Q&A: Rancho Santa Fe Association Manager Pete Smith discusses finances, the economy, broadband coverage and more

The Rancho Santa Fe Review recently sat down with Pete Smith, manager of the Rancho Santa Fe Association, to discuss how the Association is doing in light of the economic downturn of the past several years and other issues facing the organization.

Smith, 59, has been with the Association for 20 years, the first five as golf club manager, and as manager since 1996. Before coming to the Association, Smith worked in finance and banking.

— Reported by Joe Tash

Following is an edited version of the conversation.

Q. Can you tell us about the Association’s role and what it does?

A. Perhaps a lot of people don’t realize, it is a homeowners association. The Rancho Santa Fe Association is, we believe, the oldest still-operating homeowners association in the state. There may be some dispute because there were several of them being formed about the same time, but certainly within the top 10 of homeowners associations. That was back in (1927). Now today there are some 40,000, almost 50,000 homeowners associations throughout the state. And we were set up originally to operate a lot like a city, that’s why we have a building department, a planning department; the thought was perhaps someday we would evolve into a city. And as you know from the history of Rancho Santa Fe, we’ve looked at it several times, but we never have made that step. The reason is, generally the membership feels that we get services we need directly from the county and we don’t have to deal with the additional burden of city expenses. And that historically has been the decision, and frankly, in light of today’s market, we see so many municipalities are just struggling to survive, it was probably the right thing to do.

Q. What are the key issues facing the Association currently?

A. Right now, I think in a nutshell, it really is the economy, and the impacts of the economy on virtually everything we do. Rancho Santa Fe is not immune to the downturn. Our assessment that we charge our members, the homeowners’ dues, are based on property values. And it’s currently 14 cents per hundred dollars assessed valuation. That works out to about $1,400 per $1 million in assessed valuation. So if you have a $2 million piece of property here, that’s $2,800 a year of your assessment, that’s the average throughout the community. So you can see that’s about $225 a month, so, as homeowners association assessments go, that’s really pretty reasonable. Especially for the bundle of goods that you get.

Right now what we’re seeing is a younger family is moving to Rancho Santa Fe, and that’s because the property values have dropped and the price range from $1 million to $2 million to a lot of people is affordable. Especially when you equate in the fact that schools and school districts right now are struggling financially and you can get into one of the best-rated schools in the state, the Rancho Santa Fe school is a public school. So you don’t have the annual tuition that you would at some of the private schools. Yet the caliber of education is every bit as good.

The other thing that we are facing with the economy is — just like a lot of homeowners associations — it impacts our collection efforts. Our delinquencies are up. As I’ve told the board, the bad news is our delinquencies are up 400 percent. The good news is overall they’re still under about one and a half percent, which, as you know from businesses, that’s virtually unheard of.

Q. Can you put some numbers to that? What are the outstanding delinquencies?

A. We have about 1,900 properties in the Covenant (the Association’s geographic boundaries). If they have not paid the assessment in a year we’ll suspend them and lien their property. Homeowners associations have the right to file a lien on property directly without going through the judicial process. And the thought is because it’s to the detriment of the entire community if people are not paying their bill. So the board in July passed authorization for (liens) for the 2010-2011 assessment that had not been paid, and there were 15 properties. So you could see 15 out of roughly 1,900 is pretty low.

One of the things that’s happened that’s a little misleading in the numbers, when the economy first started turning down in 2008, we had a large influx of delinquencies. And those were the spec builders. The developer out here, the people that had leveraged their properties, as soon as the market turned they were upside down, they stopped paying.

Now what we’re looking at, unfortunately, the reason I say our issues are economic, we’re now getting into what I would call some of the core membership, people who have lived here a long time that have struggled through the early couple years of the downturn, they’ve tried to hang on but they’ve gotten to the point that for many of them they just can’t. So I would say what you see now is some of the delinquencies are more of a challenge just because... they’re losing their home. They’re people that you know losing their homes.

Q. Is this resulting in reduced revenue and, if so, have you had to make cuts?

A. Our assessment is based on property values. Last year, for the first time since we’ve kept records, property values overall in the Covenant area have actually dropped. They dropped about 3.1 percent so what that means is our income dropped obviously by that 3.1 percent. For the current fiscal year, 2011-2012, we had originally budgeted that property values would stay flat. We don’t know what that number is until early September, when the county releases the property values. We just got that number and unfortunately, again, property values have dropped in the Covenant. They’ve dropped two and a half percent for the year, in a year-to-year comparison.

Q. So that’s the first time that’s happened?

A. Last year was the first time it ever went negative in at least 30 years. And the reason I say 30 years is we don’t keep records past that.

The other thing that happens when property values drop, you can go back to the county and have your properties reassessed, and the values dropped, and that is happening a great deal. We honor whatever value that the county recognizes. We’ve had some people drop as much as 20 percent.

Q. Have you had to make any cuts? Reduce staff?

A. We’ve done exactly that. Last year, we had one of our planners leave and we didn’t replace him. The other thing, the managers and above, nobody received any pay increases. Used to be we’d give health benefits to all full-time employees of the Association. Generally, with new employees we don’t offer health care anymore. That’s case-by-case. If you’re going to hire a position where it’s customary in the industry, we still have to be competitive with our package, we will do that. So we’ve cut back along those lines and we’ve also cut back on some of the discretionary things.

The good news for the Association is our legal litigation expenses are way down. We just have not had a lot of expenses. In the last 10 years, we’ve had years where… our expenses have been $400,000 or $500,000 a year. Last year, they were somewhere around $125,000. So, that’s down a great deal.

One thing that gives us some flexibility that the average homeowners association doesn’t have, is, I mentioned we did that 14 cents, 14 cents per hundred of assessment. Right now, we allocate 11 cents of that into our general services, which is our normal operating (costs) — that’s the road crew, the patrol, administrative staff, all that. Three cents goes into an open space fund to buy potential open space purchases. What the board has done historically when the cash flow gets tight, they’ll change that allocation. They’ll move some of the allocation from open space into general services. And the goal is obviously is we don’t ever want to be in a position to have to increase peoples’ assessment.

Back in 04-05 we actually dropped our overall assessment two percent, from 16 to 14. Thirty years ago we were at 22 cents.

Q. How many employees do you have?

A. The Association has about 135 employees, including the golf club. The biggest one’s the golf club, they’ve got about 90 employees. You have the park and rec. crews, they’ve got a dozen, the patrol has got another 10, 11, right in there. The Association administration staff, our planners, Art Jury process, me, our accounting people, they’re about another dozen. But clearly the largest number is the golf club. They’re the golf pros, the waiters, the chefs, the busboys, their maintenance crew as you can imagine is about 20 people. Then we have employees at the Osuna Ranch, which we own. A couple of employees at the tennis club, so we do have some other scattered employees. That’s kind of the mix.

Q. You survey Association members every 10 years on long-range planning issues. The most recent survey results were released in April. What were the key issues that came up?

A. The board takes those surveys very seriously and they try to implement all the recommendations that come back, the majority of the recommendations from the members. The one thing, the number one thing that came out of that was broadband coverage. The community is concerned… with inadequate broadband coverage. To that end we have a committee that has specifically been formed to look at that issue and they have started that process.

Q. And what kind of things can the Association do?

A. The problem is because of the topography here, the different servers out here in this area, there is no one solution that’s going to fit the whole Covenant. My suspicion is it’s going to be a lot of different areas to address. Whether it’s AT&T U-verse in one area and it’s cable in another… can you get service through satellite access, what is the best way to get it to people? And what the committee’s doing right now is they’re meeting with providers out here, they’re meeting with some of the companies that have looked at providing more of a global coverage out here, and the hope is to come back with some kind of recommendation and solution that’s going to work for people.

Q. Is it strictly finding an outside vendor to do it or is there the possibility that the Association itself could be involved in providing infrastructure, laying cable, or putting up relay stations?

A. At least in my opinion, from what we’ve seen so far, the right provider, it doesn’t exist because you can’t justify it economically, without some support. And that’s been the story of Rancho Santa Fe forever. Because the homes are so far apart, and the topography is such, the economies of scale to try to provide coverage… they look at it and go, oh, it doesn’t work. So part of our review when we get into this, we’ll say okay, what does it take to get it in here. And frankly, it becomes difficult to say who’s going to pay for it. Because if the Association pays for it, we represent all homeowners here, and some of them will come back and say, hey wait a minute, why are you using part of my dues to pay for a system that I had to personally pay for to bring to my house? That’s inequitable.

Q. What about concerns with traffic and roads?

A. One of the issues, from my perspective, where we have a real problem out here, is road conditions. And that is a direct result of economics as well. Funds to do roads out here come from the state. And the state is in terrible shape. So they’ve cut back the money they’ve sent. But at the same time, if you drive around the roads here, they’re horrible. I do a lot of bike riding throughout the county, and frankly, I think Rancho Santa Fe may have some of the worst roads in the county, which surprises me, because just the base and the awareness here.

Q. What else came in the survey results?

A. One of the questions is generally, how do you feel the Association is performing? Their general overall perception of what the level of service is perceived to be, and 86 percent of the people who responded said it was just right. Not enough was 10 percent and too much was 4 percent. So the board looks at that and thinks okay, we’re doing pretty good. Let’s focus in on maintaining what we have as opposed to trying to expand things.

Q. What about business development in the village? Any areas the Association is concerned about, or issues it plans to address?

A. We’re back to the economy. The economy has hurt the village. You can walk through and see the vacancies in some of the retail, as well as second-story space and things like that.

What the community has always liked in the village is retail businesses that support the community. The coffee shops, the bookstores, the cleaners, those type of retail operations. As you know there’s just a proliferation of banks and real estate. When economics come into play, that’s who can afford the rent. The retail can’t. And so we’ve looked at ways over time, how can we help those retail businesses survive and thrive in the community? And it’s a tough one. Economics are working against them.

One of the challenges in the village, it’s a perceived challenge, has always been parking… and how do you fix the parking in the village? And the problem, depending on what perspective you have, the problem differs. If you’re a cleaners or a coffee shop, one-hour parking’s great for you. If you’re a restaurant, you need two- or three-hour parking. Some of the real estate folks like all-day parking because their clients come and they go out looking at houses. They’re gone for long periods of time. So it’s hard to find a solution… who do you help without hurting somebody else?

Q. Any final thoughts?

A. I think the good news is, probably the biggest story again is the economy. And the answer to that is we’re doing well. The Association is getting through just fine. The golf club is doing well, considering the environment. You look at other clubs and they’re struggling. Ours has had to cut back too, but their cash flow is positive, and they’re not having to cut a significant level of service, so it’s good. Revenues are good. Crime here, knock on wood… has been flat to down for the last five to six years overall, it’s surprising, back to the economy, that’s usually when you have a tick up.