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Subject: Reserves Investment Policy
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DavidW5
(North Carolina)

Posts:565


02/14/2016 7:21 AM  
I know that some states mandate that HOA reserve funds only be invested in FDIC or other government insured accounts such that there is no risk to principal. Virginia is one such state and I believe Oregon is another.

Does anyone (Tim?) have a list of the states with that requirement?

My current HOA's investment policy allows up to 40% of the reserve funds to be invested in market based investments such as mutual funds and exchange traded funds. I was elected Treasurer in January and I have introduced motions to restrict investments to government insured accounts but the board has not approved them. I am looking for additional ammunition to support my motion.
TimB4
(Virginia)

Posts:16416


02/14/2016 7:37 AM  
Try doing an internet search on:

investing hoa reserve funds

reserve fund investment guidelines

DavidW5
(North Carolina)

Posts:565


02/14/2016 1:44 PM  
Thanks, Tim. I have already done that and have provided our board numerous articles that clearly state that putting funds at risk in the market could expose directors to personal liability for losses incurred. I still can't get 4 votes for a motion to change the investment policy.

I guess my only option is to take my argument directly to the members of the community whose funds have been put at risk.
TimB4
(Virginia)

Posts:16416


02/14/2016 4:25 PM  
Associations are allowed to invest their reserves. They should do so prudently, but some Associations actually utilize the investment income as a methodology to fully fund the Reserves.

Providing that your Association has a written investment policy and the Board is in compliance with that policy, along with being in compliance with applicable laws, I don't think any member would win any action against an individual board member.

You have provided the articles and, I suspect, the info you gained from this forum to your Board. Bringing up the issue, proposing an amendment to your policy and providing the information (as you have done) is really all you can do. As you pointed out, this may be one issue you may simply be outvoted on.

GenoS
(Florida)

Posts:3132


02/14/2016 10:08 PM  
I think the key, as TimB4 says, is to have a WRITTEN investment policy and have the board review/revise/re-approve it on a regular basis. Make the owners aware that such a thing exists and FOLLOW it.
PitA


Posts:0


02/16/2016 5:11 PM  
My current HOA's investment policy allows up to 40% of the reserve funds to be invested in market based investments such as mutual funds and exchange traded funds.


Evidently the OP's HOA has said policy in place.

The OP simply disagrees.
ArtT5
(Illinois)

Posts:82


02/16/2016 7:30 PM  
I would question the wisdom of any law that prohibits any investment of HOA funds that involves risk. There are situations where funds may remain invested for 10 years or more (say, money set aside for repaving roads, which will need to be done every 15 years). When investing for such periods, a willingness to take a moderate amount of risk, IF DONE WISELY, can produce a greater expected return with a small probability of coming out worse than with risk-free investments. In a comparable situation where you were investing a college fund for a kid who will be going to college 10 years from now, few investment advisors would recommend 100% risk-free investing.

Having said that, I have to add that there are significant problems in taking risk with reserve fund investments:

* Most homeowners are not sophisticated enough to understand that a sound investment strategy will lose money in many years, and will gripe about bad results even when the strategy is good.

* Individual investors tend to bail out of risky investments just when they need to be holding on or even increasing them. You need to be sure the investments are controlled by someone with the fortitude not to engage in this kind of destructive behavior.

* Most investors are clueless about the importance of minimizing investment cost and will give up much of the benefit of their willingness to take risk by choosing high-cost investments or relying on high-cost advisors.

All of these considerations point toward minimizing risk when investing HOA funds. Yet in the right situation, where you have a long enough time horizon and investments under the control of a Board that has enough savvy to deal with these problems, it could be desirable to invest a portion of the money in something like a low-cost, broad-based stock index fund.

For risk-free investing, the best deal is probably a CD ladder set up at one of the companies offering relatively high rates. Last I looked, you could get something like 1.75% on 4-year CDs. Laddering them improves liquidity and prevents you from being hurt too badly by a sudden increase in rates.

If you're investing more than $250,000, you may want to set up an account with an institution that participates in CDARS, a program that makes sure you have FDIC insurance on the full amount by spreading ultimate responsibility for repayment among multiple institutions, but without the need for you to open accounts with more than one.

Finally, if you want something "official" that supports minimizing risk, there are some conservative recommendations in the Foundation for Community Association Research's "Best Practices" publication on Financial Operations:

http://www.cairf.org/research/bpfinancial.pdf
KellyM3
(North Carolina)

Posts:1418


02/22/2016 11:41 AM  
David,

I like your conservative strategy and would disagree with any HOA budget planning that assumes return on a mutual fund for revenue.

Reserve Funds are most healthy when cash flows into them regularly and flows outward under a schedule of projects, which is fairly easy to accomplish with planning. The reserves should always hold enough in case the HOA follows its schedule of property amenity replacement and gets "hit" with an unexpected project replacement that insurance won't cover.

Reserve Funds that only grow upward reflect an HOA board that isn't investing in the community. Reserves that go downward, or bust, reflect dues rates that are too low.

The main issue would be liquidity of the invested Reserve Fund amount. Can you get your money if disaster struck? Can you afford to throw away dues payer HOA payments because the market dropped?

It's a local leadership question but I'd recommend no riskier account than a money market fund.
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