Reserve Accounting - Line item or one large pot

There seem to be three ways of thinking when Associations look at Reserve funds.

a) Associations see the Reserves as one big pot of money that is to pay for specific items that are to be paid for from the Reserves.

b) Associations assign a specific amount of money to individual line items ($ for playgrounds, $$ for roads, etc).

c) Associations assign a specific amount to individual line items but will reallocate (vs. borrow) funds from one line item to another if needed.

There are certainly pros and cons for each.

For discussion purposes, which process does your Association use and (if known) why that method vs. one of the others?

Tim,

We've just had our first Reserve Study done.

They recommend a Cash Flow model... Everything is in one account and maintains the minimum balance above 20% at the lowest point in a 30yr period (our big events occur every 20 years... one in 15 years and one 5 years after the current study coverage period.

But our items mainly deal with our Park and Playground.... No clubhouse, pool, streets, etc...

Paul

Tim,

We employ method number one. We calculate our need for reserves based on the remaining useful life and estimated replacement costs of an inventory of 207 items. The full accumulated amount is available as needed for any inventory item that needs to be replaced.

Tim,

I think there should be a distinction between collecting and spending reserves.

Having a line item for income for each reserve item ensures that nothing gets overlooked. Each asset should be identified along with a projection of anticipated capital expenses likely to be incurred in the future. Having a line item that says only Reserve Funds would allow too many items to drop through the cracks.

Probably the biggest single influence on the life of an asset is weather. Few things are less predictable than Mother Nature. You can plan for the roof lasting 20 years but the weather may force replacement sooner than that. Few things would be more frustrating than to have sufficient funds on hand for roof replacement but being unable to do the job because some of that money is allocated to replacing the swingsets on the playground and repaving the tennis court five years from now.

If you take money from the playgrounds and tennis courts to pay for the roof, replenishing funds for all three of those items in the future is going to get really messed up if they are not accounted for separately.

I think your option C may be the best as specific amounts are allocated for each asset but the entire pot can be utilized when it needs to be while retaining some accountability for each capital item.

Although a little off the topic, nothing is more important than having your reserves in a separate account that your manager does not have access to. The manager can make deposits but only the signature of two officers should be able to take money out.

A management company in Maryland recently has had to shut down while it is being investigated for co-mingling and embezzling association funds. Maryland has tried to pass a Manager licensing bill for several years and this event should do it.
Jeanne

Agreed. In my opinion, no management company should have access to spend Association funds. They should only keep the Lot ledgers and make deposits. The Board should be the one's issuing checks and the Treasurer should be the one balancing the checkbook and verifying the lot ledgers.

We were lucky if we had a savings/reserves. When I took over there was about 2K in a separate savings account. Our monthly expenses were about 5K. We collected about 5K a month. So building a reserve or putting money in our separate savings account was nearly impossible most months. Although many believed we had money in our savings. It wasn't enough to cover one month's worth of bills. It was always an area that IF I had stayed would have been my next area of concentration. It's important for a HOA to try and have a savings account no matter what. Just wish we could have established a better one.

Mind you we did have a 2 signature system with special checks. The accounting firm had to write them and then 2 board officers approved for signing checks had to sign off on them. This really helped in keeping a really close eye on our money. Even if you can't establish an adequate reserve, atleast establish a good spending open spending system.

We use Tim's (c)-- separate line item for each component on our reserves schedule. As 12-yr. old twin high rises, we have over 200 components worth about $10 million. Many are mechanical, e.g., cooling towers for our HVAC systems. Some have a line item for repair, e.g., our poolside furniture has one line item for replacing the fabric, which we did about a year ago, and a separate line item for replacing the furniture.

We do have a contingency line item in reserves in case a component needs work or replacement sooner than its estimated life. In some cases, the developer used ridiculously long estimated lives and/or ridiculously low replacement costs. A 5-year old high rise near us learned their reserves had a shortfall of $1 mill. for that reason and those Owners are facing some special assessments to "catch up."

Frank,
do you have a copy of the accounting software that you use?