HOA states $144,000 deficit but does one really exist?

hello, long time lurker, we got a budget letter which states there is a deficit $144,000 mostly due to litigation but some other extra snow expenses that have piled up since 2016.

2022 HOA budget letter states:

"Special Assessments: The HOA reserve account has a deficit of ~$144,000 as of 12/31/2020. By law,
the HOA is required to fund it's reserves at recommended levels to defray anticipated future costs of the HOA,
such as infrastructure (road and side paving, irrigation, etc). Rather than increasing dues each year to balance this
large deficit, we might have to use a Specials Assessments for Infrastructure related items where possible."

However my issue is that the HOA reserve study of 2016 was over calculated for 2021 year end is $341,709 but the
2021 reserve study significantly recalculated the year end balances for 2021 to $184,833. The monthly financials for November 2021 show that the reserve account balance is around $211,000.

So what is a deficit? 3rd party audits were based on putting around $50k per year according to the 2016 study (obviously they didn’t deposit any for a few years due to litigation) and the audits then show that as a deficit since it based it off a higher reserve year end balance using a Cash Flow method analysis.

Any idea’s how to convince the board that there is no deficit or am I way off? That in fact they should raise fees for the deficit since that old reserve study was the only one at that time when the deficits occurred. That they would be in violation of their duties if they zero out the deficit?

2nd: There is no law in Virginia that says reserves must be funded to recommended levels, so the letter seems to going beyond the HOA's obligations.

Any help would be greatly appreciated.

Hi Paul,

I believe your HOA could not have planned for litigation expenses in its budget and those fees would certainly drain cash flow.

The Reserve Study suggests your HOA is facing $341,079 in possible capital expenses but only possesses $184,833 in cash. Should EVERYTHING on the list break down on the Reserve Study's timeline, then the HOA would need a special assessment. However, the HOA will likely slow the replacement schedule and leave aged-out amenities in place as long as they are fully functioning. This will skew the reserve study's calendar of replacements but the board must exercise common sense.

You have simply been told by your HOA that there is $341,079 worth of untapped repairs and replacements that can reasonably be observed (it doesn't mean there's an emergency). You have $184,833 in cash if those repairs all come due at the same time. Many HOAs have this challenge due to "Murphy's Law" that prevents things from going as planned on the timeline we prefer.

This is first-hand proof that HOA lawsuits eventually bite all parties, some twice. You cannot zero out this "deficit" no more than a private family can zero out the cost of new roof on the basis they don't have enough money to pay the roofer. You will pay now or later.

From the new reserve study:

"This report is a Level II Update of the previous report and includes a new condition assessment. All common components were visually observed. Measurements and quantities were generally accepted from the previous report except where changes have occurred. The update report is a stand-alone document and reference to the previous report should not be necessary."

"Currently, the reserve fund is adequate, and requires only minimal annual adjustments in contributions to eventually achieve the fully funded goal by the end of the 20-year period. "

Thank you, this letter was also sent before the 2021 reserve study was conducted:

December 22, 2020.
"The board is currently exploring the option of adjusting the reserve balance from $274,000 to $174,000. This
adjustment will serve no other purpose than to "reset" our reserve requirement and eliminate the deficit."

So I there must be a reason why the deficit wasn't reset, I will be asking these questions in the next meeting but wanted to post this on the forum for other's insights and other questions that anyone here might think of I can ask the board.

Paul

A Reserve Study should show the life expectancy of an item and the cost to replace it. Let us say roofing needing replacement in 20 years at a cost of $800K. If $40K per year was put in the Roofing Reserve Fund for this then the Reserve Fund for this is 100% Funded each year. While after say 10 years it has $400K in it, it is still 100% funded but in actual dollars, only 50% funded to some. Similar to reading Cash Accounting versus Accrual Accounting.

The question is where did your BOD come up with how much had to be in the Reserves? Also if they keep on this path, they will accrue deficit each year. You needs a dues increase to break even each year including placing funds in the Reserves.

Sorry used my wrong account, using the correct one now.

So it's a matter of the association not putting money into the reserve account(s) versus taking monies out to pay for litigation.

So the special assessment they are proposing is to pay for the litigation they pursued as they used the funds earmarked for the reserves to pay for their possible foolish legal endeavors.

What the board wrote reads like jabberwocky to me.

Chances are good none of the directors knows what she or he is talking about when it comes to reserve studies and reserve funding. Chances are even higher owners know even less about how reserve studies and reserve funding work.

The Level 2 study done in '21 should give you a lot of info, not just the little summary that the analyst writes in the beginning. Have you read the complete study, Paul?

The issue is not with the reserve study, the issue is with the board(s) tat didn't put any monies into the reserves for a number of years.

Paul - I just saw this.

You are correct. Your HOA will be replacing amenities (unless it's planning to get rid of them as they fail). What can change is the cost of making those replacements in 2021 vs 2016. Costs absolutely will have changed with current inflationary environment AND the previous Reserve Study may have over-estimated costs. Both can be true.