Treasurer: Question about Finances

Jh,

The operating funds should correlate to one or more accounts.

The reserve funds should correlate to one or more accounts.

The funds should not be mixed together.

My Association consists of 130 lots.
We have one checking account and one savings account.
The checking account acts as our operating funds and the savings account acts as the Reserve Funds.

We did have some investment accounts at one time and they were considered part of the Reserves.

Are you a non-profit HOA or a For-Profit? Most are non-profit but depends on the setup. Why so concerned about investing? The investments you should be making is in your own HOA. Otherwise, investing is a tax burden on your HOA if not used to fund a larger capital fund. A HOA budget isn't like your home budget. Your goals are to make sure whatever bills/expenses your HOA has is covered by whatever it collects. Included in that is a long term capital replacement fund if needed/required.

I am of the school of thought that a HOA should NOT be in the business of investing unless it's part of a long term capital plan that will benefit in time. Example if the HOA is responsible for replacing roofs. If that is to be done in 10 years time, then I would consider putting the money into investment option. However, if the HOA just wants to invest money for the sake of investing, then not so much. Long term wise, investing for investing sake can cause additional burden in my opinion than benefit.

Melissa. Have you ever considered not making these statements anymore? - especially since they always get blown apart by other posters.

And EXACTLY, what do you think a reserve plan is?

One more comment. We do budget for snow clearing within our operational funds.
However, when there is an especially hard winter, we utilize the Reserve Contingency fund to make up that payment. In 2010, our snow removal costs were almost $20,000. We typically budget $8,000 and the contingency line item kept us from having a special assessment to pay for the snow removal.

Our typical annual snow removal expenses are between $5K and $8K.

I KNOW I KNOW I KNOW

profit may be spent

surplus must be refunded

The difference? A surplus is when you spend all the money your HOA collects on it's expenses and there is extra money left over. Example: Your HOA owns a pool and budgets $10K for it's upkeep. (Chemicals, cleaning, water expenses...) However, this year someone put on a water timer on the filler hose requiring less water expenses. The HOA has $1K surplus due to planned expense and the real expense. The surplus can then be re-budgeted or spent on a "Splurge" item. Maybe a new pool cover.

A profit is different than a surplus. It's intentional. The money isn't coming from a budgeted item/area. The extra money is coming from money the membership pays extra in order to get more money. (Make money to get money). I would NOT consider having a CD/money marketing fund/investment options as part of my HOA's expenses or requirements. Money earned from a cashed in CD or investment option would be a PROFIT.

If your using the HOA money as how non-profit should work, then there would never be a profit. There would only be surpluses. Surpluses that would then be used for more additional benefit of the HOA. Those being items like new flowers, repairs on neglected items, improvements, or other non-line items that would benefit owners.

Not bad Melissa. Some good thoughts in there.

In reality, "profit" and "surplus" are pretty much the same thing.

For an ordinary business, "profit" is the amount that revenues exceed expenses.

For a non-profit, "surplus" is the amount that revenues exceed expenses.

Definition is exactly the same. It's just the labels that are different.

Planning and budgets are not unique to non-profits. Ordinary businesses and non-profits both prepare budgets and both attempt to come in on budget. And just like a non-profit that has to decide what to do with an unplanned surplus, an ordinary businesses has to decide what to do with an unplanned profit.

The interest that a CD earns is not a profit - no matter if you're an ordinary business or a non-profit. Whether you're an ordinary business or an HOA, the interest on the CD is revenues. If you're looking at an income statement for either one, the CD interest is always going to be listed under Interest Income. Profit has nothing to do with it.

The main thing that I would like to get across to you is that it doesn't matter how the HOA generates revenues (assessments, interest, insurance payment, etc.). You find out if you have a surplus at the end of the year when you subtract total expenses from total revenues. Just as an ordinary business finds out if they have a profit when they subtract total expenses from total revenues.

Yes the tax consequences of ordinary businesses and non-profits are different. And the HOA will be taxed on certain types of income. But the possibility of taxes should never be an excuse for not trying to generate income. If there are taxes due, that means that there is more income than there is tax - And that after-tax amount can go toward paying expenses.

Obviously you didn't pay attention to a single thing I wrote.

I started with a simple question about the difference between "surplus" and "profit". You gave an OK answer that had flaws. In response, I gave you a CPA's explanation of things that you were and weren't accurate about. I gave you actual definitions. I gave you comparisons between ordinary businesses and non-profits.

You on the other hand decided to revert back to your typical rant that we should be comparing a household budget and an HOA budget. Strange - I started posting to you personally because I wanted to see if you could think through a different approach than the one you always fall back on about malls and vacations and the like. Maybe you could get away with that when you were imposing your views on the members of your old HOA. But I'm looking for a more mature discussion.

What's needed in this discussion is a clear understanding of the differences between "income" "profit" and "surplus" - which I attempted to lay out for you - and which you chose to ignore. If you don't get it, just say you don't get it.

Ok. Let's see if you do get it:

1. On an HOA income statement, where do you put interest from a CD - Under "profit" or under "income"?
_____ Profit
_____ Income

2. Should an HOA buy a CD and pay taxes on the CD interest - Or is it better to not buy the CD because you can avoid paying taxes that way?
_____ Buy CD
_____ Don't Buy CD

3. Who's inside the box now - You or me?
_____ You
_____ Me

This topic could be a thread of it's own.

Typically when Associations discuss investments they are also discussing the Reserve Funds.

We all agree that it's best to have Reserves fully funded. However, membership approval or mindset of individuals on the Board may prevent this from occurring. When this happens, the Board is still obligated to do the maintenance, repair or replacement that the Reserves pay for. Therefore, to avoid or minimize special assessments, it makes sense to consider investments. The key issue is to consider investments that still protects the principal.

In response to Melissa's statement:


I offer the following info:

Investing Reserve Funds From the Davis Stirling site citing CA statute:

The board shall exercise prudent fiscal management in maintaining the integrity of the reserve account. (Civ. Code §5515)

Four HOA Reserve Fund Investment Hurdles from a MC who mentions Oregon Law:

State laws vary but in Oregon, for example, HOAs are limited to direct investment in issues of the Federal Government and/or FDIC bank accounts or CDs. HOAs are not permitted to invest in municipalities, mutual funds or indirect investments (investments to which the investor does not directly hold title, such as mutual funds, limited partnerships and Real Estate Investment Trusts).

Managing Your Reserve Fund from the New England Condominium (and I believe this sums it up nicely):

In today’s economy, investing with caution is the key for just about everyone. The same goes for reserve funds – although they need to grow, they are made up of, in essence, other people’s money and should be treated as such.

“If you want to invest them, you need to protect the principal. That’s the overriding concern for board members – principal preservation over growth and return,” says Levy.

Actually our Civil Code states "The board shall exercise prudent fiscal management in maintaining the integrity of the reserve account". Over ten years we averaged $25K in interest income each year, NEVER once losing a dime. I think we exercised prudent fiscal management. IF YOU, don't understanding how this works, my suggestion is don't keep involved.

perhaps repertoire would be the word in question

as in: a stock of prearranged answers which 'fit all'

7th grade spelling

Sorry for the delay in responding... I had a bad case of bronchitis that turned serious. Plus we got snow which forced me into a double shift at work... Not been a pretty few days...

My opinion is that I would NOT use a bank that generated interest at all. Why would I if we are a non-profit? Interest bearing account would not benefit. Plus if we did have an interest bearing account I would either spend that extra money or roll it over into our savings. I find no reason to have interest bearing account if your a non-profit. I do as my PERSONAL account.

Again the purpose of a NON-PROFIT Corporation is to collect as much as it spends. Hence the whole "non-profit" part. Doesn't mean one can't have a capital savings account for long term capital repairs. It just means that if your funding such a savings, it should be built into the collections NOT generated by the collections.

I don't think my HOA should be in the business of investing my funds on my behalf. No matter if it is for a later "Profit/surplus". Why? The ONLY qualification one has to be a board member? To be an OWNER!!! Last time I checked, most owners are going to run a budget like their personal accounting philosophy. Call me stupid or dumb, but I would prefer more qualifications for such considerations...

Melissa. You answered my second question. Please answer my first question. In this second question, I'm not asking if you prefer an interest-bearing bank account. I'm asking - assuming that you did have an interest-bearing bank account, would the interest earned be listed on the income statement under profit or income?

1. On an HOA income statement, where do you put interest from a bank account - Under "profit" or under "income"?
_____ Profit
_____ Income

Actually the correct answer is INCOME.

Oh dear, I'm very sorry for not answering; I thought that the topic was closed and I didn't have a chance to log back in I'll try to answer as best I can:

Melissa: Non-profit HOA. You said, "Example if the HOA is responsible for replacing roofs. If that is to be done in 10 years time, then I would consider putting the money into investment option." That's exactly it. We have a substantial reserve replacement fund for future anticipated expenses, and we invest to earn income on that fund in the interim which will ideally be reflected in lower assessments. The investments are conservatively structured to be available meet the needs identified in the regular reserve studies with some extra wiggle room.

NpS: Right now everything has been getting paid out of Operating Reserves--mostly because it was very large. I know this is not ideal; there hasn't been an actual transfer out of the other account in a long time.

Tim: Thanks for the suggestion about the contingency resolution. That would make maintaining this arrangement much more manageable.