Hoa contingency funding

Started by NormaB3 • 13 replies • 1222 views

💬 Join us to post & get advice from 50,000 HOA & Condo leaders.

⚡ Takes 30 seconds

Already a member? Log in

NormaB3 (Florida)
Posts: 45

Posted:

Looking for some input on a subject matter. Our HOA has dedicated reserve funding that we fund monthly out of our budget.
We usually have approx $100,000 in our operating account. Our president insisrs the law says we have to have 6(six) onths contingency money on hand at all times and therefore cannot spend this money to pay bills. I cannot find any law in Florida statutes or anywhere else where this is a requirement. We asked her to show us in writing but she has not done this. Is anyone out there privy to something like this? I know this can be a suggestion but find no law that makes it mandatory.

AugustinD
Posts: 5,144

Posted:

NormaB3 elsewhere indicated this is a HOA (not a condo).

Quote:

Posted By NormaB3 on 01/14/2021 8:32 AM
Our HOA has dedicated reserve funding that we fund monthly out of our budget. We usually have approx $100,000 in our operating account. Our president insists the law says we have to have 6 (six) months contingency money on hand at all times and therefore cannot spend this money to pay bills.

I know of no such federal law, state law (including FS 720) or case law for Florida or any state that says this.

Your Board should keep in mind that the President is one person and can be outvoted by a Board majority on issues like this. Contrary to what newbies like to believe, a HOA President-Director has hardly more legal powers than a HOA Director who is not the HOA President.

I suspect the bigger problem is this Board does not have majority who feels as the OP feels. Oh well.

TimB4 (Tennessee)
Posts: 21,059

Posted:

With others, I know of no law requiring this.
It's a good idea to have a buffer/contingency in the operating account to address any shortfalls between assessments received and bills paid. Keep in mind that the actual amount will fluctuate throughout the year.

How much you have for your contingency should be based on what your bills are and what the delinquency rate is in paying assessments.

When I was on the board, we had a very low delinquency rate so we budgeted for an amount equal to one month of normal bills (the monthly payments). Our budget would show this amount as the beginning balance and ending balance for the year (as income should equal expenses). That said, the actual amount was typically higher as many members would choose to pay yearly or quarterly vs. monthly. So, in December we would get a lot of checks for the following year.

SheliaH (Indiana)
Posts: 6,964

Posted:

Unless and until she comes up with a specific statute, I'd just ignore her. Besides, if you have other board members, she's only one vote, so you can outvote her on this matter.

That said, reserves and operating funds should be in separate accounts, so perhaps that's what she's thinking of. However, reserves aren't the same as a contingency fund. Reserves are supposed to pay for future major improvements or replacements to the common area (e.g. street repaving), whereas a contingency fund might be used for an emergency in case there's an unexpected expense that can't be covered by the operating fund, which is supposed to pay for routine association expenses (the monthly stuff).

You don't say if you have a contingency fund. If you'd like to have one, you might want to talk to your association accountant as to how to set it up, and there may be tax implications you'll have to consider. You can always decide if you'd like to try and keep six months of routine expenses in it, but you'll also need to develop a policy indicating how and when that money should be used.

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

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Norma

To keep terminology straight:

The Operating Budget is for normal, planned on, day to day expenses like utilities, landscaping, etc. Part of an Operating Budget will be some money for Reserve Fund funding.

The amount in the Reserve Fund should be based on a Reserve Study, not a number like 6 months. Reserve money should be used for "planned" events like resurfacing a parking lot, replacing a pool liner, etc. It is not for taking money out of for operating expenses.

Few associations have a specific Contingency Fund and if Operating Budget and Reserves are properly funded, I see no need for one though I would not be upset if there was one. To me it just unspent money not a specific funded expense.

GregM14 (Washington)
Posts: 81

Posted:

Since dues come in on a quartely or annual basis, but expenditures go out on a more frequent basis, you need some money that you can drawdown to pay for expenditures without worrying about when the revenue is coming in. For example, if you have a big expense like renovating a community park that costs $50,000, having the $100,000 in the operating account would allow you do to the park renovation anytime during the year and not fret about whether you can pay the vendor with the funds you have.

I have looked into this and see where some accounts recommend a few months revenue in this fund. For our association, we keep 2.5 months revenue as the minimum balance in the operating budget.

$100,000 seems like a lot, but maybe your HOA/COA has a lot of revenue coming in to warrant that.

CathyA3 (Ohio)
Posts: 6,299

Posted:

I can think of one instance in which a contingency fund may be useful and that's when you have a unexpected but urgent repair needed and there are provisions (CC&Rs or state law) stating that you can't tap the reserves for non-reserve items unless you can pay back the "loan" within the calendar year - and your annual reserve contribution doesn't count as repaying. Depending on the repair and the HOA's finances, that may not be doable, which means the HOA may need to consider things like a bank loan.

But as others have said, it really does depend on your HOA's particular situation.

We have an account labeled "snow reserve". We budget for a typical winter each year, and any unspent funds go into this account. Ohio being what it is, we usually need those excess funds within a year or two. We labeled the account that way so that future board members wouldn't go "oh boy, extra money, we can buy flowers!!"

GeorgeS21 (Florida)
Posts: 3,808

Posted:

Norma,

Are you on the Board?

There are other Board members, thought, right? Hopefully, all are not at ignorant as the president ... this is a nonsensical situation.

I am still confused about what the 100K is for, how it gets into the reserve account, how this can be related to a timeline vice items that are depreciating and will need to be replaced/repaired?

GenoS (Florida)
Posts: 4,276

Posted:

HOA or Condo association? Is there a Reserve Study? I've heard there's a "rule of thumb" that it's a good idea to have 3 months of operating income available for unusual situations and truly unanticipated expenses, but there's no statute or Administrative code that requires such a thing. In fact, there's no law or code in Florida that requires anything at all to be held aside for anything. Statutory reserves should be kept in other bank accounts than the operating accounts and mingling the 2 types of accounts together is a big no-no.

MarkM19 (Texas)
Posts: 1,459

Posted:

Norma,
I think all comments received above are technically right and also not completely right.

How much should a board have in operating account at any one time depends on many things.

1) Are your dues paid monthly or quarterly?
2) How many members on average are in collections currently?

If dues are collected quarterly and bills are paid monthly then a cash reserve is needed to cover all bills and also some contingency. I would think that 6 months is a good number to shoot for but would be happy with between 3 and 6 months. I sounds like the president may have been listening to shows like Dave Ramsey who mentions 6 months in personal reserves set aside. It is a good goal and many HOA and actual people fail to meet those goals.

She is not doing anything wrong by wanting to have your HOA to have funds set aside for unexpected issues. Do you think anyone had COVID 19 on their things to worry about going into 2020? I already no that answer. The one thing that every homeowner HATES is a special assessment because the HOA was un prepared for an event that happens. If she is preparing for the worst and it does not happen the money is still in the account and belongs to the HOA. As others have mentioned it always takes a majority vote for things to happen in any HOA. Don't blame her for this alone because the whole board should have voted and the majority agreed.

The reserves are an entirely different animal and money should be set aside for Repairs and replacement of common area components. This is usually based on a Reserve Study that is done at least every 3 years and give the board a suggestion of how much should be directed in the reserve account for future repairs. This is a good thing because it protects the board from having to make Special Assessments for repairs that pop up at unknown times during the year.

IMO the President is being responsible and doing her Fiduciary Duty of managing the HOA funds and more is always better than not enough. The HOA should not be in the business of using credit to finance issues like homeowners do when emergencies arise.

MichaelS56 (Minnesota)
Posts: 859

Posted:

The state of Minnesota has HOA budgets split with an Operating budget that is for day to day expenses and the contingency budget is part of that. The other budget is the Replacement Reserve that is for the large maintenance expenses that are not found in the Operating budget, such as roads, street light replacement, retaining walls. etc. The two budgets cannot mix by our state law.

AugustinD
Posts: 5,144

Posted:

Quote:

Posted By MichaelS56 on 01/15/2021 12:54 PM
The two budgets cannot mix by our state law.

The two accounts cannot mix? From:

CHAPTER 515B. MINNESOTA COMMON INTEREST OWNERSHIP ACT
515B.3-1141 REPLACEMENT RESERVES.
(a)The association shall include in its annual budgets replacement reserves projected by the board to be adequate, together with past and future contributions to replacement reserves, to fund the replacement of those components of the common interest community which the association is obligated to replace by reason of ordinary wear and tear or obsolescence, subject to the following:
.
.
.
(3) The association shall keep the replacement reserves in an account or accounts separate from the association's operating funds, and shall not use or borrow from the replacement reserves to fund the association's operating expenses, provided that this restriction shall not affect the association's authority to pledge the replacement reserves as security for a loan to the association.

From https://www.revisor.mn.gov/statutes/cite/515B.3-1141

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By GregM14 on 01/14/2021 1:42 PM
Since dues come in on a quartely or annual basis, but expenditures go out on a more frequent basis, you need some money that you can drawdown to pay for expenditures without worrying about when the revenue is coming in. For example, if you have a big expense like renovating a community park that costs $50,000, having the $100,000 in the operating account would allow you do to the park renovation anytime during the year and not fret about whether you can pay the vendor with the funds you have.

I have looked into this and see where some accounts recommend a few months revenue in this fund. For our association, we keep 2.5 months revenue as the minimum balance in the operating budget.

$100,000 seems like a lot, but maybe your HOA/COA has a lot of revenue coming in to warrant that.

Greg

When you say renovating a community park, it raises a vexing question and one often ending in heated arguments. This is, when does a renovation cross over to a capital improvement? As an example, replacing the benches with similar, sodding some areas, etc. should be paid for out of the Reserves Fund. Adding say a splash pad, parking spaces, etc. would be a capital improvement and it should be paid out of money set aside for Capital Improvements, not out of the Reserves. Often see this when a clubhouse renovation is done.

🎯 You've read this entire discussion

Join the conversation with 50,000 HOA & Condo Leaders:

✓ Ask follow-up questions
✓ Share your experience
✓ Get expert advice
✓ Access 350,000 discussions

Create Free Account →

⚡ Takes 30 seconds

Already a member? Log in here