Dr. Albert P. Bartlett, is  a physicist who claims that “The greatest shortcoming of the human race is our inability to understand the exponential function”. He points out what is undeniable: that at current growth rates the world population will have to decline within a relatively short period of time, or we will not have enough room to stand up, let alone farm, and that this decline can only come about through a finite number of mean.

Analogous to Dr. Bartlett’s assertions,  we posit that “the greatest shortcoming of housing mutual directors is their inability to understand the exponential function.”

Around the time of the 3rd mutual presentation of the version 3 of the 3rd mutual 2009 budget, we pointed out that our assessments had increased something around 60% in a period of 8 years. We were assured that this had been discussed this with Janet Price, PCM financial officer and the real value was just over 5%.

We took a careful look at the figures covering the past 8+ years and found that the annual increase in assessments were fairly constant at roughly 5.3% per year.  We made no impression on the directors to whom we pointed out that this was significantly above the annual inflation rate.  After all, it is merely 5.4% per year.

On the other hand, Professor Bartlett made a number of points directly pertinent to the discussion.  An exponential function is nothing more than an equation which you would write down “if you’re going to describe the size of anything that was growing steadily.”  In cases of constant growth, you can calculate how long it would take to double the value or cost of things such as automobiles, petroleum, or assessments.  It seems that the doubling time can be calculated merely by dividing the number 70 by the % growth per year.  At a 5% growth rate an assessment will double in 70/5 or 14 years.  It is simple arithmetic.  Since our assessments have been growing by over 5% per year, in 13-14 years, the monthly assessment will reach $1066.

Are these numbers real?  Well, President Jimmy Carter, in a speech on energy, said that “In each of those decades (1950’s and 1060’s) more oil was consumed than in all of mankind’s previous history.”  A shocking statement, but it was the simple consequence of a 7% growth per year in world oil consumption–the historic figure up until the 1970’s. The statement was accurate.

Professor Bartlett offers a view of the inflation in the cost of ordinary goods over 70 years, a conservative estimate of lifespan.  After 70 years at an increase of 7% a year (a doubling time of 10 years)  a $.55 gallon of gasoline will cost $35.20; a $4000 auto will cost $250,000 and a $45,000 home nearly $3,000,000.  Is this absurd?  No.  In 1960 the cost of an average car in the US was $3000, in 1980 it was $7200, in 2000 it was $20,355.  These costs are doubling every 14-15 years and indicate a roughly 4.5% rate of inflation which was the actual average rate of inflation over that 40 year period.

The question, then is,  is this effect inevitable?  The answer is, at least in part, no.

For instance, there are advances in technology and increased competition which may limit the growth in cost over a period of time.  Ultimately, though, there is the impact of consumer resistance.  If we take a look at automobiles, we can see that the resistance to the exponential price increase was overcome by market strategies.  First the traditional cash purchase gave way to financing over three years.  As the cost increased to a new resistance point, financing was offered first over five and then over seven or eight years.  In periods where long finance terms were not enough to protect market volume, reduced interest rates, even zero interest, were introduced and the market and the price increases continued.  And what is the result of this strategy?  With the collapse of several major banks and other institutions it is not immediately possible to purchase a car using home equity.  Leasing, which requires dealers or manufacturers to finance their inventory, is extremely limited, and as a result the sales volume has, in many cases, dropped by 50% and the US makers in particular are near bankruptcy.  All of this is the result of an exponential increase in cost.

The $1,000,000,000.00 question is, How does this relate to Laguna Woods Village? 

The simple truth is that without incentive on the boards to limit the yearly increase, this overall increase is inevitable.  However, remember that oil consumption has not kept on doubling since Carter’s day.  Part of that is price resistance and part relies on our stumbling attempts to evaluate alternate energy technologies.  Remember that Saudi Arabia forced (this year) a decrease in the cost of oil because they were afraid that the high prices would force us to switch to alternate technology.  We need to take a lesson here.  We must cease doing things the way they have always been done.  Everyone knows that warehousing appliances and other inventory is a waste of money–too high cost of labor plus the capital investment.  Home Depot and Lowes will guarantee delivery within a day.  So what is stopping us?

Excluding the past year (2008) the inflation rate under Clinton and Bush’s first term was under 3% per year. The 3% constant increase has a doubling time of 23 years; virtually half what we are experiencing as manor owners at 5.3% . When the discrepancy has been pointed out to directors the response is always that they are “improving services” which means spending more money and increasing reserves and yet GRF, which in the event of a catastrophe, provides less critical facilities has been padding their reserve accounts at the expense of the housing mutuals.  Since these directors are not accountable to the membership directly -  they are elected by the housing board members -  members have no say about GRF budgets. When United Mutual proposed not accepting a $2 increase in GRF reserves, Janet Price said it was impossible that they not do that. Her response is always that any exceptions to proposed budgets may only be made early in the budget process (for instance version 1or 2) and not during the final budgetary review. What then is the purpose of the final review if changes cannot be made? Why is the GRF budget built before the housing mutual budgets? That process is upside down and backwards. Whenever cost savings are proposed, the response is always “we’ve never done it that way” or “that will decrease property values.”  This is said and accepted without a valid study of actual impact.

Who benefits from increased assessments and increased operating costs?  What is the difference between a $93 million/year budget vs. a $180million budget? These numbers provide financial clout. Anyone who controls the allocation and investment of funds of this magnitude wields tremendous clout within the financial organization that houses the funds. What sorts of benefits would accrue by keeping funds in a single location? The primary beneficiary is PCM.  Management fees are closely related to total budget since managers of huge funds receive greater compensation than managers of smaller funds. Therefore management fees go up at least proportionally to the budget.  Larger budgets imply larger reserve and long term investments in addition to liquidity. Who selects the savings instruments and how are they purchased? Janet Price. Who directs where services are obtained? PCM. Who gets the bids if they are bid out? PCM. Who approves approved contractors? PCM. On what basis are they “approved”? Is there any board involvement in the approval process?. If so, at what stage is board approval sought? And what about the shell game of the myriad of offshoot corporations that cover all operating segments?  Who potentially suffers from disbanding broadband services; a financial albatross on the community? The revenues are not accounted for now.  Broadband, nursery, contracting–all are areas where PCM/GRF has set a series of “subsidiary” corporation such as Media Services 55, contractor, nursery sales/trades.  And our directors cannot track down revenues through these corporations because they are either subsidiaries of PCM (Construction) a private for-profit corporation, or only accounted for in a single line where all operating revenues are lumped together.

The result of this exponential increase in assessments can ultimately only be the bankruptcy (and default) of manor owners and the inability to attract a customer base large enough to keep our manors filled. In short this policy risks the solvency of the Village and opens the door for redevelopment and the loss of our senior community lifestyle.  The San Sebastian is just phase I. Can United’s redevelopment be far in the future? This is the result of business as usual.

Based on Bartlett’s exponential function, our present assessments will be doubled in 14 years. That means in Third they will be $1066 but even more if PCM is allowed to continue to control our funds they way “they always have.”

Can you afford business as usual?