Operating Reserve Fund

Sorry. I just found the thread from a month ago on this very topic.

I need to improve my search skills on this discussion board. I am too used to Google and Yahoo.

Nevertheless, if you have anything else to add, please chime in.

Then there's the contingency fund. The contingency fund can be up to 3% of the annual budget set aside for emergencies or to pay ins. deductibles. Actually, monies in a contingency fund can be used for anything the BOD so desires. Frankly, I don't like using the term "operating reserve fund" as it's too confusing. Reserve fund traditionally means a fund set aside to provide monies for long-term maint and/or replacement of capital items.

George,

It comes from a document I have prepared by NICM (Nat'l Inst. of Comm. Mgmt) an org. that deals with HOAs. I don't know where they got the 3% requirement as the doc. doesn't ref. the source of that info. I don't believe the IRS places requirements on contingency funds.

If things continue down our same track, we will have a bit more then two year's worth of assessments in "non-restricted" investments. Our capital reserve fund hasn't had a study in two years, but at that time was 1000% funded. (Yes that is the correct figure. The study calculated that we had enough in reserves for the next 30 years with no additional funding.)

We have a different problem on our hands. But I think it is a problem as we are a "non-profit" and should not be accumulating a mass of money for with no purpose in mind. I guess the good news is that we can afford to go to court should the need arise.

Two problems, to begin. First problem … The title of George’s posting was almost guaranteed to cause confusion. Sorry George. That leads us to the second problem and that is that the replies so far are a mixture of some people talking about operating expenses and others talking about reserve fund expenditures, and some people aren’t that clear WHAT they’re referring to.

So to get the wheels back on may I remark that the Operating Budget and the Reserve Fund are two distinctly different animals. The Operating Budget is drawn up for one year, usually, and covers the month-to-month costs of running the community. Power bills, water bills, the PM’s fees, the caretaker’s salary, the gardening expenses and so on. The Reserve Fund covers, usually, 30 years. It takes care of major, periodic repairs … paving, carpeting, roofing, fencing. The big stuff.

My own expertise is in Reserve Fund matters, and yes, we do have guidelines for determining the adequacy of the fund balances. (Anyone may request one if they’d like).

But George does raise a good question, and it’s about the Operating Budget. I.e., what kind of money should you have on hand to take care of your Operating Costs? We have a sensible guideline for this too. Here’s the answer. Add up your budgeted operating costs for 12 months, and set your unit-owner fees to cover them in such a way that the predicted monthly bank balances — (for Operating expenses, again, not for the Reserve fund) — will never sink below the average monthly Operating Expense, times two. Example: If your annual Operating Expenses are $240,000, your average monthly expenses are therefore $20,000. You should never have less than $40,000 in the bank and you should set your fees accordingly.

If anyone is unclear on any of the above, please let me know.

Thanks, Graham.

Our HOA has an emergency fund (that meets insurance deductibles only) a "cushion fund" of 3 month's operating costs,an Annual revenue/expenditure Fund based on the annual budget, and a 20 year Reserve Fund.

I'd like to hear if anyone has ever ceased to operate, and how they liquidated all assets and funds. How long it took, were members refunded anything, etc.

KirkW1 - Charities? Please provide some quotes, or a link to IRS code 503. I'm very interested to see where it state in IRS code that the funds (assets) of an HOA/COA are to be given to charity. Rather than re-distributed to the membership.

Our CC&R's state that after all the legal obligations of the HOA are met, then any remaining funds are to be distributed equally to all homeowners.

Gerald,

It would not be the IRS stating where the monies go. It is in the Articles of Incorporation. In looking back, I will say that I made a mistake and it isn't a charity, the money and property must go to an HOA. Below is the appropriate section of the Articles of Incorporation:

DISTRIBUTION OF ASSETS UPON DISSOLUTION
In the event that the Corporation is dissolved or otherwise discontinued, the assets of the Corporation shall be applied first to pay all liabilities and obligations of the Corporation, and any remaining assets shall be transferred to and become the property of an organization that is qualified as exempt under Section 528 of the Internal Revenue Code of 1985, as amended, and the regulations thereunder, as they now exist or as they may hereafter be amended (the "Code")

Quite frankly, the assets in my HOA come no place close to enough to make it worth my time and energy to worry about changing the above. If my HOA disbands the amount of money to be gained is not worth the effort to try and redirect it. And in our case, there is currently no real property involved. If there were I would make moves to donate said property to the city in advance of dissolution. I would have to be paid to make it worth my time to return money to the members.

Aside from that, who would you return the money to? The current owners are not always the ones who paid in to build up any funds that your organization now has. And if there was exempt income, then returning the money to the owners would have to be reported as income.

But the short answer to this is to "check your documents" as to what happens if you shutter the HOA. A bit longer would be to check the "Articles of Incorporation." I was told they should address the issue. And in my case they sure enough did.

One pot (except for the reserve fund investments); the report details it out. (not to my satisfaction, but easy enough to understand)