Capital Projects - Operating and Reserve Funds

Started by JoeB21 • 12 replies • 740 views

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JoeB21 (California)
Posts: 19

Posted:

Can an HOA change the allocation of funds that go into the operating budget - putting less in the Reserve Fund - to get around the requirement for ownership approval to borrow money for a large capital project ?

KerryL1 (California)
Posts: 14,550

Posted:

Can you tell us more? So, even though not budget time, your board seems to want to reduce the monthly contribution to reserves and move that contribution to your operations budget you'll have enough to fund a Capital expenditures project. Right?

I think you can do this, but you must follow certain state gudileinelinr. See davis-stirling.com on changing the published budget mid-year that went to owners at the time required.

And you'll have enough in the operating budget so that you won't need Owners to vote on the expenditure because it'll be less than your HOA's limit on dues increase in one year. Right?

Just curious, what is the project? Can none of it be funded from reserves? Do you happen to know what % funded your reserves are now? And how decreasing the contribution to them will change your % funded?

JoeB21 (California)
Posts: 19

Posted:

Right - you got it.

This is a large capital project that would require a vote of owners if funded through reserves.

The board is trying to do an end run around Davis Sterling.

KerryL1 (California)
Posts: 14,550

Posted:

But, Joe, in CA, reserves only can be used to repair/replace those components listed in the reserve study. A capital expenditure is for items NOT in the reserves study. And, whatever the case, why would owners need to vote on the use of reserve funds if for items listed in the study?

Sorry, --I've managed to confuse myself.

Are you, by the way, on the board?

JoeB21 (California)
Posts: 19

Posted:

The large capital project is a completely new project.

My understanding is that money could not be taken from reserves as it is a new capital project - not currently part of the reserve study / plan.

It is also my understanding that a vote of owners would be required if funding came from reserves as there must be a plan to pay back the borrowed funds..

The board wants to dramatically change the percentages of money going into operating and reserves to fund this capital project.

This is an attempt to fund a large capital project without a vote of owners.

GeorgeS21 (Florida)
Posts: 3,808

Posted:

Sorry ...

Kerry, must capital projects be approved by membership vote in CA?

MarkM19 (Texas)
Posts: 1,459

Posted:

So I was elected to a Board that had just completed a Pet Project (Parking Lot) many years ago in Ca. I have an example of what is supposed to happen.

The Board if planning a Capitol project that is over 5% of the annual Budget must have voter approval. They may also borrow from Reserves if they have a weel defined payback plan in less than 1 year.

What JoeB mentions here is a way to get around some of these details. If the money that is budgeted for reserves is not transferred into reserves it would remain in Operating Account and could be allocated for this project. It would still need to follow the 5% rule. I would say this is somewhat sneaky by the board but the only thing they may be charged with is not funding the reserves as well as they should have.

JoeB21 (California)
Posts: 19

Posted:

I found this argument last night:

Borrowing & Duty to Fund.

One view is that associations have a duty to fund their reserves and diverting reserve contributions to other uses is the same as borrowing from reserves. As such, before diverting the funds, the board must provide notice of its intent to transfer funds in a noticed meeting of the board. If the board authorizes the transfer, the board must issue a written finding, recorded in the board's minutes, explaining the reasons the transfer is needed and describing when and how the monies will be repaid to the reserve fund. (Civ. Code §5515(a).)

GeorgeS21 (Florida)
Posts: 3,808

Posted:

Joe,

Can you attribute the material (quote?) you posted?

Is it from D-S?

JoeB21 (California)
Posts: 19

Posted:

https://www.davis-stirling.com/HOME/Diverting-Reserve-Contributions

Thank you - everyone - for your feedback.

MarkM19 (Texas)
Posts: 1,459

Posted:

JoeB,
I have been present, on a Board and President of boards and I do not recall anytime other than Budget meetings when Reserves get discussed. In my past and present we set the monthly or quarterly contributions and then the PMC makes to transfers without any Board approvals or meeting notes in minutes.

I do get the point that if changes to that reserve contribution was to be made mid year it would be transparent to vote and make a motion to note the action.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Joe

One could submit a new budget at the beginning of the year showing less going into Reserves and more going into a Capital Improvement Fund. Would then be up to owners to reject the new budget.

Even though budgets are best guesses, shifting large amounts of money during the year for such would be improper.

KerryL1 (California)
Posts: 14,550

Posted:

Your Davis-Stirling.com citation about diverting reserves funds is a good one, Joe, and shows there's not complete agreement.

It appears the Board can reduce the published budget's contributions to reserves and increase the monthly contribution to the operating budget. It looks like a procedure must be followed. If I were on this Board, I'd want the HOA attorney to weigh in.

I also agree with those who say the Board should be transparent and vote on the changes to the budget contributions at an open meeting and make sure th purpose of this "transfer" is in the minutes.

sorry I ve' been so slow on this--just don't have time to read the relevant D-S teams on it and this is outside my experience as a long-time director.

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