Operating versus reserves

Sounds like keeping your life savings in your checking account so you can spend, spend, spend.

Mia,

The amount of funds to be placed in Reserves should be based on a reserve study.

Although I could not find a MD statute to prohibit the co-mingling of funds, I think it is best to place the funds into a separate account vs. leaving operating and reserve funds in one large account (as this removes temptation). This also helps in the understanding of financial reports when provided to the general membership and other Board members who may simply look at account balances.

Technically (because there is nothing prohibiting it), as long as the books are correct (and funds are available when needed), the actual money could be stuffed in a mattress. The choice is the Boards.

I'd suggest pointing out that it's silly to not earn interest on funds that aren't needed for over a year. At the very least, it can offset any monthly bank charge for the checking account.

In my Association, we utilize our savings account as the reserve fund and the checking account as the operating fund. All assessments are deposited into the checking account. All bills are paid from the checking account. Monies allocated to reserves each year are transferred from checking to savings and considered an expense to the operating fund in the budget. Reserve money used to pay for reserve items are transferred from savings to checking and a check is issued.

Hope this helps,

Tim

Mia

As Larry pointed out, I would be cautious about large amounts of money earmarked for reserves kept in an operating account. I would keep an eye out for any large projects, not associated with reserves or a reserve study, being done.

Smart financial planning for an HOA would include having at least one operating and one reserve account. A good budget will allocate monthly deposits into a reserve account. Those reserve monies could be placed in multiple types of accounts, based on the amount of money the association has. Some will have both CD's and Money Market accounts. My philosophy, if using multiple reserve accounts, is to have at least two years worth of funds in a money market account, which is readily available and does not have a early withdrawal penalty.

Hi Mia,

Forget the reserve study for one second as I've got direct experience with this HOA philosophy.

If the board only maintains an operating account, you can bet the house that the HOA board will overspend on small projects that add up over time. The money is too "liquid" and Reserve Funds require discipline.

You may not win this board debate but:

1. I'd support the creation of a Reserve Fund Deposit line item as part of your monthly budget. Have the HOA pay itself just like it's a monthly bill coming due.

2. Create the separate Reserve Account as you support.

The separate account holds the HOA leaders accountable to dues payers as Reserve Funds exist to pay for amenities without needing special assessments. Dues payers, in my experience as a board president, EASILY understand the Reserves concept when broken down this way.

Importantly, the operating budget is NOT the appropriate budget vehicle to fund large-scale, very expensive amenities replacements. Operating budget hands routine expense and smaller repairs of those same amenities.

3. You will need a reserve fund study conducted to tell the HOA budget writers how much money they should save, annually, to replace expensive amenities as they need replacement (Roofs, pool plaster, tennis court surface) and when - on the calendar - they should expect to need to launch that project.

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My board, last decade, funded its reserves by only rolling over unused Operating Expenses. When our pool "emergency" occurred, we were saddled with a huge loan debt that was renewed when the clubhouse needed "emergency" repairs before the original loan was retire. The budget didn't include Reserve needs at all, or very little.

I can show any of my dues payers how, since about 2008, our HOA expenses have been held relatively stable with over 90% of the annual dues increases we've passed being used to fund the "reserve fund" item in our operating budget. I've never had a complaint about it. Not one....and our dues have risen, with inflation (as our by-laws dictate) for every year we've had inflation per the CPI-U Index (2009 & 2015 excepted due to zero official inflation).