Reserve vs Contingency Expenditures

Joanne,

My opinion is that transparency rules on matters of Reserve Fund expenditures and 'contingency' is marked to protect the HOA from unexpected expenses that the operations budget cannot reasonably accommodate.

Yes - your board could divorce a contingency account from the Reserve Fund (this effectively makes such a fund more "liquid" and more easily tapped for new projects.

Yes - I'd think Reserves are just fine for holding responsibility for 'contingency' expenses, which should be rare.

In the event of a community emergency repair, your board would tap money, whereever it could be found, to cover the cost in a real world sense.

Florida's Department of Business and Professional Regulation (DBPR) published a "Self-Study Training Manual" on "Budgets and Reserve Schedules" about 10 years ago. Most of it is still relevant. In Chapter 3, "Reserves", it has this to say (see p. 30 in the linked PDF):

"Many associations want to have a reserve called “Contingency Reserve.” The purpose of this account would be to fund items for which reserves have not been established or to cover unanticipated operating expenses. However, it is inappropriate to create a “reserve” account for this purpose as there is no apparent restriction on the use of the funds. Consequently, the account does not meet the definition of a reserve, and associations that desire to have a contingency account should budget for a surplus in the operating fund. As stated above, the association may create a reserve for general deferred maintenance and capital expenditures. Funds in this account may be used for any deferred maintenance or capital expenditure project, but not for ordinary operating expenses."

YMMV in New York but I think this describes a "best-practices" approach to the question of funding for contingencies regardless of what state you're in. My own HOA found that about 5 years ago and it did convince our board at the time (and since) on the subject. It's always prudent to plan for contingencies that are unpredictable, but something that's unpredictable shouldn't really be in the Reserves.

Let's say you had a major plumbing issue, a large water pipe burst and it cost $20K to fix. You could temporarily fund out of reserves, do a special assessment for the $20K to replace the reserves. That would be the prudent thing to do.