ANNUAL FINANCIAL REVIEW HIDDEN VALLEY FOUNDATION ANNUAL MEETING

ANNUAL FINANCIAL REVIEW HIDDEN VALLEY FOUNDATION ANNUAL MEETING November 22, 2015 Prepared by: Robert J. Kollar, CPA Treasurer, Hidden Valley Foundation

WHAT EVERY HOMEOWNER SHOULD KNOW ABOUT THE FOUNDATION’S FINANCES TOPICS: • • Annual Audit of Foundation’s Financial Statements Financial results for year ended June 30, 2015 Replacement reserves—taking care of our community for the long-term! Fiscal year June 30, 2016 budget

ANNUAL AUDIT OF THE FOUNDATION’S FINANCIAL STATEMENTS • Required by our by-laws • Unqualified or “clean” opinion again rendered on our financial statements • Very important! This sends a positive message to prospective buyers (as well as their mortgage lenders) that our financial statements have been subject to an independent audit by a neutral third party and are in compliance with Generally Accepted Accounting Principles (GAAP) • Auditor communication with audit committee— auditors noted no weaknesses in internal controls

ANNUAL AUDIT OF THE FOUNDATION’S FINANCIAL STATEMENTS • Audit committee involvement: a) Recommend CPA firm for current year audit b) Provided input to the auditors on areas of suggested audit emphasis c) Met with the auditor prior to the financial statements being finalized, reviewed the draft of the statements and audit adjustments d) Committee members: Bob Armen (Chair); Kellie Kuhleman, CPA and Mike Roberts

FINANCIAL HIGHLIGHTS Fiscal Year ‘ 15 Operating revenues Operating expenses Operating surplus Total transfers to reserves Remaining surplus Actual $2, 381, 474 1, 782, 110 599, 364 408, 700 $190, 664 Budget $2, 367, 754 1, 957, 733 410, 021 408, 700 $1, 321 Fiscal Year ’ 14 Operating revenues Operating expenses Operating surplus Total transfers to reserves Remaining surplus Actual 2, 371, 546 1, 780, 818 590, 728 398, 700 $ 192, 028 Budget $2, 372, 890 1, 958, 102 414, 788 398, 700 $ 16, 088

FINANCIAL HIGHLIGHTS Reasons for the surplus in FY ‘ 15: • Snow removal costs less than budget by approximately $157, 300 (budget of $375, 000; actual of $217, 700) due primarily to more snow removal done in-house and better coordination with snow removal vendor • Some budgeted areas not expended (e. g. , landscape planning) • Savings in the aforementioned categories were offset by expenses in excess of budget related to professional fees (legal work) and pool maintenance

FINANCIAL HIGHLIGHTS • 97% of revenues come from member assessments; remainder from directory advertising, late charges, misc. income (consistently 97 – 98%) • Approximately 73% of total operating expenses are in five categories (5 year-average): • • • Labor/benefits/taxes Grounds maintenance Snow removal/salt 24 hr. Security Utilities TOTAL FY 15 25% 23% 12% 8% 5% 73% FY 14 25% 21% 15% 8% 6% 75% FY 13 21% 19% 16% 7% 7% 70% FY 12 25% 23% 7% 9% 8% 72% FY 11 23% 20% 17% 8% 8% 76%

FINANCIAL HIGHLIGHTS—SUMMARY At June 30, 2015, the Foundation: • Had NO long-term debt (no loans, mortgages, or other obligations) • Finished the fiscal year with an operating surplus • Made all of the budgeted transfers to our reserve replacement fund

REPLACEMENT RESERVES—TAKING CARE OF OUR COMMUNITY LONG-TERM • At June 30, 2015 the Foundation had capital reserves of $2, 319, 000 (Board Designated Replacement Fund in the audited financial statements) • Capital reserves are maintained to fund significant repairs and replacement of existing assets. The Foundation’s practice is to transfer a monthly amount into the replacement fund throughout the year (based on an independent reserve study). Considered a best practice for planned communities. • We also move any remaining surplus at the end of the fiscal year into reserves. • The replacement fund is invested conservatively in money market funds and certificates of deposit (spread across various banks in accordance with our Investment Policy).

REPLACEMENT RESERVES—TAKING CARE OF OUR COMMUNITY LONG-TERM • Our investments are invested in a “laddered” fashion; amounts maturing each year for several years • Provides slightly higher earnings and ensures that funds are available when needed for capital projects • As of November 2015, our reserves have the following maturities: Currently available (money market) $ 542, 896 Maturing in 2015 250, 000 Maturing in 2016 500, 000 Maturing in 2017 756, 515 TOTAL $2, 049, 442

REPLACEMENT RESERVES—TAKING CARE OF OUR COMMUNITY LONG-TERM Reserve expenses—FY 2015 approximately $670, 000, including: • $490, 000—paving streets, sidewalks, walking paths • $111, 000—South Ridge / Highland Center renovations • $55, 000—Summit pond repairs Prior years reserve expenses: • FY 2014—$326, 000 (paving, Highlands Center, Summit Pond) • FY 2013 --$66, 000 (paving; ADA; drainage, storm water maintenance) • FY 2012 --$511, 00 (street paving; retaining wall replacement; drainage projects and tennis court repairs) • FY 2011—$ 48, 300 (Highlands pool renovation) • FY 2010—$411, 100 (street paving) Total reserve expenses (from 2010 – 2015) = $ 2, 032, 400

REPLACEMENT RESERVES—TAKING CARE OF OUR COMMUNITY LONG-TERM Over the next five years, projected capital expenditures from our reserves are estimated (in the reserve study) as follows: • FY 16—$423, 000 (street paving, light poles, sport courts) • FY 17—$473, 000 (street paving, sidewalks, light poles) • FY 18—$418, 000 (street paving, guardrails, light poles, vehicle) • FY 19—$352, 000 (sidewalks, light poles, vehicle) • FY 20— 205, 000 (paving, light poles) Projected, next five years = $1, 871, 000

IMPORTANCE OF REPLACEMENT RESERVES! • Defined—amounts invested and “set aside” from operations to fund future major repairs and/or replacement of Foundation assets (pools, trucks, etc. ). Reported as the “Board Designated Replacement Fund” in our financial statements. • Best practice in planned communities is to have an independent consultant perform a “reserve study” with regular frequency (e. g. , every 2 - 3 years). • Independent consultant reviews all of the community’s existing assets and infrastructure, their current condition, and assesses when major repairs/replacement should occur in the future and their estimated cost.

IMPORTANCE OF RESERVE STUDY! • Independent consultant is used. • Estimates future costs of repairs or replacement and when it will be needed (typically a 30 -year estimate). • The future amounts needed are compared to amounts currently held in capital reserves, and a funding recommendation is developed (i. e. , how much should be added to reserves each year to meet future expenditures). • Funding recommendation is included in our annual budget. • Inflation rates and estimated interest earnings are factored into the calculation. • A reserve study of the Foundation’s assets was completed in early summer 2014. Results (totals by major category) are included on the last page of the 2015 audited financial statements.

RESULTS OF RESERVE STUDY • Over the thirty years covered by the 2014 reserve study, HVF • • will need to spend $ 19. 7 million to maintain the existing assets of the community. Expenditures recommended by the reserve study over the next five years covered by the study are $1. 871 million (refer to previous slide). Additional amounts will also be spent to address various drainage issues in the community. Recommended increases to reserves over the next five years covered by the study are $2. 2 million. As part of the FY ‘ 16 budget, the Foundation budgeted for increases to reserves of $419, 000. Amounts are transferred into reserves on a monthly basis ($34, 917/month).

WHY DO WE NEED REPLACEMENT RESERVES? Hidden Valley Foundation owns and must maintain the following assets and infrastructure: • Approximately 10 miles of paved roads • Approximately 25, 000 linear feet of walking paths • Approximately 68, 000 square yards of parking areas • Two buildings • Two pools • 14 ponds • Approximately 1, 500 streetlights • 50 dumpster blinds • Basketball and tennis courts • Vehicles

FUNDING OF CAPITAL RESERVES Three ways to fund capital repairs and replacements in a planned community: “COUNTRY CLUB MODEL”—special assessment to each member as needed. B. BORROW MONEY—must repay with interest. C. “LEVEL FUNDING”—build into annual budget an amount to fund future needs based on an independent reserve study (current approach at HVF) A.

OPERATING BUDGET FISCAL YEAR JUNE 30, 2016 OPERATING BUDGET Revenues $ 2, 452, 063 Expenses 2, 018, 597 Surplus-before transfers to reserves 433, 466 Transfers to reserves 429, 000 Projected surplus $ 4, 466

FISCAL YEAR JUNE 30, 2016 BUDGET —CURRENT STATUS • First time in three years—assessment increase ($15/month) • Necessary due to loss of revenue from Four Seasons and anticipated additional expenses for legal, utilities and maintenance • Based on review of financial results for the first quarter of FY ’ 16—revenues are consistent with budget and expenses are slightly lower than budget ($27, 000 surplus for 1 st quarter). • The major unknown that could impact this year’s budget— severity of the winter and the amount of snow removal and salt costs that will be incurred. • Monthly transfers to reserves of $34, 917 are being made in accordance with the budget.

CAPITAL BUDGET FISCAL YEAR JUNE 30, 2016 CAPITAL BUDGET—$ 658, 000 This year’s capital budget includes: • Continuation of road paving program • Sidewalk/walking path repairs and paving • Drainage repairs • New Dump Truck • Streetlight replacement Sport Court repairs • South Ridge Center office renovations • South Ridge Pool repairs • Community landscaping project

FINANCE COMMITTEE • The committee’s role is to advise the Foundation’s Executive Director and board of directors on accounting, budgetary and financial matters affecting the Foundation. • During the past year, the committee was actively involved in developing and monitoring the Foundation’s annual budget and our investments.

FINANCE COMMITTEE MEMBERS • Bob Kollar, CPA, Chairperson • John Cupps • John Eddy • David Oster • Bert Ries • Sam Rockwell • Chris Umble

SUMMARY • Our community is financially strong! • Unqualified or “clean” audit opinion on the Foundation’s financial statements • No long-term debt! • Budgeting for capital reserves is an integral component of the overall budgeting process • Included in annual budgeting process are the results of reserve study requirements—this ensures adequate financial resources available to maintain the assets of the community! • Active audit and finance committees monitoring the Foundation’s financial affairs