Funding a Reserve

Started by LorieV • 5 replies • 1352 views

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LorieV (Pennsylvania)
Posts: 1

Posted:

My HOA is sending out a separate line item $ on our Yearly bill to fund the reserve. Our bylaws state any new fees require an assessment or an increase in our yearly dues. Shouldn't the funding of the reserve (which was predicated by a Reserve Study) be done via an assessment or an increase in dues which would therefore fund a budget line item?

I am interested in your thoughts on how a reserve fund might be established.

TimB4 (Tennessee)
Posts: 21,046

Posted:

Short answer, Yes.

Have you asked your Board for an explanation? It could be that you are being assessed a single amount but the Board wants to show how much of that is for operating expenses and how much is for the Reserves. Perhaps the "bill" can be better designed to prevent confusion.

Is it possible that the Association is having an initial special assessment to kick start the Reserves?

FrankM7 (Pennsylvania)
Posts: 61

Posted:

Quote:

Posted By LorieV on 01/01/2012 3:46 PM
My HOA is sending out a separate line item $ on our Yearly bill to fund the reserve. Our bylaws state any new fees require an assessment or an increase in our yearly dues. Shouldn't the funding of the reserve (which was predicated by a Reserve Study) be done via an assessment or an increase in dues which would therefore fund a budget line item?

I am interested in your thoughts on how a reserve fund might be established.

My thought on your billing is that your dues statement should include two items with one total. It should list the amount designated for your annual budget and also the amount to be transferred to your reserve fund account.

Your reserve study should also be based on a 10 or 20 year projection of repair and replacement expenses, estimated dates for the expenditures, the estimated amount of each entry, and an annual or quarterly amount to be contributed with each dues payment to completely fund the projected expenses prior to or on the projected date when it is needed. The study should also show the amount per member per payment.

As far as I know, PA does not require a reserve study, although any responsible association should have its board doing one itself.

DavidW5 (North Carolina)
Posts: 565

Posted:

In our association the reserve is funded via monthly transfers from the operating budget.. The operating budget (including the planned transfers to fund the reserves) is a balanced budget (i.e. the total income is equal to the total expenses). The operating budget that is presented to the members at a board meeting and is posted on the HOA website includes a pie chart showing the breakdown of the monthly assessment to the various categories of the budget, including contribution to the reserves.

Given all of that, the monthly assessment amount is fixed and covers both the operating expenses and the contribution to reserves.

FrankM7 (Pennsylvania)
Posts: 61

Posted:

Quote:

Posted By LorieV on 01/01/2012 3:46 PM
I am interested in your thoughts on how a reserve fund might be established.

I guess I did not really answer your basic question. If your association does not have an existing reserve fund account presently, they should establish one. It simply needs to be a separate account with a name which reflects that it is a reserve or capital account, and is to be used for reserve account type expenses as I mentioned above. The account, as calculated by the reserve study, establishes a fund for projected costs at future dates, but when unexpected repairs, etc. occur which are not part of the reserve study plan or line items in your budget, an assessment would be needed to cover those particular costs.

In another discussion here, I read about an association's management company dipping into the reserve account to pay current budget items because of late payment fees. In my opinion an association should not give any management company direct access to the association's accounts, but rather provide monthly amounts to them in time to pay bills. It is the ultimate responsibility of the treasurer and the entire board to safeguard association funds and allocate them strictly according to the budget and the reserve study plan.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Frank,

Some HOAs must temporarily dip into what's a "reserve account" to maintain cash flow when monthly collections fall short and the HOA board doesn't necessarily enforce a strict collections policy.

If an HOA board can't trust a bonded and insured property management company, which itself is subject to annual audit of its bookkeeping, to write checks on the HOA's behalf, then the point of having a property manager is moot. It's more risky to have board members cutting checks in 99.9% of cases.

Regarding two statements, I would think the board is being very clear as why there is an assessment and why it's being assed - for the Reserve Fund. Reserve Fund Deposits can just as easily be incorporated into the operating budget as a line item. It's a form of communication from my perspective.

They key is board transparency.

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