Reserve Fund

You may want to double check, Rick, but I believe funds set aside for issuance deductibles should not be in your reserves account (if I understand you right).

I do not have any knowledge about FHA requirements.

Major maintenance may or may not be a reserves line item and if so, each item should be named. Your roofs, for instance, three might have an est. remaining life of 15 years and the others 10 years. I'm a non professional, so just a start here.

Thanks for your input Kerry & John. I'm with you John and feel that our contracted services (trash,water/sewage, grass-cutting,etc) as well as insurance premiums historically increase yearly. However our board is of the opinion that the Reserve is more than adequate to handle any contingency and if we keep putting in at the present pace we will be collecting fees to cover an expense that is not needed. In other words, the 10% FHA requirement is fueling a fund that may never be used to the extent that projected future expenses require. So if we cant reduce the percentage of the fund requirement, why not circumvent & start paying some of the non-recurring expenses out of the fund?. The Board also has the option to re-instate the dues in increments necessary per year which we feel is a better option than putting a special assessment on for a particular unforeseen contingency.
Both our Condo Declarations & the LA Condominium Laws mandate a Reserve Fund (singular)
for "replacement of common elements and equipment and operating contingencies of a non-recurring nature" What I failed to mention above is that our Association owns no other common elements than the unit buildings themselves. We have no club house, swimming pool nor recreational area. So our future "replacements" would be limited to the roofs, siding & fencing all of which are insured and subject to the deductible as stated above.
As I am a contracted Treasurer (Financial Management Agent) I have no vote in this matter and only trying to reply to their inquiry.
As far as the insurance deductibles not belonging in the Reserve Fund Kerry, That was a decision made several years ago by another Board and could easily be changed. But I'm not so sure I agree that it shouldn't be there. If we were to have another Hurricane and our insurance pays replacement value less the deductible, isn't that part of the purpose of the Fund as mandated to "replace common elements"?
Thanks again guys, looks like I'll have to do a little more studying.

Rick forget about the 10% for a minute. Has your HOA ever had a reserve study done? If so are you on track as far as the RS study goes? If not a reserve study should be first on the agenda. I believe FHA also looks to the percent of the reserves that are funded but I'm not sure.

What you are looking to do could be called smart budgeting others will call it FRAUD and I doubt D&O insurance will defend you and your fellow Board members against it. Not only could you be on the hook for restitution but also prison time. Get a legal opinion before you start with the creative bookkeeping.

You noted FHA requires 10% of the association’s budget be put in reserves, but didn’t specify what the balance should be or what amount could be taken out. From what I’ve read on the subject, the 10% is a minimum amount FHA would expect to see (along with some other things) to determine if they should underwrite a mortgage in a HOA community or condominium. There is no minimum balance because every community is different – you say you have nearly $95K for your reserves, but another community might have $195K.

So, you look at your annual budget and see how much is going to reserves – is it 10% or more? I’ve heard some reserve specialists say deposits should be between 15 and 20% of the annual budget – you might not need that much, but it’s a good idea not to let the deposit drop under 10%. You also have to factor in inflation – if the rest of your buildings will need roof replacement in, say 15 years, you won’t be able to do repairs in 2025 with 2015 dollars.

Nor is there a minimum amount of what can be taken out –again, that will depend on what needs to be fixed at a certain time and how much it’ll cost. Your complex may only be 10 years old, but as you said you’ve already had 3 roofs replaced because of a hurricane – hopefully, you won’t have to deal with another, but what if one came through destroying more than 3 roofs and you didn’t get enough in insurance proceeds to fix it? You’d need some of your reserves and if you don’t have enough, the homeowners would have to cough up the rest.
That’s why I believe assessment reductions are only possible if expenses are reduced – whoever’s asking you to reduce them by $60 (I assume you pay monthly) should take a look at the budget and come up with some ideas on what can be reduced or eliminated.

I was treasurer of my townhouse community and from time to time the “can we reduce assessments because they’re too high” came up. I think the key to addressing this is education – no one likes to pay more for anything, but the Board has a fiduciary duty to make sure there’s enough money to pay the bills and fund reserves so the community can avoid special assessments and/or loans – both of which can jack up assessments a lot higher than $200. Most important, get a reserve study done, as Glen suggested, get a reserve study done – that’ll determine if your reserves are well funded or not. Good luck!

Rick,

If you have a $100,000 yearly budget, the FHA wants to see $10,000 MINIMUM in a cash Reserve Fund. Your board is treating minimum standards as if they're maximum standards. Whatever 10% of your budget may be should be in a cash account at all times......

That said, you'd be FHA compliant even if greatly reduce your Reserves.....but those roofs will cost more than 10% of your annual budget to replace, sparking a special assessment down the road.

Your board - and duespayers - are simply making a gamble - $20/month now.....or $1,000 or greater, special assessment in the future. But it sounds like your board is making a few assumptions that can't be proven and really want to reduce monthly fees but there's no free lunch.

Don't cut dues....just don't raise them. Inflation will nibble it down anyway.

Line items in your reserves list are physical, visible, quantifiable components. Their estimated remaining life can be estimated and the cost to replace (+ inflation, of course) also can be estimated. Insurance deductibles should be built into your operating budget, not reserves.

is your HOA also responsible for retention ponds, an entrance monument, sprinkler systems, street lights, sidewalks, streets. If so, you need to reserve for them. Some HOAs put their trees on their reserves schedules.

but, let's say this HOA ONLY has roofs that must be reserved for. Let's say for this purpose that they will cost $100,000 to replace in 10 years. This means that ideally the HOA sets aside $10K a year so that there'll be enough funds there when the roofs need to be replace.

But you also could have a reserves line item for roof repair.

Are you saying that the HOA now has $95,000 in reserves???? I don't know what that number refers to.

With all due respect, I'm with Kerry on this. It's true that deductibles are an unexpected expense, which is why it's best to put it in the operating budget (it's a line item our administrative budget). If you don't use it, the money could be put towards something else or carry over into next year. You should also remember that deductibles can go up or down, depending on your coverage.

Your association might also consider setting up a contingency reserve which can cover insurance deductibles as well as budget shortfalls (which may raiding of the reserves to pay for operating expenses). Talk to your association's accountant for more information - there could also be tax implications, so you'll need to talk to a tax expert as well.

O.K.Sheila you're confusing me. On one hand you say that deductibles should be a line item in the budget. and then later say to consider a contingency reserve for them. Our budget is for "operating expenses" & contracted services, etc. Having a $68K budget how do I line-item a $40K expense?? The contingency reserve you suggest is exactly what we have. Only we are dedicating $40K as untouchable in the event (contingency)we may have to use it in the future. This is our hedge again a special assessment added to our current common assessment (Condo Fees). This I guess can be set aside in another reserve fund, but is just a bookkeeping separation in the fund we already have.
As covered a few years back on this site, reserve fund budgeted contributions do not figure in the 1120-H calculations.
But all this now is moot as I've just learned that our five member board has voted 3 to 2 to keep things as they are with $200 fee and the 10% Reserve Fund deposits.
I don't think this is improper financial management (and certainly not fraud as earlier suggested by someone). If it is, then so be it. I feel safe with this budgeting technique as does the board. I'm still struggling to see what law is being broken here.
So now finally I rest my case & sincerely (& respectively) thank everyone for the input even if I stubbornly maintain my position.

Rick,

I can support your position on insurance deductibles being "reserved" in reserve fund. It's based on the fact that the operations budget should reflect reasonably expected expenses. Expecting to pay insurance deductibles annually is unrealistic.

That said, property insurance is insuring the Reserve Fund as much as the property. The deductible would be the HOA's cash cost of "that roof" the hurricane destroyed. The Reserves just aren't paying the 100% cost of damage; the insurance company is. So - I would link any insurance deductibles to the Reserve Fund IF the deductible would be used to replace an item covered by the Reserve Fund (which it would). You can't "set aside" 55% of your operations budget for insurance deductibles. It's overkill. Just be transparent and have the HOA board maintain its strategy of $40,000 of reserves as "Untouchable in case of insurance event."

Until the board is absolutely certain of its future liabilities - never expect an insurance event - hold rates and savings deposits steady. Good move. Sounds like dues payers are kept informed and float ideas worthy of discussion even if ultimately dismissed because many residents underestimate the cost of replacing property elements or don't recognize that Murphy's Law strikes HOA operations very heavily.

Good luck!