Talking points to support spending HOA money

Started by MichaelT21 • 22 replies • 339 views

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MichaelT21 (Arkansas)
Posts: 462

Posted:

I'm preparing for our budget ratification meeting coming ahead.

We've been spending heavily (i.e, investing in the community parks), and my arch critic is loudly arguing that we should save accumulate money rather than spend it. She says that we need a healthy "emergency fund" for unexpected expenses and the like. (Keep in mind we are a single family HOA, don't own any buildings, etc). Under my arch critic's leadership, there were years that nearly $100,000 was collected from homeowners but not spent and rather just carried over to the next year.

I'm strongly opposed to the idea that it's okay to collect money from homeowners and stash it rather than spending it. If we are collecting money that we are not using, it should be refunded to homeowners. I like to see us run lean with less money in operating and more money in homeowner pockets than to have the money sit in the HOA operating account.

However, as soon as I mentioned that, people immediately think "RESERVES" and generally well funded reserves are appropriate. I'm not talking reserves, I'm talking operating account. People, even board members, don't really understand the difference.

Can anyone give me talking points on how I can explain to homeowners why us spending HOA money on improving our parks and community spaces, rather than collecting the money and not spending it, is a good thing? It's harder than it seems.

KerryL1 (California)
Posts: 14,550

Posted:

One talking point it to make clear the distinction between reserves and the operating budget. Write something to mail to Owners. Start with a draft to us for comment. I think it would be very educational for many who read this board and for your owners, too, MichaelT.

I agree that waaaay too many owners AND directors do not understand the difference. We have two fairly new directors and a new onsite property manager. Our ONLY director--the treasurer-- who's savvy on the budget and reserves--had a disabling stroke a month ago and couldn't help with the budget.

At the board's budget meeting the other night the board voted to put way too much in the Contingency line item for "unexpected" expenses. But in their discussions it emerged that some of these would be reserve expenditures. Frustrating for this recently former director.

AugustinD
Posts: 1,027

Posted:

I agree few owners and directors understand what a HOA reserve study; a HOA reserve account; a contingency fund line item (which provides a cushion to take into account that budgeted, and so predicted, operating expenses rarely match actual operating expenses). All you can do is do your best to come up with accurate, short talking points and repeat them again and again. And there is nothing wrong with repetition of relevant facts. This is what it takes for people to learn.

Suggested talking points when this owner (call her "Ms. Jones") speaks out next:

-- I have studied HOA budgeting for some years now. Ms. Jones speaks of a healthy "emergency fund." I believe the correct HOA accounting vocabulary that covers this topic includes two phrases: The first phrase is "Contingency fund." The second phrase is "Reserve Account."

-- A "contingency fund" is a line item in the budget that provides a cushion for unexpected operating expenses. Conventional wisdom is to have from two to six months of operating expenses in the contingency fund. Anyone can look this up. This Board intends to budget for three months of operating expenses in the HOA's contingency fund. As unexpected operating expenses arise, the contingency fund may decline in value, but hopefully not so much that a special assessment is ever needed. When the new fiscal year arrives, the new budget will replenish the contingency fund.

-- An example of why a contingency fund is needed is if, say, an unexpected weather event results in having to increase expenses beyond what was budgeted. E.g. suppose drought causes the water bills for irrigation to shoot up. The budget did not anticipate drought. Now the HOA has to pay a lot more than it planned for irrigation. What pays for this? Hopefully the contingency fund can cover the difference between what was budgeted (forecast) for irrigation and what the actual costs for irrigation end up being.

-- A reserve account holds money for the replacement or major maintenance of that infrastructure that has a life expectancy of one year or more. Nationwide HOAs use professional reserve studies to guide them as to how much should be in the reserves.

-- These two line items, contingency fund and reserve account, if you will, are what cover infrastructure-related "emergencies" at a HOA. I want to encourage people to use the correct vocabulary here, so we can all be on the same page.

-- Again, I remind all that conventional wisdom is to hold two months to six months of normal operating expenses in the contingency fund. The board intends to hold two months of operating expenses in the contingency fund for next year's budget. Now Ms. Jones, the board would be happy to hear how much money you think should be in the contingency fund.

KerryL1 (California)
Posts: 14,550

Posted:

Had to rush through Aug's reply. The word "emergency" shouldn't be used in discussion of reserves because it leads to the very confusion so many have. IMO, it's fine to use it for the contingency line item in the operating budget.

Reserves also are not a "rainy day" fund. components in the study must each have a predictable lifespan, but "emergencies" are unpredictable.

AugustinD
Posts: 1,027

Posted:

Quote:

Posted By KerryL1 on 10/14/2022 9:53 AM
Had to rush through Aug's reply. The word "emergency" shouldn't be used in discussion of reserves because it leads to the very confusion so many have. IMO, it's fine to use it for the contingency line item in the operating budget.

Reserves also are not a "rainy day" fund. components in the study must each have a predictable lifespan, but "emergencies" are unpredictable.

Yes, I considered this. But since reality is that infrastructure often does not fails when a reserve study says it will, I think it's fair to consider that the reserve account does play a role in emergencies. "Emergencies" meaning anything that does not happen as anticipated.

Just my view.

MichaelT21 (Arkansas)
Posts: 462

Posted:

I think Kerry and AugustinD are thinking condos when it comes to emergencies.

We're single family homes. We own thousands of square feet of lawns, some playground equipment, mailboxes, and rent street lights. None of these things really have emergencies. A well failure might be an emergency but the cost of repair is at most $10,000 which we can pay out of operating. Playground equipment doesn't really have emergencies if we are paying attention to the condition. Same with mailboxes.

The biggest "emergency" we might have is a freak storm or signficant vandalism, both of which are covered by insurance.

I understand that a condo building with significant common elements might have emergencies, but a single family home situation with parks would rarely have such an emergency.

AugustinD
Posts: 1,027

Posted:

Quote:

Posted By MichaelT21 on 10/14/2022 10:05 AM
I think Kerry and AugustinD are thinking condos when it comes to emergencies.

Nope. I had in mind the massive lawns you all maintain, period.

Quote:

We're single family homes. We own thousands of square feet of lawns, some playground equipment, mailboxes, and rent street lights. None of these things really have emergencies. A well failure might be an emergency but the cost of repair is at most $10,000 which we can pay out of operating.

I would expect a well failure would likely by payable from the reserve account.

If you're against a contingency fund, just say so. But while you're saying it, know that you are going against conventional wisdom to have a bona fide, CPA-approved, cushion in the operating expenses.

You gotta be on the side of truth and throw your ego out the window here. If Ms. Jones is criticizing you all for not having a contingency fund, then she is right to do so.

Go google on:

"contingency fund" "HOA" "months"

MelissaP1 (Alabama)
Posts: 13,836

Posted:

A HOA budget does not work like your home personal budget. I think people get in the wrong mindset for this. You are to spend as much as you collect. Plus it is okay to have a small savings and a long term reserves account for capital expenses.

Personal budgets do not work this way. The goal is different. Personal wise you want to save money for retirement. A HOA is not going to retire. It needs funds for operations not for life.

I think you can find a compromise here. Remember the HOA money is NOT your money. It is EVERY members money. The board is elected to act in the best interest of the members

Former HOA President

MichaelT21 (Arkansas)
Posts: 462

Posted:

Quote:

Posted By AugustinD on 10/14/2022 10:11 AM

Posted By MichaelT21 on 10/14/2022 10:05 AM
I think Kerry and AugustinD are thinking condos when it comes to emergencies.

Nope. I had in mind the massive lawns you all maintain, period.

Quote:

I think having $30,000 in the operating account is fine for us. (We have fixed expenses of $11,000 per month). Mrs. Jones would like us to have $100,000 in the contingency fund.

More importantly, and more to the point, Mrs. Jones would like us to save for the future, similar to family budgets. In other words, grow our contingency fund by like $10,000 or $30,000 every year. In other words, collect more than we spend.

Every time I try to explain it, people assuming that the contingency funds is the same as reserves. And then quickly lose interest when I try to explain how contingency is a separate thing than reserves.

Thus, Mrs. Jones tends to convince people that she's right. But I don't agree that an HOA should save for the future in operating. We should spend money or reduce dues.

MichaelT21 (Arkansas)
Posts: 462

Posted:

"The property of the people belongs to the people. To take it from them by taxation cannot be justified except by urgent public necessity. Unless this principle be recognized our country is no longer secure, our people no longer free." ~ Calvin Coolidge, 30th President of the United States of America

MichaelT21 (Arkansas)
Posts: 462

Posted:

KerryL1 (California)
Posts: 14,550

Posted:

Sorry, MichelT, I was only trying to get "emergencies" out of reserve study language in general. Nothing to do with condos. There's no need to use that word re: reserves. A good. reason NOT to is owners get confused.

A reserves item -- your well --suddenly fails. It is an "emergency" to fix it, but the fund to repair and replace it should be in reserves. The eventual expense is being funded whether the well fails prematurely, or lasts longer than estimated, which also happens. Why would you pay for this out of your operating budget, Michael?

You've noted that your previous reserve study was inaccurate. I believe you stated your HOA was in the process of building it stronger. Did you not achieve that goal, Michael?

AugustinD
Posts: 1,027

Posted:

Quote:

Posted By MichaelT21 on 10/14/2022 10:42 AM
I think having $30,000 in the operating account is fine for us. (We have fixed expenses of $11,000 per month). Mrs. Jones would like us to have $100,000 in the contingency fund.

You say:

"Ms. Jones would like the HOA to have about nine months of operating expenses in the contingency fund. The board believes three months is fine. Three months is consistent with conventional wisdom for HOAs. Anyone can look this up. Next question."

No, people are not going to understand. But the truth is your best friend always.

Else --
I can appreciate your little sidebars about "Mrs." vs. "Ms." and how government taxing people should only be done when "urgent public necessity" arises.

No wonder you have enemies there in the great state of Washington. Politics mixed with HOA ops is anathema to the HOA corporation.

MichaelT21 (Arkansas)
Posts: 462

Posted:

Quote:

Posted By KerryL1 on 10/14/2022 11:13 AM
Sorry, MichelT, I was only trying to get "emergencies" out of reserve study language in general. Nothing to do with condos. There's no need to use that word re: reserves. A good. reason NOT to is owners get confused.

A reserves item -- your well --suddenly fails. It is an "emergency" to fix it, but the fund to repair and replace it should be in reserves. The eventual expense is being funded whether the well fails prematurely, or lasts longer than estimated, which also happens. Why would you pay for this out of your operating budget, Michael?

You've noted that your previous reserve study was inaccurate. I believe you stated your HOA was in the process of building it stronger. Did you not achieve that goal, Michael?

If we had a 100% funded reserve fund, we'd pay for the well out of reserves in a heartbeat. We do not.

I am hoping in 5 years we will get to 100% funded reserve fund based on accurate and comprehensive cost estimates. Rome was't built in a day, and sadly, our reserve fund will not be either. It's going to take years to get up to speed.

As I've posted here before, for a variety of reasons, our parks and community spaces were falling into a variety of degrees of decay until I joined the Board. I've given my heart and soul into renovating and improving the apperance, functionality, and usefulness of our parks and open spaces. They are looking much better, but it's costing $$$. Some are using the improvements as opportunities to complain, because they don't mind living in a community with decayed parks. I happen to mind so we are at loggerheads with regards to that subject.

Much of the issues that I have had consumed a lot of time, and a lot of HOA budget, is the previous President (my arch critic) spent a lot of money starting but not completing projects. What do I mean? Install a new expensive entrance monument but not get around to any landscaping surrounding it, so it stuck out like a sore thumb. Installing a new zipline playground feature on an elevated pad, but failing to put code compliant steps in, so children were getting hurt trying to get up to play on the new zipline. So much of my time and HOA budget went into correcting these deficiencies (installing code compliant stairs at the zipline, installing landscaping around the monument, etc, etc.)

MaxB4
Posts: 3,513

Posted:

Kerry and Augustin have been hoodwinked into Michael's little scheme which is to spend HOA money as HE sees fit. Let's not save for the future, let's spend it right now on my pet project and folks, give me the talking points to pull over the owners eyes.

"I have studied HOA budgets for some years now" is a load of crap.

AugustinD
Posts: 1,027

Posted:

Quote:

Posted By MaxB4 on 10/14/2022 11:23 AM
Augustin have been hoodwinked into Michael's little scheme which is to spend HOA money as HE sees fit.

Whoa there. I am the one who not long ago shredded Michael's little scheme to have a "discretionary fund."

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By MaxB4 on 10/14/2022 11:23 AM
Kerry and Augustin have been hoodwinked into Michael's little scheme which is to spend HOA money as HE sees fit. Let's not save for the future, let's spend it right now on my pet project and folks, give me the talking points to pull over the owners eyes.

"I have studied HOA budgets for some years now" is a load of crap.

Rhoda Island law does say that surplus funds must be refunded to homeowners after expenses have been pairs and reserves have been funded.

So it seems to me that unless there is a specific project that needs funding, I don’t see how “saving for the future” can be justified.

TimB4 (Tennessee)
Posts: 21,061

Posted:

Hoping your Reserves are fully funded (based on a recent reserve study), that would be the argument that the funds are available.

You should also acknowledge the individuals point that it is good to have an emergency fund and explain that (I would hope) you have one consisting of x months of normal expenses.

TimB4 (Tennessee)
Posts: 21,061

Posted:

Quote:

Posted By DavidG45 on 10/14/2022 11:37 AM

Keep in mind that Michael is actually in Washington State.

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By TimB4 on 10/14/2022 12:54 PM

Posted By DavidG45 on 10/14/2022 11:37 AM

Keep in mind that Michael is actually in Washington State.

It appears Washington law is identical.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By AugustinD on 10/14/2022 9:04 AM
I agree few owners and directors understand what a HOA reserve study; a HOA reserve account; a contingency fund line item (which provides a cushion to take into account that budgeted, and so predicted, operating expenses rarely match actual operating expenses). All you can do is do your best to come up with accurate, short talking points and repeat them again and again. And there is nothing wrong with repetition of relevant facts. This is what it takes for people to learn.

Suggested talking points when this owner (call her "Ms. Jones") speaks out next:

-- I have studied HOA budgeting for some years now. Ms. Jones speaks of a healthy "emergency fund." I believe the correct HOA accounting vocabulary that covers this topic includes two phrases: The first phrase is "Contingency fund." The second phrase is "Reserve Account."

-- A "contingency fund" is a line item in the budget that provides a cushion for unexpected operating expenses. Conventional wisdom is to have from two to six months of operating expenses in the contingency fund. Anyone can look this up. This Board intends to budget for three months of operating expenses in the HOA's contingency fund. As unexpected operating expenses arise, the contingency fund may decline in value, but hopefully not so much that a special assessment is ever needed. When the new fiscal year arrives, the new budget will replenish the contingency fund.

-- An example of why a contingency fund is needed is if, say, an unexpected weather event results in having to increase expenses beyond what was budgeted. E.g. suppose drought causes the water bills for irrigation to shoot up. The budget did not anticipate drought. Now the HOA has to pay a lot more than it planned for irrigation. What pays for this? Hopefully the contingency fund can cover the difference between what was budgeted (forecast) for irrigation and what the actual costs for irrigation end up being.

-- A reserve account holds money for the replacement or major maintenance of that infrastructure that has a life expectancy of one year or more. Nationwide HOAs use professional reserve studies to guide them as to how much should be in the reserves.

-- These two line items, contingency fund and reserve account, if you will, are what cover infrastructure-related "emergencies" at a HOA. I want to encourage people to use the correct vocabulary here, so we can all be on the same page.

-- Again, I remind all that conventional wisdom is to hold two months to six months of normal operating expenses in the contingency fund. The board intends to hold two months of operating expenses in the contingency fund for next year's budget. Now Ms. Jones, the board would be happy to hear how much money you think should be in the contingency fund.

Good explanation.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

When talking RI, one unpredictable Operating expense is snow removal. It can vary quite a bit thus I say a Contingency Fund Budget Line Item is just fine. Now remember, it is not a Capital Improvement Fund and do not try to make it such.

KerryL1 (California)
Posts: 14,550

Posted:

MichaelT's well (about which I know nothing) comprises many parts, I think. These all should be itemized in the reserve study. Pumps, for instance can be repaired perhaps a few times before they ned to be replaced. The entire well is unlikely to fail all at one time.

Very few HOAs' reserves are 100% funded. The cost to repair the well's pump, for instance will exceed what's in that line item to pay to replace it. but MichaelT certainly may use other aspects of reserves to pay for the replacement. That replacement should NOT be paid for out of the operating budget.

It's possible that MichaelT's reserve study has a line item for tree replacement and possibly lawn replacement, so It's not necessarily for only what we call infrastructure.

But what is your % funded of your reserves, MichaelT? I think is where your assessment do need to be increased.

I agree with him & Aug. that the amount he wants the board to approve for the operating budget's Contingency line item is reasonable. But imo it's for more than emergencies, e.g sought makes their water bill shoot up. It also CAN be for unexpected expenses that might emerge in June that are simply items or services that the board decides would benefit their community and they don't want to wait until '24 to purchases it.

It's up to the critic to say WHAT the purpose of a huge contingency line should be for. What does "save for the future" mean?? Exactly WHAT does she want to save FOR???? A helicopter pad?

An annual budget îs exactly that: educated estimates of how much is needed to operate your HOA for ONE YEAR. Unlike reserves, it has more elements than infrastucture as it includes your PM, your auditor, a line item for possible attorney fees, landscapers. You should a operating budget line item for minor repairs of, say the well,

I have no idea what Max is yammering about this time. Does he have advice for MichaelT?

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