Using interest earned on Reserve Fund

We are earning apx $5,000 a year on our reserve fund.

I think We should be able to offset our reserve funding requirements by our expected reserve fund earnings.

An eaxample: When doing our yearly budget, our reserve study tells us we need to fund the reserve account by $25,000. With expected earnings of $5,000 on the reserve fund, those earning being reinvested in the reserve fund, we could reduce our reserve funding to 25,000 - 5000 = $20,000.

We are located in Nevada. I have searched the Nevada statutes and can't find any thing about this.

thanks, Scott

The $25,000 figure is based on whatever the projected earning are. From your example, it appears that your reserve study believes the reserves actually need to grow by $30,000 per year, made up of $25,000 in contributions PLUS $5000 in earnings. The only way you could justify reducing contributions is if your annual earnings EXCEEDED the reserve study's projections.

As a board member I'm always wary when we start to think about reducing contributions. Reserve studies are basically educated guesses based on projected interest rates, projected inflation rates, and remaining life of physical assets. Any of these can end up being wrong, and the consequences of underfunding the reserves are a lot more painful that those for overfunding. Underfunding can result in special assessments as well as lenders refusing to approve mortgages for prospective buyers.

At least in my area the board needs to justify any deviation from recent reserve study projections. It's a big deal. We're actually in a similar situation - our real earnings on the reserves are exceeding the projections from our last reserve study (2018). And we're letting it ride until we get a feel for how close the study's projections are to what actually is happening. Anything else feels irresponsible to me.

We do it every year. Required reserves contributions are offset by the interest we expect to earn.

Another reason that you don't want to reduce your reserve contribution:

The interest earned can fall dramatically after a major expense. If you continue to fund the reserves based on the previous earnings, you'll probably find yourselves underfunded. I like Tim's idea of keeping the interest as a separate line item for contingencies. There are always contingencies...

Scott,

Is your HOA fully funded in terms of Reserves?

There's a difference between depositing 100% of expected cash into a Reserve Fund annually versus the size of cash already deposited.

Interest is a great way to build savings but expecting your ROI to essentially fund operations or keep HOA dues lower is a subjective call based on the financial philosophy of your board.

Scott,

I get the impression your Association is using the cash flow vs. component method for the reserve study. If this is correct, I would be concerned on offsetting the contribution with the interest. This is because you can always have the unexpected (item needs replaced sooner then expected) which can, as you say, take a bite out of the reserves which would have to be made up.