure, and is being presented in this study in conjunction with the standard risk value as an alternative measurement that is quick and easy to use. Daily sales outstanding is calculated as follows:

Table 4 – Establishing a Standard Daily Sales Outstanding Measure

* rounded

We are now ready to explore the results derived from the sample database and make final projections of potential lost CIRA revenues related to the subprime market crisis in the sample database, as well as in the United States and California.

Chapter 9

Analysis of Sample Data

 

Estimating Assessments Receivable Using AI Metrics.

Using AR = $1,499,176 and AI = $27,577,717, values derived from the 2007 Sample financial statements, along with AI metrics to test the projection of AR resulted in the following outcomes:

Table 5- Testing AR Estimations With Sample Data

	Testing AR Estimations with Sample Data
AR = Assessments Receivable AI = Assessments Income SRV = Standard Risk Value				Actual AR =	$1,499,176
				Actual AI =	$27,577,717
				Actual SRV =	0.0544
SRV Source		Formula	SRV*	Estimated AR	$ Variance from Actual AR	% Variance
2008 Control		AR / AI	0.0217	$598,436	-$900,740	-60.08%
2007 Control		AR / AI	0.0160	$441,243	-$1,057,933	-70.57%
Total Control		Sum AR / Sum AI	0.0372	$1,025,891	-$473,285	-31.57%
Total Control		Mean	0.0405	$1,116,898	-$382,278	-25.50%
2007 Sample		Sum AR / Sum AI	0.0544	$1,500,228	$1,052	0.07%
2007 Sample		Mean	0.0599	$1,651,905	$152,729	10.19%
Total Sample		Sum AR / Sum AI	0.0560	$1,544,352	$45,176	3.01%
Total Sample		Mean	0.0723	$1,993,869	$494,693	33.00%

*rounded

Table 5 shows that estimated assessments receivable can be manipulated by choosing the standard risk value that supports the calculations desired. The choice of standard risk value should be based on CIRA trends and known risk factors.

Assessments receivable may need to be estimated if not known and can be done by multiplying the chosen SRV value by assessments income.

 

Estimating Uncollectible AR (UAR) Using AI Metrics

From the 2007 sample data, the actual standard risk value was calculated as .0544 and for CIRA #1, the 2007 risk value is calculated as .0160.  Clearly, there is a large variance that could be resulting for various reasons, including reporting error or fraud, high concentrations of mortgage risk, or data calculation errors.

Using AI = $27,577,717, estimations of uncollectible AR based on the AI market risk factor (MRF) obtained in the control data, total sample data and 2007 sample data results in the following observations:    

Table 6 - AI Metrics Used to Estimate AR as .0544 of AI.

Notice that in Table 6 the AI market risk factor increases as the standard risk value increases. This maintains the relativity of base risk as the other risk factors are introduced into the data, which could include high concentrations of mortgage related risk.

 

Estimating Uncollectible AR (UAR) Using AR Metrics

Estimating uncollectible AR with AR metrics is a process of estimating the uncollectible value as a percentage of assessments receivable. Though it can be used with estimated AR, its significance arises where the assessments receivable (AR) value is known. Using actual AR and the three AR market risk factors (MRF) derived from this study, the following outcomes were observed:

Table 7 – Estimating Uncollectible AR Using AR Metrics

Notice that as the standard risk value increases, AR market risk factor values decrease, which maintains the relativity of projected risk in the AR balance. If .0217 reflects 29.35% of uncollectible AR in the base data, then a lower standard risk value means the relative market risk is even higher than 29.35%. As the AR market risk factors fall, other risks increase, and could include higher concentrations of market risk.    

 

Observation of Individual CIRA SRV and DSO Scores

     The table below shows the suggested correlation between standard risk value and daily sales outstanding for control and sample data. For purposes of this study, standard risk value is set at .0599 and will be used for making projections of 2008 sample, United States, and California losses associated with the mortgage crisis.

Table 8 – High Standard Risk Values and Correlating DSO values

The high risk values in the above table are actual results from the specific CIRA financial reports.

Figure 3 below shows the allocation of CIRA risk in the various zones.

Figure 3 – 2007 Sample Data Standard Risk Value

 

Table 9 – Low Standard Risk Values and Correlating DSO values

The low risk values in Table 9 were derived while building the model and correspond to the total sample, the 2007 financial reports in the sample, and results from CIRA #1 for 2007 alone and all CIRA #1 financial reports.

Figure 4 presents daily sales outstanding for the 2007 sample data. Comparing the standard risk values with the daily sales outstanding scores from the CIRA data suggests a correlation between standard risk value and daily sales outstanding as the placement of the CIRAs data points on the graphs are approximately the same.

Figure 4 - 2007 Sample Daily Sales Outstanding

 

 

Analysis of the High Risk Sample Data Group    

Referring to the graphs above showing 2007 data standard risk values and daily sales outstanding scores, we see that three CIRAs appear to have extremely high collections risk. CIRA #5 has a DSO score of 82 with a SRV score of .2238, which means that the CIRA’s assessments receivable are equivalent to 22.38% of one year’s assessment income. This could be a misleading value if the 2008 billing was posted to the general ledger in 2007 near year end. However, in 2005 this CIRA’s DSO was 62, and in 2006 the DSO was 72. Unless the CIRA consistently posts future billings in the prior year, it appears this CIRA’s receivables are climbing steadily between 2005 and 2007.  My projection would be that this CIRA has a high concentration of mortgage loan failures resulting in foreclosure, and therefore may experience or has experienced high losses of assessment revenues that may still be reflected in the books as assessments receivable. The financial reports from this CIRA are not audited, which leaves questions regarding the validity of the data. There were indications on the CIRA’s web site that fund and accrual basis accounting are used. Since this CIRA’s assessments income is over $2,000,000, the potential write-offs associated with this CIRA are high. There is no bad debt allowance recorded in the books to indicate what CIRA management might be expecting to happen.

CIRA #4 also is in the extremely high risk zone with a daily sales outstanding score of 68 and a standard risk value of .1870, meaning that this CIRA’s assessments receivable are equivalent to 18.70% of one year’s assessments. The assessments income for this CIRA is only $48,300, representing a much smaller write-off risk to the US economy than that of CIRA #5. However, the impact to the members of a small CIRA can be far greater than the impact to the members of a large CIRA, especially if the CIRA does not have excess cash reserves. This CIRA’s balance sheet reflects approximately $22,000 in cash and investments, and $33,000 in equity from excess revenues. There are no other assets reflected on the books. This suggests that this CIRA may be in trouble financially. Without the presence of fixed assets on the books, the retained excess equity generally represents cash in excess of that collected for the year. Given the placement of this CIRA in the SRV and DSO graphs, it may be projected that this CIRA will be facing special assessments or bailout from the greater community.

CIRA #31 is the third CIRA that sits in the extremely high risk zone with a daily sales outstanding score of 71 and a standard risk value of .1941. This CIRA, from Arizona, has 163 units, with assessments income of $27,046 recorded and assessments receivable of $5,250. While potential write-offs from this CIRA do not represent a large impact on the US economy, the outcome to the CIRA could be substantial. We do not know what year this CIRA was established, but there is only retained excess of approximately $9,000 and cash of approximately $10,000 with no other assets or liabilities recorded on the books. Prepaid assessments of approximately $6,500 represents about 2/3 of the cash reported. We only have one year’s financial report so we cannot see the trend in the past couple of years. The outlook does not appear good for this CIRA, especially if it is a condominium association.

Three CIRAs sit in the moderately-high risk zone, with two from Florida and one from Texas. With daily sales outstanding scores ranging from 46 to 51, and standard risk values of .1264 - .1410, they appear less likely to be in imminent danger of financial distress that the three CIRAs sitting in the extremely high risk zone. A closer look at these CIRAs reveals that # 51, from Florida, is fairly small with only 89 units. This CIRA’s assessments receivable is only $5,685 and its assessments income is only $40,310. It has a retained excess equity value of $29,413, and cash reported is $29,813. There are other assets recorded, though only about $2,000 in value. Depending on whether or not this is a condominium CIRA, the results could indicate this CIRA is on the edge of financial distress.

CIRA #25 is from Texas and has a recorded assessments receivable balance of $35,258 with assessments income recorded as $254,633. There are 1,616 units in this CIRA, and about $8,000 more in other assets than other liabilities reflected. Retained excess equity is $202,155, which is about $20,000 more than the cash stated of $180,392. While the equity in this CIRA is better than some, $202,155 is a small value for 1,616 units.  In comparison, CIRA #1 with 1,529 billable units has over $6.9 million in equity as of December 2007, but is also nearly 50 years old. CIRA #25 was established in 1999, and therefore is likely to be suffering from high mortgage defaults in the current market.

CIRA # 29 represents the state of Florida and has 948 units and an assessments receivable balance of $36,714 accompanied by assessments income of $290,353, a high ratio when compared to CIRA #1 with approximately $64,000 AR and $4.0 million AI. The retained excess for this CIRA is $164, 264 and the cash is stated as $143,244. Other assets are about $144,000, but other liabilities are about $124,000, which suggests that there may be a substantial inter-fund balance that needs to be transferred. Cash is about 87% of retained equity. We do not know the year this CIRA was established, but it appears this CIRA could be in financial distress.

Those CIRAs with standard risk values below .1198 are not likely to face serious threat unless their trends show increasing standard risk values or daily sales outstanding scores. There are factors in this crisis that affect timing of when mortgage distress is occurring, and gaining awareness of these factors is imperative to an effective bad debt analysis. Certainly with daily sales outstanding scores ranging from 28 – 43 they should be watched cautiously. Three CIRAs from California appear in this grouping, with CIRA #34 representing Lake County, #36 representing Nevada County and CIRA #45 representing El Dorado County.

CIRA #34 has an assessments receivable value of $28,729 with assessments income of $244,850, which correlates to a standard risk value of .1173. This CIRA has cash of $625,236, which is higher than the CIRA’s retained excess equity of $525,982. My first instinct was to think that this is a really good sign for this CIRA, but a closer look reveals other liabilities exceed other assets by about $70,000. We only have 2005 and 2007 financial reports to consider and those reports reflect that in 2005 this CIRA had a DSO of 100 whereas the 2007 report reflects a DSO score of 43. It appears this CIRA likely experienced write-offs between 2005 and 2007 and is now in a recovery mode. This is an older California CIRA and was established in 1964. It also is in an area that has not had the wealthiest of residents, and therefore could very well be in financial distress.

CIRA #45 resides in El Dorado County, has 627 units, and was established in 1971. With assessments receivable of $23,638 and assessments income of $222,908 it reflects a standard risk value of .1037. This CIRA has retained excess of $288,716 and cash reserves of $189,689. El Dorado Hills, where this CIRA is located, is part of the Sacramento Metro Region, which has nearly 25% of California’s CIRA units.  It is certainly plausible that this CIRA could have a higher than average concentration of high risk mortgage failures resulting in delinquencies.

Five CIRA data points lie on the zero level line, indicating zero AR balance. While this could be true, it is not likely and any CIRA with a zero AR should be scrutinized for unreported receivables and payables balances. Consider a CIRA with zero recorded assessments receivable to be in a high risk zone unless credible evidence proves otherwise.

 

Summarizing the Results of the Study

The 2007 results for CIRA #1, the test CIRA, reflect a standard risk value of .0160, whereas the mean for all years between 1991 and 2007 = .0405. Using CIRA #1 as a model, knowing the minimal impact experienced from foreclosure in today’s market and the tight controls that were in place as the crisis unfolded, we can see that the standard risk value of .0217 derived from the 2008 control period reflects minimal risk from the market activities related to the subprime mortgage loan crisis. After fully analyzing the status of all accounts in collections in CIRA #1 in September 2008, it was determined that total write-offs at year end could be as high as $25,000 out of $4.0 million in assessments, leaving the ratios approximately the same. The 2007 sample data mean standard risk value equals .0599, which is higher than the test data of .0217, and indicates that there are other risk factors in the 2007 sample CIRA environments that do not exist in the control CIRA environment. This unknown risk in the Sample CIRA reports could be comprised of any of the risk factors in the model, including error or fraud, ordinary failure to pay, and higher concentrations of mortgage risk properties. This study assumes that the increased risk is predominantly due to higher concentrations of mortgage risk in addition to possible control risk factors.

Two models were generated to compare the results of the total sample data and 2007 sample data with the base year. These two models provide measurements that can be used to make projections as to potential lost CIRA revenues in the sample data as well as in United States and California resulting from the mortgage crisis. Both models can be set to estimate AR where not given as a percent of assessment income (AI), and if a comparison is to be made to the base data, the base standard risk value is .0217. The base AI metrics model estimates uncollectible AR as a percentage of assessments income using a market risk factor of .0064 and the base AR metrics model estimates uncollectible AR as percentages of assessments receivable using the market risk factor of .2935. This means that .64% of assessment income is presumed to be uncollectible, as was found to be true in the 2008 control data, and 29.35% of assessments receivable are presumed to be uncollectible, as was found to be true in the 2008 control data. In other CIRAs the mix may be quite different.

The standard measurement for daily sales outstanding arising from the 2008 control data results in a score of 8, which correlates to a standard risk value of .0217. Any projections arising from data where only assessments income is known will result in a daily sales outstanding value that correlates to the standard risk value used in projecting assessments receivable.

These tools are only a means for estimating assessments receivable and uncollectible assessments receivable, and as such should be treated as an estimate instead of as actual results. Assessing the scores in real CIRA financial reports requires obtaining some level of understanding of the social and business environment of the CIRA as well as the relevant market conditions of the entire economy and the local economies in which the CIRAs are integral.

Chapter 10

 Estimating lost CIRA revenue in the United States

 

Using the annual assessments income of US CIRAs projected to be $41 billion and a standard risk value of .0599, assessments receivable are estimated to be approximately $2.5 billion. A range of uncollectible accounts receivable is estimated to be between $262.4 and $672.4 million as follows:

Table 10 – Projecting Lost US CIRA Revenues Using AI Metrics

Table 11 – Projecting US Assessments Receivable and Uncollectible AR

Estimating uncollectible AR with AR metrics without AR being given requires estimating AR given known assessments income.  Using a standard risk value of .0599, we estimate the same AR value as calculated in Table 10, with Table 11 showing the results of  projections for uncollectible accounts in US CIRAs using AR metrics.

The range of estimates using assessments receivable metrics is slightly higher than the range using assessments income metrics, but the results are very close. Depending on the concentrations of mortgage risk in US CIRAs, it is estimated that $2.5 billion of the $41 billion in CIRA revenues generated annually is in a receivable status, with somewhere between $262.4 million and $720.8 million being uncollectible as a result of the mortgage crisis. With a 2004 estimate of common interest development units comprising 15% of total US housing, an estimated 1,847,427 CIRA units in the United States could be impacted by the mortgage crisis.

Chapter 11

Estimating lost CIRA revenue in California

 

Using a standard risk value of .0599, and estimated annual CIRA revenues for CA in the amount of $6.3 billion results in the following projections for assessments receivable and uncollectible AR:

Table 12 – Projecting CA AR and Uncollectible AR Using AI Metrics

Using a standard risk value of .0599, we estimate the same AR value as stated in Table 12. The following results are observed:

Table 13 – Projecting CA AR and Uncollectible AR Using AR Metrics

The range in the estimates for California generated by the two models is between $40.3 million and $110.8 million.  California total housing units are estimated to be approximately 10% of all US housing, but California is reported to have approximately 27% of the mortgage failures.

Chapter 12

 Applying Metrics for Estimating Uncollectible balances

 

The management of CIRA #1 has used the standard risk value as a measure of collections health of the CIRA for many years. For this CIRA, a standard risk value of approximately 2% of assessments income has been considered very healthy. While the CIRA’s mean standard risk value for the years 1991 – 2007 is .0405, the value for 2007 is only .0160, reflecting in part the outcome of tight internal controls even while the market was generating losses in other CIRAs. The historic data of CIRA #1 shows rises in assessments receivable, and consequently the standard risk value, that correlates with previous housing price level adjustments and while CIRA #1 is not representative of all CIRA environments, knowing the history of the CIRA, how it was managed during this crisis, and the outcome of less than 10 foreclosure losses out of 1,529 billable units between November 2005 and September 2008 provides a guideline for measuring the operations of other CIRAs.

In applying these metrics it is imperative to fully understand the environmental factors affecting the CIRA, both internal and external to management’s control. The risk to CIRA #1 may not have been equivalent to today’s actual risk in other CIRAs, which in part is dependent on where the CIRA is located, the type of CIRA, and the demographics of the CIRA membership, but those differences must be understood to use these metric tools in the most effective way. The variances between the two model calculations reflects unknown risk variables. Certainly, the values derived from the control data represents the lowest potential risk. In the total sample data there are 83 CIRA reports with standard risk values less than .0217. This means that approximately 47% of the sample reports reflect conditions similar to CIRA #1. Showing the strong correlation between standard risk value and daily sales outstanding, there are also 83 CIRA reports with daily sales outstanding scores less than 8. In setting a standard for measure, one must be careful not to set the bar too high.  Doing so could result in losses related to many risk factors including error, fraud, market conditions and the payment cycles of those individuals who fail to pay on time. In assessing the 2007 sample data standard risk values and daily sales outstanding scores, using .0599 as the average measure of standard risk, it is observed that 42.5% of the CIRA standard risk values and daily sales outstanding scores are above average. Many of those above average values likely correlate with the mortgage and housing market crisis. Several CIRA reports reflect very high risk levels, and it would be interesting to see if those CIRA’s future financial reports provide any insight into the predictions made in this study.

Chapter 13

 In Conclusion

 

Estimating bad debt is always a judgment call. Never-the-less, it is hoped that these metrics will prove useful in the everyday life of CIRA managers and other constituents wanting to understand a CIRA’s financial health as it relates to collections, especially during our debt-deflation economy. Based on the results of this study, it appears that approximately half of the CIRAs in the US are facing a higher than average concentration of mortgage risk. Of the 40 CIRAs included in the 2007 sample data, 15% appear to be in an extremely high risk position while 27.5% are in the moderately-high risk zone.  With care taken to enforce a strong collections policy, enhanced by engaging the services of a high quality collections agency, these CIRAs could weather this market storm and minimize financial damage.

As discussed in this study, a CIRA that is proactive in its collections efforts stands a good chance of protecting CIRA members from covering losses associated with bankruptcy. Also shown in this study, foreclosure resulting from the conditions associated with a deflationary economy and falling price levels can wreak havoc on a CIRA’s financial well-being.

Considering all factors in the subprime mortgage, from the levels of public greed to our incessant obsession with home ownership, Irving Fisher’s Theory on Debt and Deflation appears to hold credence. While our contemporary market adjustments are vastly different from those of the depression era, most interestingly, the forces associated with our over-indebtedness seem to have dissolved the secondary mortgage bank safety net built to protect society from the results of the very activities that destroyed them. We are often our own worst enemy, and as we strive to buy low and sell high I am reminded of the cyclicality of the Ouroboros, or a serpent consuming its own tail, representing the repetition of history.

  Nothing in life can sustain continued, high-level growth forever, so why it would be expected of an economy is somewhat mysterious. What rises must eventually fall, and that would seem to include price level adjustments resulting from debt-deflationary economic cycles.

Many believe that a CIRA cannot experience loss resulting from bad debt because the real properties are bound to the CIRA by way of law. The current mortgage crisis has brought to the forefront of the minds of those who have worked in CIRAs daily for the past few years that this is far from true. CIRAs have and will continue to experience some level of loss related to our current housing market downturn. Just how dramatic the impact will be depends on, above all things, concerned constituency willingness to study the risks to the common interest realty association, and to act in a way that best serves the interests of all CIRA members.

     Assessment of risk is the first step toward taking action. By using the two models developed in this study, the first step will have been taken toward minimizing loss and thereby building the goodwill in the CIRA for its many constituents, who include not only the members themselves, but also the members of the greater communities in which these community associations reside.

This study could be continued by performing unit analysis to estimate losses. To possibly increase data reliability, data stratification may provide additional insight. Follow-up could be performed to determine if actual results support projections. Also, additional work could be done to estimate losses in California counties.

The United States would be served well by having free public access to CIRA financial and other pertinent data. There are CPAs who perform services for CIRAs that have kept track of certain CIRA facts, but that information is only accessible by paying fees to the CPA firms.  In the interim, all interested CIRA constituents should take the time to learn what they can about their CIRA operations and begin familiarizing themselves with trends showing in CIRA financial reports. If all members acted in this manner they would be better informed citizens and probably increase their own wealth by increasing CIRA goodwill.

 

 

 

 

 

 

 

 

BIBLIOGRAPHY

Submitted 12/2/08 to CSU Sacramento in partial satisfaction of the Master of Science Degree in Accountancy.

Robbin McCullough