Recommended operating fund

Started by NancyM2 • 5 replies • 1358 views

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NancyM2 (California)
Posts: 249

Posted:

What is the recommended operating fund reserve for a HOA relative to the average monthly expenditure? For example, if monthly expenditures average $100,000 do we need $250,000(a factor of 2.5x) in our operating budget or is a smaller or larger amount recommended per "generally accepted accounting practices" for HOA's? Our association's history of dues payment(from 600 members) is very good and our budget estimates usually are within +5% of actual expentitures at the end of the year.

Thank You
Nancy M

GlenL (Ohio)
Posts: 5,491

Posted:

Check your documents, the answer should be in there. Ours requires an operating account equal to three months of assessments.

Studies show that 5 out of 4 people have problems with fractions

RobertR1 (South Carolina)
Posts: 5,164

Posted:

Glen is probably right for his HOA in Ohio. It appears from the manying posting on this site from California, that a different drummenr might lead the band in CA. If not in doocuments, I would ask state clarification. Your AG office might be able to direct you.

GrahamO (Ontario)
Posts: 55

Posted:

Interesting question, Nancy. Here’s an approach you might look at. First … ensure that you are looking only at the “fund” (actually, bank balances) for operating expenses. It should not include reserve fund money. Second I’m going to suggest a mathematical approach which may be or may not be your “cup of tea”.

It’s based on a simple statistical formula for standard deviations (SDs). (Don’t give up yet!). With this formula you can take your monthly operating expenditures, month-by-month, over, say, two or three years. The SD formula will give you the average (they call it the “mean”) as well as the SD. If your average is, say, $150,000 and your SD is $30,000 that means that 68% of your expenditures will be between $120,000 and $180,000 — 150 plus-or-minus 30 (that’s 1 SD). 80% of your expenditures will be between $60,000 and $240,000 — 150 plus-or-minus 60 (that’s two SDs). And virtually all of your expenditures will be between “0” and $270,000t.

How do you figure out the SD? Here’s a link to an online calculator. http://www.easycalculation.com/statistics/standard-deviation.php It’s very very easy to use. Once you have your mean (average) and the SD you can decide if you’d like your balances to allow for a 1 SD range, a 2 SD range or a 3 SD range. Don’t let the “name” standard deviation scare you off. It works, and it works well. Hope this helps.

KirkW1 (Texas)
Posts: 1,665

Posted:

I would focus not on what you are required to have, but on what people are comfortable with. Keep in mind that this is the money that will prevent a special assessment. To that end, you may want to go well beyond the minimum.

IF you don't have the reserve now, then I would certainly say that three months should be obtained as rapidly as the association can do so. After that, then things can gradually increase. If you have three months, then perhaps put a line item to this that constitutes 5% of your operating budget. Hopefully this will give you gradual rise until you are at a point to where you have a very comfortable position.

JesseB (North Carolina)
Posts: 6

Posted:

nancy, get as much as you can!!!! and put it in specific accounts that can only be used for that pourpose that way when every body needs a new roof you wont have to have a special assessement to pay for it. it will take some planning but your efforts will be rewarded.your operating account should be based on an annual work plan

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