Overfunded Reserves

Unless someone sees your reserve study, they are talking out both sides of their mouth or worse.

I would first check out the current costs for milling and paving. Then I would update the study with an additional $3 to $5 per sq yard (based on today's gas prices). Then determine if you are fully funded in the reserves or not.

BTW - is your reserve study based on cash flow or component funding?

To understand the difference, see:

HOA Reserve Studies Methods: Pooled VS Component from a management company

Cash flow or component funding: Which is best for a reserve study?

An Explanation of Reserve Study Standards from CAI

If you are truly funding the reserves at 130 percent, you should readjust your budget and consider lowering assessments.

Our studies had a contingency line item for unexpected costs (spike in costs due to inflation or remaining useful life miscalculations) equal to about 10 percent.

I understand the argument on why you did this and maybe it's the right thing to do? However, it has a ring of dishonesty to it. Isn't an accurate accounting of the people's money a core principle of any HOA Board? When you start adding 'cushions' and 'rainy day' funds I can't help but think you are going down a slippery slope. NpB's statement that they are 30% overfunded would bother me as a homeowner.

A form of lowering assessments without actually lowering the assessment . . . consider giving all owners a "free" month where assessments will not be collected that month. Around Dec or Jan is a good time for that considering Christmas/Holiday expenses are typically higher at that time.

Why are we not spending any of the reserve money? It is there for a reason. Which thought part of the evaluation included life span of certain capital items. How much longer have on the roofs or roads thataybe part of the reserves? It seems to me the reserve studies may need re evaluated. If they are not matching the timeline of replacement needs

No significant reserves isn't the only problem with many HOAs. There are HOAs who don't do reserve studies regularly and/or ignore the funding recommendations altogether. It's true the boards at Surfside let things go, but you also saw how the homeowners squashed at special assessments which might not been necessary if....they'd funded the reserves properly from the be.

All of this stuff can lead to underfunded reserves or no reserves at all, so you have to think carefully about this "overfunded" stuff. By the way, you HAVE heard of inflation , haven't you? This fund may be considered overturned now, but you're looking at 2022 prices. When he money's needed five or 10 years from now, it may be a different story and you'll be glad you have all that money.

Hell, prices are going up THIS YEAR because of supply chain issues, increasing gas prices (that's why it seemed the pump wouldn't stop the last time you filled up your car). And depending in where you live, the weather may be a huge issue with more damage from wildfires, more severe tornados, and so on.

There's no perfect answer, but I know life has a strange habit of doing what it do regardless of what you and I think, and sometimes you do your due diligence and shit still happens. I so think there's probably a reasonable compromise somewhere, but it's a matter of NP and the rest of the board running the numbers and considering the pros and cons of their options. Remember, we don't live in that community, so we won't have to live with the consequences.

Great overall advice here...

1. Don't lower dues, hold them steady.

2. Ensure that the HOA board isn't "saving Reserve money" by waiting too long on planned capital replacements, thus burying costs in the slow death of multiple amenities, which could lead to multiple capital projects needing to be addressed at the same time (which doesn't respect written plans for project management). The Reserve Funds can be easily swamped by Murphy's Law.

3. An operating reserve account isn't a bad idea but the dollars in it shouldn't reach close to levels of the Reserve Fund. This account is perfect for expenses that are slightly bigger than expected for your monthly operating budget yet don't rise to the level or appropriateness of tapping Reserve Funds.

If your HOA board is holding steady dues, conducting capital projects on a methodical basis AND builds a "rainy day/operating money market account," then your dues may, in fact, be too high. That's very rare.

To be really clear, reserves are NOT a rainy day fund. In fact, they are the exact opposite of a rainy day fund.

Why?

Reserves cover the predictable and known expenses than an association will occur in the future. A playground structure that naturally wears out after 20 years is not a rainy day expense, it's a known and predicted future expense. A roof replacement is not a rainy day event, again, known and predictable.

Rainy day expenditures might be for a surprising windstorm that knocks down a lot of trees. This isn't a reserve expense because it is not known or predictable.

Excellent responses! Thank you all.

I know how I would vote, but reflexively, what option would most un-engaged homeowners who are not in any financial hardship choose in your opinion?

I would vote for Option 4, not presented above

4) Work on improving the maintenance of the community to restore the condition of the community back to the original intent. Tasks might include replace dead vegetation, irrigation maintenance, entrance monument refresh, and the like

Of course, I don't know your community so maybe this really isn't needed at your place. But I imagine most HOAs can benefit from maintenance spending to improve the aesthetic appearance of the community and make it look sharp again.

Last fall I had a Town Hall meeting, with one of the agenda items being to explain next year's budget. At some point the conversation came to what happens if we are over or under budget, and one of the more active residents actually asked how it is possible to spend anything other than exactly the budgeted amount, "After all, there is a budget. That's all you can spend."

I tried pointing out that even in a mature community it is impossible to know exactly how much will be spent in each category, but in our case - with five or ten homes being built each month - we will be lucky if we are in the ballpark. She was unconvinced...

NpB,
First off you have some great advice from all the regulars here. My only concern is when you mentioned Private Streets. My Ca. HOA had private streets in a 438 SFH community. Our Street maintenance was 250K every time we repaved and every 4 years. That can drastically change your percentages. I am surprised you do not already know what it cost last time for your community. It is not a number that would be easy to forget. Also depending on the age of your community you can expect more things to start to happen. When ours was reaching the 20-year mark in Ca. our 1700 trees that we maintained started attacking owner's sewer lines. This was not in the reserve budget.

I would never suggest lowering the dues. If you raise them a dollar later people swamp your board meeting wanting to know why you are mismanaging your jobs.

Say, NpB, if your % funded increases every year, the contributions to reserves are too high. One question might be why? Did a certified reserves analyst or specialist recommend that level of contribution?

One reason might be that certain components cost less than when their replacement cost was estimated. This actually happens, but since most reserves are not 100% funded, the assn. % funded doesn't get too high.

To summarize the founder of a national reserves firm: When an assn. is 100% Funded, that percent funded doesn't change when you spend the estimated amount for a scheduled (Remaining Useful Life = 0 years) reserve project. This is because the amount set aside in reserves exactly matches the planned expenditure at that point in time. But most reserves are 30-70% funded, so expenditures are more than what is set aside for that/those components. Any reserve expenditures, then, lowers the % funded.

70-130% funded is considered just fine by these specialists. Until very recently we are about 92% funded--took a a long time to get there. BUT the replacement costs of some major components now underway exceeds the analyst's predictions though they were accurate for years. The problem with our big project right now is inflation. We had inflation built into our reserves for every year. But not, what? 16%! So some elements of some projects are costing way more than estimated. In addition, electricity has gone nuts here and our projects require a lot of it.

I like Michael's point that reserves most certainly are NOT a "rainy day fund" they specifically are funds needed to replace existing common area components based on the estimated replacement cost & estimated life of each. Thus reserves aren't for accidents vandalism, etc. because the estimated life renders those unpredictable. Those events are why associations have insurance.

NpB,

Vigilance over maintenance will save money over the long term by stretching out the replacement schedule. Nice work.

Ah, thanks, NpB. Our analyst often has two elements to a component: Repair est. cost & RUL and replace est. cost & RUL. Our 20 y.o entry gates are a good example

This expense (roads) is in our 2019 reserve study and it's anticipated to be completed in 2033. The analyst anticipated inflation would be 3% a year. Official government inflation figures coupled with high petroleum costs, puts this number likely way higher.

That is my thought too, as who knows how perpetual current inflation numbers and current high petroleum costs will be.

I like the idea suggested previously about a one month dues holiday around December, because that gives the Board options depending on how the year went financially, whether or not its prudent.

I just don't know how appreciated it will be by the members or if some might view it as a political stunt, kind of like politicians and candidates in the non-HOA world conducting free gas giveaways.

We do crack-sealing and seal-coating every 3 to 4 years.

Repave every four years, I think that is quite excessive and overkill. Maybe reseal the asphalt, for us that is about every seven years, fill in the cracks as needed.

Thad's reply seems to be the only one to address statutory requirements in certain states (and in certain governing documents) to refund surplus member income. There are many hypothetical avenues to discuss related to spending CIC funds, but what matters most of all is the *AMOUNT* of surplus. BTW, surplus member income is tracked as retained earnings (RE) on your balance sheet. Our CIC refunded owners two years ago because we had amassed a $70,000 surplus from the prior year. Our declaration restatement requires that we return surpluses in excess of 3.5% of our annual budget and allows the Board to make a decision if the surplus is less than that amount.

EXAMPLE: RCW 64.90.475 - Accounts and Records - (similar in many ways to RCW 64.34.356 - Surplus Funds)

(1) The association must establish and maintain its accounts and records in a manner that will enable it to credit assessments for common expenses and specially allocated expenses, including allocations to reserves, and other income to the association, and to charge expenditures, to the account of the appropriate units in accordance with the provisions of the declaration.

(2) To assure that the unit owners are correctly assessed for the actual expenses of the association, the accounts of the association must be reconciled at least annually unless the board determines that a reconciliation would not result in a material savings to any unit owner. Unless provided otherwise in the declaration, any surplus funds of the association remaining after the payment of or provision for common expenses and any prepayment of reserves must be paid annually to the unit owners in proportion to their common expense liabilities or credited to them to reduce their future common expense assessments.

Here's an entire page devoted to surplus funds if you'd like more information: https://www.(LINK-NOT-ALLOWED-PER-POSTING-RULES)/governance/surplus-funds

Regards,
Steve

Reserve studies should be adjusted every year.

If this hasn't been done, I would strongly suggest this gets done prior to considering any other alternative.

In my old Association, once our roads were repaved I calculated a huge surplus (because we started putting money in reserves too late). I recommended adjusting assessments accordingly. The board that took over did not want to lower assessments because they had projects they wanted done.

I do not know what happened.
I suspect the assessments kept increasing.

AugustinD: This is a planned community.

I do not know about anyone's personal financial situation in the HOA. Zero owners are in arrears on assessments, so somehow they can afford the $200 per month dues. I don't think a $25 per month dues decrease will be that meaningful for most owners.

Arizona statutes require planned communities to provide a copy of the current budget to prospective buyers.

And come on: Do the Bylaws have a requirement for the budget?

AugustinD: Yes, the Bylaws indicate a budget needs to be approved each year. Past and present Boards have been historically frugal and expenses have come in under buget, hence the great positive reserves.