Recommendation to Board--Postpone Vote

May 25, 2009

To: Board of Directors
Elizabeth Condominium

From: Molly Frantz
Apartment #1007

Subject: Proposed Management Contract with Legum & Norman -- My Understanding, Comments, Concerns, Worries, and Alarm

Recommendation: Postpone the vote to accept the Legum & Norman (L&N) contract until the Board has the facts and figures to support an affirmative vote.

Committing to an unspecified -- dare I say, unknown -- six-figure payment to L&N is (1) fiscally irresponsible, (2) a breech of Board responsibility to the owners of the Elizabeth Condominium, and (3) and abuse of Board power. To fire employees (or whatever you want to call it to ease your consciences) without cause and in the absence of supporting cost-benefit analyses is (1) morally reprehensible, (2) fiscally irresponsible, (3) a breech of Board responsibility to the owners of the Elizabeth Condominium, and (4) and abuse of Board power.

The manner in which the Board of Directors of the Elizabeth Condominium has approached the need for and selection of a Professional Management firm brings to mind these quotes:

"Not only should you believe in what you’re doing/ But you should know what you’re doing." (Mason Williams F.C.C. Rapport (Liveright))

"This update on our recent discussions concerning a management firm for the Elizabeth Condominium is the first of what we expect to be a continuing transparent process." (emphasis added) (Woody Cunningham (For the Board) Letter to friends and neighbors dated February 24, 2009)

"Prior to that meeting owners will be provided the Board’s estimated one time costs as well as the annual costs for professional management." (emphasis added) (May 13, 2009 notice to Residents and Owners)

Thinking Behind My Recommendation:

1. The Board’s decision-making process has been anything but transparent, forthright, open-minded and amenable to the concerns of the owners.

Administrative services account for 10 percent of the Elizabeth Condominium’s operating budget. Eliminating this line item from the Budget significantly and irrefutably alters the management structure of the Elizabeth Condominium. This is not just simply a personnel issue involving the firing and hiring of individuals. And, as such, such a change deserves to be openly presented and discussed with the owners. I do not believe the Board has come anywhere close to doing this.

It is pretty hard to believe the Board was interested in what the owners had to say at their first public information meeting (January 14, 2009) about hiring a management firm. Mr. Cunningham’s remarks were general, although he did indicate the net cost of hiring outside management was estimated to be $67,000 more than what is currently paid to manage the Elizabeth Condominium. No gross cost estimate or limit on any contract was provided. Mr. Cunningham refused to discuss the ramifications on Elizabeth administrative staff/management structure, claiming this was a personnel matter that can only be discussed in Executive session. Owners were permitted to speak for 3 minutes. Immediately thereafter the Board voted (4 yes and 3 abstention votes) to proceed with contract talks with Legum and Norman.

The February 24, 2009 communication to owner’s (1) again mentioned the $67,000 net cost associated with hiring a management firm. This figure was now "whittled down" to $17,000 because the Board "saved" $50,000 by eliminated one security/doorman sift – an example of "apples" and "zebras" (not even "oranges") cost analysis and budget scoring! (2) Reaffirmed that only the Board has the authority to hire and fire Elizabeth employees, but failed to address the actual concern/question (as expressed at the January 14 meeting) -- i.e., what will happen to our Administrative Staff if their responsibilities are to be performed by L&N? This is a budget question, NOT a personnel question! (3) Agreed to explore a "hybrid" form of management with L&N, but nothing was said about what that meant. And (4) indicated that any management contract would not be long-term (e.g. 5 years). Of course, there was no indication of what the Board considered "a fair evaluation time" period.

At the April 21, 2009 Board Meeting, Mr. Cunningham indicated that drafts of a contract with L&N were being exchanged; he would provide NO information on the content; AFTER the contract was signed there will be an information meeting. He also informed the owners that there would be NO discussion or ballot initiative regarding the proposed contract/action at the Annual meeting.

May 6, 2009 Annual Board meeting. I did not attend but know it was ugly.

The May 13, 2009 notice for the upcoming May 26, 2009 open Board meeting "to discuss and vote on a proposed contract with Legum and Norman" indicates "Prior to that meeting owners will be provided the Board’s estimated one time cost as well as the annual costs for professional management."

At the May 20 meeting, Mr. Rhodes and Ms. Harrington, representing L&N, and Mr. Cunningham went to great lengths to provide the owners only general information about Legum and Norman, as a company, and the generic responsibilities and management structure L&N would provide the Elizabeth Condominium. There was no information forthcoming on the fate of the Elizabeth’s Administrative management structure/staff if the L&N contract is signed, even though these responsibilities would be assigned to L&N. After the discussion period, Mr. Cunningham distributed a "Cost Analysis for Legum and Norman Professional Management at the Elizabeth" that laid-out the basis for the $67,000 net cost figure that had been previously provided. Reflections on the May 20 meeting:
Mr. Cunningham stated that "there will be a complete staff restructuring" .
He also stated that he "expects there to be a substantial number of Elizabeth employees that will be supervised by a L&N Site Manager". The implication was that these employees will remain Elizabeth employees, however, the Cost Analysis indicates that there will be NO Elizabeth employees.
How many Elizabeth Administrative Staff positions are slated to be eliminated?
Accountant/Bookkeeper Position: The Cost Analysis’ narrative states that "Handling of all financial matters would be centralized at L&N Headquarters." The accompanying financial details clearly indicate that the accountant/bookkeeping position will be eliminated from theElizabeth’s budget and, presumably the management structure.
Manager and Assistant Manager Positions: The L&N handout identifies 15 "Specific job responsibilities of your Community Manager". These duplicate the responsibilities of our current Manager and Assistant Manager positions. Unlike the accountant/bookkeeping position, the Cost Analysis does not show any offsetting cost savings and, by inference, changes in the Elizabeth budget. Is the Board really proposing to pay for the same services twice? Or is the Board intending to fire these employees in Executive session once the contract is signed? Is this the "promised" transparency?

2. It is clear that the identified $117,978 cost estimate laid out in the Cost Analysis is no where near whatthe actual L&N contract payments will be. In fact, I have serious doubts the Board has any idea what the L&N contract will actually cost the Elizabeth Condominium.

The first-year costs of the L&N contract is either (1) grossly understated on the Cost Analysis ($117,978 or $89,850 Base annual fee plus $28,128 in per-incident service fees) or (2) the Elizabeth Condominium has been overpaying for the administrative responsibilities carried-out by the Elizabeth’s administrative staff ($217,777 based upon the FY 2009 Budget amount of $202,440 for Administration Salaries plus FICA of 7.58%, but excluding an unknown amount for insurance and other employee expenses) more than twice what L&N purports to be able to do the work for.

The L&N proposal calls for a part-time Community Manager, a full-time Site Manager, and a Resident Services Coordinator. Is the $89,850 Base annual fee really adequate to cover their costs? It is clear from the Cost Analysis and from Mr. Bressler’s questions at the May 20 meeting, that a significant portion of L&N’s payments will be generated by per-incident items. Is this how L&N will recoup the "cost deficit" for managing the Elizabeth? Does the Board know what these fees are, let alone what they are expected to amount to? Is there a reason the owners are not privy to this information?

How open-ended is the contract’s cost structure? Has the Board made provisions to have L&N provide the kind of information necessary to evaluate how effective and how economical L&N’s services are (i.e., to be able to carry out the "fair evaluation" referenced in the February 24, 2009 communication)? How detailed will that information be? What controls will be in place to monitor and -- if need be -- limit these service fees? For instance, the Cost Analysis indicates that all of the Elizabeth staff will actually be L&N staff. L&N charges an additional 2.5% service fee for Payroll Administration when the employee is an L&N employee as opposed non-L&N employee. Who is going to monitor these fees?

Has L&N ever provided the Board an estimate of what it’s contract will cost? The Cost Analysis provided the owners was done by our accounting firm (DeLeon and Stang) on January 4, 2009, even before the Board voted to enter into negotiations with L&N! The numerous NL (not listed or addressed) entries make it clear this can not possibly be a comprehensive cost estimate. Yet this is what was provided the owners, presumably in accordance with the May 13 notice. Why is the cost estimate coming from a third-party and not from L&N? Shouldn’t a firm as experienced as L&N be able to provide their own cost estimate of their proposed services? After all, if they can’t do that, what is so great about their expertise!

What due-diligence has the Board undertaken to assure itself that the L&N contract is the best approach to meeting the management challenges the Board is trying to fix? For instance, our financial system. Mr. Axelrad wrote, "While we have excellent personnel running and overseeing our finances, our system is antiquated." (undated correspondence, handed out at the May 20, 2009 meeting). Is hiring L&N the only way to modernize our finance system? What did the cost-comparison for upgrading/replacing our current software coupled with providing training to "our excellent personnel running and overseeing our fiances" show? Was such a comparative cost-analysis even performed? I have to think that there is more to L&N’s assuming the finance responsibilities than meets the eye (or the public record). Two explanations might be: (1) there are problems with our employee that the Board has previously failed to address and has now chosen contracting-out as the way to resolve the situation, or (2) L&N wants to perform the financial responsibilities because it will be a cash cow for them.

Why hasn’t the Board provided the owners accurate and current information regarding the estimated cost of the L&N contract and compared that to the offsetting line-items in the FY 2010 Budget? Is the Board even able to provide the owners such an analysis? This begs the question "What else isn’t the Board sharing with the owners?"

3. The proposed annual increase in the L&N contract (CPI + 1.5%) is incredibly generous and will yield double- to triple-digit percentage growth in L&N’s profits over a five-year span, while the overall payments to L&N will only increase modestly during the same 5 year period.

It is very interesting that the proposed L&N contact is not a cost plus contact. It made me wondered just what that 1.5% factor above CPI growth would mean to L&N’s bottom line. I did three analyses -- assuming L&N had build-in a profit margin in the first year of 1%, 5% and 10%. An initial 1% profit margin grows to 6.5% of contract payments by the 5th year, a 700% growth in profits. A 5% initial profit margin grows to 10.3% of contract payments by the 5th year, or a 155% growth; and a 10% initial profit margin grows to 15% of contract payments by the 5th year, or an 86% growth. The total payments to L&N grow only 30.7% during the same period. (Spreadsheet attached to the Board Member’s hard copies).

The disproportionate growth in profits reflects the wonderful power of compound interest, especially since the 1.5% factor is applied to the total cost of the contract, not just to the profit portion. I can’t imagine why the Elizabeth would agree to an automatic increase in the L&N’s profit margin without requiring a commensurate increase in benefits for the Elizabeth. Why would the Elizabeth Board agree to pay more for an actual service than its actual cost (remember, the profit is already built-into that "cost")! Am I missing something here? One of the arguments for hiring L&N is to have access to their "best-practices". Well, shouldn’t the Board also use "best practices" in structuring the contract? There is a reason for cost-plus contracting -- it keeps down the gaming of the system.

Besides this wonderfully profitable profit margin windfall for L&N, an automatic annual increase above costs would seem to discourage any incentive for efficiency. I strongly suspect that the proposed contract does not contain any provision/expectations for productivity savings. To the extent the L&N achieves productivity savings, these would all be retained by L&N.

There are "Value-Added" reasons to hire L&N. Wednesday evening Mr. Rhodes listed the following things to illustrate what L&N "brings to the table": access to more resources; economy of scale when purchasing things like energy, insurance, trash; access to best practice knowledge and expertise; cross-training of L&N employees as well as back-up staff. And L&N has certainly contributed to reducing our expenditures by alerting us to the error in paying State sales taxes on utilities. But is a Automatic Increase contract provision of 1.5% over CPI (or any amount for that matter) the fiscally responsible way to reward them? Wouldn’t a bonus (i.e., a one-time sharing of the savings) mechanism be more appropriate? Wouldn’t that provide incentive to L&N to identify/facilitate future cost savings for the Elizabeth?