Florida HOA - Reserve Fund Investments

Started by ToddR7 • 6 replies • 1898 views

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ToddR7 (Florida)
Posts: 2

Posted:

I have seen and read multiple post regarding the investment instruments that reserves can be invested in.

The logical investment to protect all principal contributed at all cost is FDIC insured accounts.

However, our board invested a significant amount of funds into non FDIC insured brokered CD's. Yes, non insured. The principal fluctuates like a bond with principal adjusted as interest rates move up or down. Clearly, in this interest rate environment, principal has been lost.

Is there a reference to any Florida law on the limitation on what accounts these funds can be invested?

I have also seen comments referencing our governing documents. There is nothing addressing investing reserve funds. However, the board adopted a resolution that is vague and doesn't limit brokered accounts.

This is a potentially dangerous scenario.

Thank you.

AugustinD
Posts: 5,144

Posted:

Is your HOA under developer control?

I agree this scenario is dangerous. It is also par for the course for volunteer directors. Yours are not bright.

Florida Statute 720 has a number of restrictions on reserve funds. It seems to me that brokered, non-insured CDs result in a Reserve fund whose value fluctuates, potentially by a lot. This will result in potential, unplanned violations of the statute.

E.g. the statute at 720.303 (6) (f) states, "After one or more reserve accounts are established, the membership of the association, upon a majority vote at a meeting at which a quorum is present, may provide for no reserves or less reserves than required by this section." The implication is that the Board deciding, via these non-insured CDs, to have less reserves violates the rights of the members to vote on the matter, pursuant to 720.303.

In general, I do not think budgeting pursuant to 720.303 (6) can be achieved.

Statute 720.303 also speaks of the fiduciary duty board directors have to the HOA and members. This means they are not supposed to violate Florida statutes on budgeting. They are not supposed to take members' money and use it to gamble.

ToddR7 (Florida)
Posts: 2

Posted:

No, it is not under developer control. Turnover was made in November 2017.

See if this sounds familiar.....a bunch of former "captains of industry" took control and made our community and HOA their own little city.

Better yet, our HOA is self managed. 1,425 doors. Recipe for disaster, you bet.

Fiduciary responsibility?

Our board consist of seven members. Three were voted out in March 2019, including self proclaimed leader. Four more to get voted out in March 2020.

Being on the finance committee has been an interesting challenge.

DavidW5 (North Carolina)
Posts: 565

Posted:

Are you sure the brokered CD's do not carry FDIC insurance? In my experience brokered CD's are actually issued by banks and are then resold by brokers. Such brokered CD's cannot be cashed in early by paying an early withdrawal penalty like a CD bought directly from a bank. Brokered CD's can be sold on the open market at a price determined by the prevailing interest rates. That price may vary substantially during the term of the CD. But if the brokered CD is held to maturity, the full face value plus interest will be paid and the principal is very likely fully FDIC insured.

My HOA uses brokered CD's exclusively for our replacement reserve funds and they all carry full FDIC insurance.

GenoS (Florida)
Posts: 4,276

Posted:

Quote:

Posted By ToddR7 on 06/05/2019 10:15 AM
Is there a reference to any Florida law on the limitation on what accounts these funds can be invested?

I have also seen comments referencing our governing documents. There is nothing addressing investing reserve funds. However, the board adopted a resolution that is vague and doesn't limit brokered accounts.

It is risky but there's nothing in the statutes that prohibits it. Monumentally stupid, but not illegal.

Your best bet is to get the board members who approved it out of there. You've got over a thousand homes? Get ready to kiss your reserves goodbye. Not saying it will happen but it's something you should be ready for.

SheliaH (Indiana)
Posts: 6,964

Posted:

What Geno said. And why wait until next year to get rid of the remaining bunch, especially if they’re still not acting right? Your documents may have instructions on how to call a special homeowner’s meeting and/or procedure to recall board members. Read it, then rally your neighbors together to get it done.

Our documents also state that reserve funds MUST be placed in investments that protect the principal, so that limits us to FDIC backed funds. You might want to have the new board adopt a rule to that effect or persuade the homeowners to approve amending the CCRs or Bylaws to mandate this.

PS - if you haven't done so, the board should have a reserve study done so you can begin funding and managing the reserves the right way. There's more to it than just protecting the fund principal.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

CathyA3 (Ohio)
Posts: 6,299

Posted:

I also recommend reviewing your governing documents to see what they require in the way of insurance. Ours require fidelity insurance to protect the Association against dishonest or fraudulent acts in an amount no less than the greater of: 1) 150% of the annual operating expenses including reserves; 2) the maximum funds that will be in custody of the Association at any tine; and 3) the sum of three months worth of assessments plus the Association's reserves.

Of course this may not address loss of funds due to stupidity unless you consider willful ignorance to be dishonest or fraudulent.

On the other hand, brokered CDs that are held to maturity will not suffer a loss of principal, the same as with bonds. If the board has invested funds that will not be needed for 10 years or more according to the latest reserve study, and the board also has realistic ideas on budgeting and spending, then things should be fine. However, we avoid brokered CDs in my community - just because we're responsible and realistic does not guarantee that future boards will be, or that they won't run into some unforeseen event and need the money ahead of schedule. I don't believe that brokered CDs pay enough in extra interest to justify taking on the added risk.

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