Allowable Expenditures from Reserve Funds

Started by StanleyW1 • 9 replies • 1983 views

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StanleyW1 (North Carolina)
Posts: 5

Posted:

We plan to replace a well that had been included in our reserve study with one of larger capacity. Can all the funds for the larger well be taken from our reserve funds or just the amount reserved for the smaller well?

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Stan

Money can be "borrowed" from another account, but sound financial planning says plan on how to replace the "extra" amount taken out.

Said another way, robbing Peter to pay Paul is allowed but it is not sound financial planning....LOL

Hope this helps.

CarolR11 (Colorado)
Posts: 2,563

Posted:

We've occasionally needed to replace something "early"(developer overestimated expect life of component) or have upgraded when there hasn't been enough in that particular reserves line item. We have a contingency line item in our reserves budget that we've drawn from.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Carol

What happens if your contingency line item does not cover the cost of the item?

I think this more the OP's question.

FrankM7 (Pennsylvania)
Posts: 61

Posted:

Quote:

Posted By StanleyW1 on 08/14/2012 6:08 PM
We plan to replace a well that had been included in our reserve study with one of larger capacity. Can all the funds for the larger well be taken from our reserve funds or just the amount reserved for the smaller well?

Certainly it's expected that the board will upgrade to more efficient, larger capacity, improved technology, and so forth when planning for the purchasing of expenditures as planned in your reserve study. I suspect in most cases, estimates and the justification for the improved or larger item would be available a year or 3 before needed which provides for possible increased in the regular dues payment and/or a redo of the reserve study to realign the planning for all future expenditures.

If you are paying for a reserve study, be aware that the expense of it to review and readjust the plan for expenditures may equal the added cost of your larger well. Learn how to do your own reserve study or at least how make needed adjustments to it. If I can do it, so can most of you.

TimB4 (Tennessee)
Posts: 21,062

Posted:

Stanley,

Yes you may use Reserve Funds for this, as the replacement of the well was part of the reserves.

Now there are two methods of thinking with reserves.

1) It's one large part of money to be used for planned repairs/replacement of capital components (roads, wells, etc.)
2) It's money allocated in specific amounts to specific items for the planned repairs/replacements of capital components.

For method 1) If you see it as one large pot of money and use money that was set aside for x to pay for y (because you didn't set enough money aside for y), when it comes time to pay for x there might not be enough money and the repairs will need to be delayed, money borrowed or a special assessment passed.

For method 2) If the amount set aside for y = $ and the repairs cost $$$ the Association will need to delay the repairs, borrow money or pass a special assessment to pay for it.

Method 1 delays the inevitable. Method 2 makes the Association deal with the issue at hand. With method 2, the Association may borrow from the other reserve line items but must have a plan in place (increased assessments) to replace the funds it borrowed.

Irregardless of what method of thinking is used, when an Association is short of money, the only options are:

Delay the repairs and raise assessments until money is acquired to pay for them.
Borrow money (from the reserves or a bank) and raise assessments to pay back the money
Pass a Special Assessment to make up the difference.
Do nothing and leave it for the next Board

CarolR11 (Colorado)
Posts: 2,563

Posted:

Stanley, Tim & Frank offer good answers! And if you don't have a contingency line item, not every HOA does and you didn't mention it, do consider adding it when you prepare your next budget.

This line item isn't required in our state, but the recommended amount for it is 3-5% of your reserves budget; ours is 3%.

StanleyW1 (North Carolina)
Posts: 5

Posted:

Thanks so much for the quick responses from everyone. I'm brand new to the blog and have already found it very valuable.
We had the reserve study done several years ago but updated it this year ourselves and found it easy to do, and very educational when you dig in yourself.
The concept of including a contingency line item is excellent and we'll do that when the study is updated.

FrankM7 (Pennsylvania)
Posts: 61

Posted:

There should be separate contingency amounts specified in both your operating budget and your reserve study planning for future expenditures.

CarolR11 (Colorado)
Posts: 2,563

Posted:

Yes, Frank raises a good point. We, too, also have a contingency line item in our operating budget.

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