Operating Fund Size

We keep one month of expenses in our account when we develop the budget.

That is to say, we plan on starting the year (Jan 1) with only one months worth of expenses ($3K).
In reality, since many pay ahead of time, we usually have an additional $12-$15K on Jan 1 of prepaid assessments.

JH

Unless you are needing this money for reserves, you are overcharging on dues. Our Operating Budget is about 80% of yearly dues.

Thanks for the feedback. The budget is balanced (as much as they ever are), I'm not worried about the allocation to reserves too much. I'm more concerned with the size of the cushion in the operating budget than I am with the allocation of dues between reserves and operating. If you stopped taking in any dues, how long would it take for your operating fund to dry up? Tim plans for very little but has a lot of cushion because of prepayments.

I think that this will vary from Association to Association.

If you typically have very few delinquent accounts, then one months worth of expenses is prudent.

However, if you typically have a lot of delinquent accounts, then 3 months is probably prudent.

Another variable is billing.
We bill annually but members may pay in 12 equal installments.
If an Association bills quarterly, or has quarterly payments, then a larger buffer may be needed.

Keep in mind buffers can be worked a couple of different ways.
One way is plan on always having a minimum in your checking account at the beginning of the year.
Another way is to only make transfers to reserves near the end of the year (after most have paid).

A budget is a guideline based on historical history (Example: we spend about 10K every year pruning trees or typically have 2 or 3 trees fall in a storm)or actual planned expenses (normal bills). However, if a light is burned out for a long time or only 1 tree falls in a storm or everyone paid on time so we didn't have the legal expenses we normally have, there is extra funds.

We handle that by transferring the extra (above our 1 month expense cushion) to the Reserves contingency line item.

No we did not collect "Extra". If we had a budget difference, then we took that money to pay for a project. Example: We paid insurance for 10 months of 12 month a year. Those 2 months we did not pay our insurance we took that money to fix an item, fill a request, pursue collections, or cover an emergency expense. It wasn't "Extra" as in we collected too much money. It was an "Extra" as in we could spend it on a non-budget item. Our budget was very tight and paid the bills.

HOA's budgets don't usually cushion months ahead. The cushion is their long term accounts for capital expenses if there is need/requirement for one. Otherwise, being a not for profit corporation, you are to spend what you collect in as you do out. You can't "donate" or have bake sales to raise the funds either. Funds are raised by dues or by special assessments. Otherwise you could be facing some tax ramifications.

Then those Associations would be asking for trouble.
Similar to your home checking account, there should be a cushion to (at least) absorb the difference between when bills are due and income is received.

For example: As I stated earlier, within my Association, the members may pay the annual assessment in 12 monthly payments. The payments are due on the first and considered late if not received by the last day of the month. Our bills are typically received within the first week of the month and are late if not paid within 14 days. If everyone chose to wait until the end of the month to pay - the Association would be late paying their bills. Hence a cushion of 1 months expenses.


Although utilizing the savings account, which is really what the Reserves are, works for someones personal accounts, it doesn't work for an Association. Money placed into reserves are to be used specifically for those purposes - not to pay the normal operating expenses.

In my opinion, an Association who is using their Reserve funds as the cushion for their operating expenses is asking for trouble and may be experiencing financial issues (excessive delinquent accounts, deferred maintenance, Reserves not fully funded, not willing to go after delinquent owners, etc.).

Additionally, there may be tax consequences using the Reserves for non-reserve identified items.


This is way over simplifying the tax code. In reality, a non-profit must account for funds. Otherwise, they would never be allowed to place money into Reserves for planned maintenance, repairs and replacement of capital components. Placing the funds into Reserves is not spending - it is accounting for the funds.


YES YOU CAN!

However, it would be considered taxable income if you utilize form 1120-H


or grants and perhaps other options.


Everyone pays taxes.

Talk to a CPA or tax professional to decide what works or doesn't work for your Association.

I know this is going to sound weird, but I think I know part of what Melissa is getting here with the tax situation. If you start accumulating operating funds, it usually means you're running a surplus, and can end up owing a sizable tax depending on what you file, how your organization is set up, etc. I don't think she's wrong about that.

Nonetheless, it's not really important to our organization. Our fund isn't growing, it's just large and has been large for a long time. We're not running surpluses, we just seem to have a lot of cash in our operating fund. I have no idea how we got there--it appears to predate me--but we have an accountant so I'm not going to worry about it. Furthermore, as far as our expenditures go, they're far too lumpy to do what Melissa proposes about timing spending and receipts as perfectly as she does. It's kind of shocking her organization can get away with it; almost every organization and person in the world needs some cushion for liquidity. Obviously, there's a lot of variance in how large that cushion needs to be, but still, it's there.

There are many things for which an HOA may have to budget even if they don't end up spending the money. For mine, snow removal is a good example -- depending on the winter, we could end up plowing a few times a year, or nearly every week, and there are five months out of the year where it's a potential expense here.

Some HOAs, especially those with minimal expenses and budget needs, might be able to get away with less of a cushion, but for HOAs with larger budgets and more complex responsibilities, more of a cushion is needed (within reason).