Contingency in the Reserve study

Started by AlB1 • 11 replies • 2435 views

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AlB1 (California)
Posts: 12

Posted:

Purpose?

Typical percentages?

When to use funds?

Keeping track of the balances?

If funds are not used up in the current year, if there a carry over?

Any other useful inof?

KennethS2 (California)
Posts: 36

Posted:

Most of what you are asking is explained at Davis-Stirling.com - here is a link: http://www.davis-stirling.com/MainIndex/ReserveMenu/tabid/675/Default.aspx

Ken

TimB4 (Tennessee)
Posts: 21,059

Posted:

ALB,

We have a contingency line item in our reserve fund. The purpose is to make up budget shortfalls of Reserve items. We set it up mainly because we didn't have a professional study done and we wanted some wiggle room for mistakes in the estimated repairs/life expectancy made by inexperienced volunteers (i.e. me).

We have used that line item often. Therefore, I'm glad we have it.

Since you are in CA, and the fact that CA has some very involved statutes about COA/HOAs, as was pointed out by Ken, davis-stirlings Reserve web page will likely answer a lot of your questions.

RichardP13 (California)
Posts: 1,767

Posted:

I happen to prepare the reserve study and funding plan for my association to insure the numbers are accurate and fully take into account ALL transactions within any given year.

In past years, our report, done by a reserve specialist, showed us 171% funded which wasn't a true and accurate accounting of our situation. What we have now done is set everything to 100% funded and put the rest into a contingency category. For example we are in the process of replacing our tot lot and our reserve study said the replacement cost was $23K. What it didn't take into consideration was demolition and installation. That has not been solved for future projects.

AlB1 (California)
Posts: 12

Posted:

Many thanks it is an excellent resource but for this subject.
When I clicked on contingency nothing happen. The items before and after worked, but it didn't
Phoned the group and was advise to use the search. A lot came up but nothing on contingency.
Is contingency for surprise repairs that are not listed in the Reserve Study?
If so, what percentages are usual?

Al

AlB1 (California)
Posts: 12

Posted:

Many thanks,
Al

TimB4 (Tennessee)
Posts: 21,059

Posted:

The best explanation I've heard is that a contingency line item is for:

Unanticipated expenses of a non-reoccurring nature to meet unexpected minor increases in repair/replacement costs and to pay for needs caused by unforeseen emergencies.

Note: In the case of Reserves, I would interpret unforeseen emergencies as damages caused by storms or vandalism.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Al,

You may want to try an internet search using contingency line item in HOA Reserves

I tried it and came up with several 3 or 4 pages of links on the topic.

SandraS9 (Ohio)
Posts: 4

Posted:

I live in Ohio and our decs & bylaws state, to para phrase, that the Board must assess homeowners each year for unanticipated or emergency costs to maintain a fund equal to two months of receipts. We interpret "two months of receipts" as two months of normal association assessment fees budgeted for the year. Our decs & bylaws were adopted in 1994 and I don't know how that amount was determined. Ohio condo law is silent on this matter.

DavidW5 (North Carolina)
Posts: 565

Posted:

It sounds like the original poster and most of the responders are using the component method for calculating reserve funding requirements. We use the cash flow method exclusively. Under the cash flow method the reserve funds are one large pool available for application to any item in the reserve inventory. The yearly contribution is calculated to prevent any year end balance from falling below 5% of the one-time replacement cost of the entire inventory. Under this method, no contingency line is needed within the replacement reserve budget.

We do maintain an operating fund contingency equal to 20% of annual assessments.

TimB4 (Tennessee)
Posts: 21,059

Posted:

There are those in my Association that would prefer to utilize the cash flow method. Unfortunately, since we are an older subdivision and our Reserves were started later than they should have, utilizing such a method would delay repairs/replacements of other components that need it as much as the component some would like to spend the money on.

For example:

We are having a lot of sidewalk repairs going on. The Association is repairing trip hazards but that doesn't always repair places where the walk just sunk a little. One member would prefer to spend all the money to fix all the sidewalks. However, if that happened, there wouldn't be enough funds to do milling and paving of roads without a special assessment. Utilizing the component method, we can ensure that the funds for the roads are available when needed and still address sidewalk issues. It's just that the sidewalks might not be fixed in the time frame some would like to see.

RichardP13 (California)
Posts: 1,767

Posted:

As I mentioned, we utilize the component system for two reasons, one, it shows the community the inventory (assets) of the community and its replacement costs and two, it is required by California Civil Code to preform an on-site reserve study every three years. How the numbers are presented in the report is different than any reserve specialist would show. Since our reserves are very healthy, we set the level of funding for each component at 100% and then use two other categories, emergency fund and contingency fund. Both are separate line items on our budget, one is used for emergency repairs of items not itemized in the reserve study and the contingency funds is to handle any cost overruns on major components that you may not foresee. We keep the emergency funds in a money market account along with other reserve monies to get as much interest has we can earn. By the way the interest we earn is used to fund community events within our association.

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