Tapping into Reserves Fund

From Florida: Hi All. When our condo association was turned over to the owners we established a Reserves Fund---earmarked for pool, roof, painting and parking lot. About three years ago our stairwells started to rapidly deteriorate. Rather than assess everyone for the replacement costs we took an official vote of all the owners to get their "permission" to use the reserves funds to cover those costs. It passed and the stairwells were rebuilt with reserve fund monies. We've faithfully collected fees each year to put into the reserves. HOWEVER---at that time, our property manager suggested we change the wording for the reserves account to read: Reserves/Deferred Maintenance. It was explained that by doing so, the Board would not have to get permission from the owners each time they wanted to use that money. The association owners never voted on that part. As a result, our board is using it as a "slush fund", taking money out for everything BUT what it is designated for. Lawn maintenance, sprinklers, building repairs, etc. Things that should be paid from our operating account. (But our budget for those extra things doesn't cover it all, this year, from our operating account.) Our property manager and our president keep telling everyone that we're not "poor" and that we have lots of money----sure----using the portion of their maintenance fees that are going into the reserve account. Opinions please? Thank you.

Anna, it appears a better budgeting is needed in the future. Meanwhile, if operating expenses exceed budgeted amounts the only source of funds your HOA has is in the reserve fund. With regard to when line item reserve accounts are specified the Board usually has the right to use reserve funds for situations such as the stairway. Allowing members to vote may have been a nice courtesy.

Is your concern that the reserve fund is not sufficient and is being expended? Or would you rather increase the the assessment and the operating fund? Your Board changed to not itemizing in the reserve fund and has the authority to spend these funds for items such as building repairs and the irrigation system.

I want to reemphasize what Paul just stated. He didn't even mention that this is strictly forbidden by the IRS and if you get audited you could have some hefty back tax penalties!

Roger: thanks for the check on the co-mingling. However, from the post, Anna states that '....change the wording for the reserves account to read: Reserves/Deferred Maintenance...and...'our board is using it as a "slush fund", taking money out for everything BUT what it is designated for. Lawn maintenance, sprinklers, building repairs, etc. Things that should be paid from our operating account....'

Though they may not be co-mingling separate accounts into one, they are using the reserve fund monies for simple operating expenses and they feel justified in doing so because the account name has been changed to 'Reserves/Deferred Mainenance.'

Does this now leave 1-2 operating expense accounts and no cash reserve account?

RobertG, thanks for the link. It is funny and true. The conclusion is why I recommend using IRS form 1120-H for most HOAs.

Our board wanted to plant our monument gardens including perennials with the usual bright blossoms used in the past. The cst exceeded our proposed budget. Therefore the board decided to pay for the perennial portion with reserve funds. While I objected, our managing agent advised that he had checked with our auditing firm which had said it was a legitimate use of reserves. Any opinions?

Hi Anna:

I'm not sure about Florida law; but Oregon law allows a board to borrow from reserve funds for unanticipated expenses and cash flow problems, but requires a written resolution on reimbursing the reserves within 18 months. If your board had "borrowed and paid back" (and it was allowed by state law) there would not have been a problem.

One possibility that I see in your community is that the reserve funds might need to be "redefined," as there may be some other elements in your community that would qualify for reserving and then spending money. Look through your documents, to see if there are maintenance or replacement/repair responsibilities that the HOA has, things that last more than 3 years, but aren't in the reserve funding.

Boards should not be dipping into reserve funds for other items. It either shows a lack of understanding of the reason for the existence of the reserve funds, or a lack of comprehension of their fiduciary duty. Some boards do see a big pool of money sitting around and feel a compulsive need to start spending it...

J. Patrick Moore, CMCA

We must be having similar thoughts on the topic of reserves. The Deferred Maintenance concept I understand to be a fund that may be either in Operating or a Reserve. It supposedly is used to stave off the need to replace big ticket items until you have the adequate Reserves to replace them, as well as makes expensive items lastlonger. Kind of like regular maintenance on a car to keep from having more expensive problems earlier than you should. Please correct me if I am wrong?

On the other hand, I note our Deferred Maintenance (that is in our Reserve) being tapped for all kinds of regular maintenance items - not just the big things that may live longer due to a little extra maintenance. So the "slush fund" idea has crossed our minds too.

So the first question I have is if the developer did not start any reserves and the management firms hired started several, where does the member vote come in?

My second question is we had a 10% raise in dues. ALL that money (~$30,000 per year) went into a "Contingency Fund" in operating. Not a penny was spent for 3 years. This year it it vanished from the budget completely. Are the members right to be asking where these tens of thousands of dollars has gone?

The original question was from 2007 – start a new topic to discuss your concerns,which I think William has already done.

As far as your question is concerned, I haven’t heard of a specific fund for deferred maintenance, but some communities have a contingency fund that pays for major emergency repairs or helps with operating budget shortfalls. Which isn’t quite the same as deferred maintenance. You should be putting money into your reserves regularly so when it’s time to replace those major community components you won’t need to rely on loans and/or special assessments.

Just like your car, however, you should be doing preventative maintenance anyway instead of waiting (and praying) nothing happens. Everyone knows real life has its own agenda and schedule, so it’s better to be prepared and not need it than wind up with big bills you may not be able to afford.

Reserves ARE NOT and shouldn’t be used as a “slush fund” to pay for regular maintenance – that’s what your operating budget is for. If that’s what your community is doing, you need to stop it right now, take a hard look at your operating budget to see how realistic it is. If you haven’t raised assessments in some time, that’s a huge part of the problem because you’re forgetting about inflation. No one likes “high fees” but special assessments are even worse.

On the other hand, I note our Deferred Maintenance (that is in our Reserve) being tapped for all kinds of regular maintenance items - not just the big things that may live longer due to a little extra maintenance. So the "slush fund" idea has crossed our minds too.

Regarding your second question, yes, you and the other homeowners are correct to wonder where the contingency fund went. If your board hasn’t been forthcoming about that, time to give them the boot and start looking at the books.

LetA , I would agree a good management company would have cautioned the board about using the contingency fund wisely and making a distinction between it and reserves, but remember, it works for the board, not the other way around, so it’s the board’s responsibility to ask questions, consider the pros and cons, take a vote and go on from there. It may be the management company did raise some concerns but were ignored. Maybe a little both occurred.

In any case, this is yet another reason why continuing education for new and continuing HOA board members is critical – if you want to be careless with your own house and finances, dowhatyoulike, but don’t serve on a HOA board. They have to run the community as a business, meaning careful budget preparation, watching expenses closely, getting reserve studies from time to time (I wonder if William’s community has done one), and so on.

All,

As Shelia pointed out, this thread is from 2007 (reactivated with a new question).

Since laws change, it's best to start new threads vs. reactivating old ones as what was good advice in 2007 may be bad advice today and can lead to confusion for those reading the thread if they don't notice the dates.