Maintenance Reserve Accounts vs Emergency Reserve Accounts

Started by KellyM3 • 5 replies • 2209 views

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KellyM3 (North Carolina)
Posts: 2,239

Posted:

The master association features a maintenance reserve account that we've recently updated to create a better scheduling of replacements. It's also sparked a thought that we really don't have money set aside for unforeseen emergencies (though a maintenance reserve fund could certainly fill the void if necessary)

For my better understanding, do HOA's carry BOTH maintenance reserves AND emergency reserves (which will not outline any planned projects and only exist for problems we can't imagine nor plan in the future?). Of course, the Maintenance reserves are well-scheduled now. I am aware that properly written and executed maintenance reserves will eliminate many "unforeseen emergencies."

I have a fair amount of HOA board experience but reserve fund nuance and strategy "ain't" easy to grasp w/ all its moving parts.

SusanW1 (Michigan)
Posts: 5,202

Posted:

IMHO a Balance Sheet should list amounts in all accounts:

General Fund:
Checking
Petty Cash
Savings

Investments
1
2
3

Reserve Fund
Bank 1
Bank 2
Bank 3

Emergency Fund (to cover insurance deductibles, only)

DavidW5 (North Carolina)
Posts: 565

Posted:

A number of years ago our annual audit report recommended that the association "develop through the budget process an operating contingency of between 10 and 20% of annual assessment income".

In the ensuing years each of our operating budgets contained a line item called "operating contingency". Over the years we planned expense in that line item such that we have now accumulated an operating contingency amounting to 15% of annual assessments. In 2009, with two 20+ inch snowfalls, our snow removal costs exceeded the annual budget by $68,000. This was covered by the operating contingency. In the 2010, 2011, and 2012 budget we gradually replaced that amount in the operating contingency to bring it back up to 15%.

When an unplanned expense occurs, it is not coded to the operating contingency line item, rather it is coded to the appropriate line item (e.g. snow removal) with the understanding that the unfavorable variance in the snow removal line item is being covered by the funds budgeted on the operating contingency line item.

When I draft the budget for the board's review, operating contingency is always funded BEFORE any discretionary spending is considered. This is a pretty conservative budgeting practice but it almost guarantees we will not need a special assessment due to unexpected, unplanned expenses.

DavidW5 (North Carolina)
Posts: 565

Posted:

I forgot to mention above - the accumulated operating contingency shows up on the balance sheet as "Unappropriated Members Equity".

BonnieG1 (Nebraska)
Posts: 1,186

Posted:

This is a smiliar question to what I was going to ask. The responses are also a great help to me. I am responding so that this will go in my forums.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

My HOA relied on a loan early last decade, which necessitated another loan (through refinancing) for deferred maintenance. I can now trace it back to the early HOA boards (since the mid-1980s) vastly underfunding the Reserve Fund, which is enough whining because many of us face that challenge.

BUT, with planning and this updated reserve study, I'm seeing that we can spend reserve funds that refresh the property, actually improve our fully funding percentage and build cash in the reserve account.....but that's a finely tune "Maintenance Reserve" and not emergency fund.

1. I REALLY like the idea of funding for the yearly deductible on the insurance policy.

2. The "Contingency Fund" would look, to me, like another reserve account w/ a different label to be deemed off-limits unless the unthinkable happens. For us, our yearly income is about $117,000. I'm thinking $40-$50,000, eventually, would work in that contingency fund. But, is there any definitive measure?

My projections show us going from $9,000 in loan debt in March 2012 to fully funded within 6 years by getting our maintenance schedules up to date and not adding amenities. My greatest education on Reserve Funding is how you can improve your funding and funding percentages by selectively spending money on Reserve Fund maintenance items while saving some money - but NOT saving only cash and hoarding it until you "feel" fully funded.

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