HOA Reserve Interest Accounting

Hello,

My condo association is completing our 2024 budget and are debating how best to factor in reserve fund interest. We have the association dues as income and then standard operating expenses. We also have Reserve Fund - Replacement as an annual expense item. Should the interest from the reserve fund be added to the income side of the budget? It's understood that reserve fund interest should not fund operating expenses, but some members are suggesting the interest should be on the income side of the budget because we have 'Reserve Fund - Replacement' as an expense. Others disagree.

Thank you in advance

Kevin,
I view Reserve Fund Interest income as regular reserves. Same thing would apply to Operating Interest income. The reason why this is coming up recently is in the last 10 or more years interest was near zero. Now it can be a real number and will help create income. In our HOA we have we have all of our RF CDs (750K) laddered with maturity dates every couple of months in the rare event that we need to access these funds. We also keep about 50K in cash on the RF side of the house. This year we will see about 30K in interest alone from the CDs. It is my plan with the boards support to help that fund our reserve contributions to some extent and reduce the amount we have given in other years slightly. We are also blessed to be above 100% funded in Reserves so we are not making catch up payments as many have to do.

It is a great question that many will be asking in HOA land.

Our Reserve interest is not shown as an income line item. It does show up in the Reserve amount so it is there. One just has to look for it.

The more I think about this the questions which is where does one show Reserve fund interest? I say it could be shown as an Income line item also. Just show is somewhere and all will be happy.

Yes this is where I was moreso trying to go with my question. The other replies have been helpful also. The disagreement on the board is whether the interest earned on the reserve funds should be listed as income on our 2024 budget or disregarded altogether. Some want to disregard the interest because reserve funds shouldn't be used for operating expenses. Some think it should be added as income for the budget because one of our expense items is the replacement of reserve funds. The argument there is that if replenishing some of the reserve funds is on the 2024 budget as an expense, then the income from the reserve funds should be included as income. I'm curious how other boards account for this on their annual budgets and any thoughts others might have.

Where do reserve funds come from? They come from assessments deposited into the operating account and then transferred periodically to the reserve account(s). The same goes for reserve interest.

Just because a bank credits interest to the bank account holding reserves does not mean that on the books, the interest is "reserve funds" that can be used only for reserve components.

See for example discussion at:

https://www.davis-stirling.com/HOME/I/Interest-on-Reserves

https://www.davis-stirling.com/HOME/T/Taxes-on-Reserve-Interest

In tandem the HOA has to figure out from what pot of money the HOA will pay the taxes on this interest income.

This is not a topic on which elected or appointed volunteers should make the call IMO.In my experience the board has a duty to take the advice of a licensed professional on this.

Personal opinion coming up.

There two ways to fund accounts: active and passive. Active funding comes from new money that is added now - it's a deliberate choice. Passive funding comes from "old money" and takes the form of interest, re-invested dividends, capital gains (stocks), and the like. These passive forms of funding do not require action by investors beyond deciding to re-invest these proceeds and letting 'er rip.

Too many associations do not do a great job of budgeting, and they do an even worse job of funding future non-discretionary needs. And that's even with state laws requiring them to set aside such funds. There is tremendous pressure on boards to "keep assessments low", and many budgets don't have enough money for routine or unexpected expenses. The whole "volunteer amateur boards" shtick favors short-term thinking over long-term planning. It's even worse in condo associations because of the demographics of their residents. They tend to skew toward first-time buyers (who will probably be moving on to a larger home at some point) or older down-sizers (who will be moving on to senior housing at some point). HOAs and COAs are up against human nature as well as economic realities.

So passive funding of the reserves can be an important tool. It works sort of like a 401(k) at work - if you don't have the money in your hot little hands, you won't drop it at Starbucks today.

I view re-investing interest in the reserves as long-term thinking, and spending the interest now as short-term thinking. Anything that tips the scale toward a longer-term perspective is a good thing IMHO.

I agree.The bigger problem may be that people often conflating a bank account, that holds some or all the reserve funds, with a HOA's ledger account for reserve funds.The ledger account for the reserve funds should always represent monies set aside only for reserve components, pursuant to the reserve study. The amounts in each may be different, for various reasons. For bookkeeping it is the ledger account that is the important one.

MarkM19, is there some reason you think I am unaware of this? My goodness. I am a typical middle-class retiree, with a part of my portfolio allocation in CDs and high grade bonds. My income has roughly doubled due to the interest I am earning on CDs now.
The funds that owners contribute to the reserve fund are earmarked for reserve items. Legally speaking, if the reserve study is silent about the use of interest earned, the interest is not earmarked for reserve items. See for one the Davis-Stirling links I provided above. Many other sites discuss this. I have yet to see one that insists that interest earned itself becomes a part of the reserve funds.

I hear you. At this point in time I agree 100% with the importance of discussing this regularly here.

For many condo boards in particular, dealing with the budgeting, tax and reserve fund implications of tens of thousands of dollars of income, due to interest, is going to require a bit of a learning curve.

And as I think you suggest, even a small HOA with a mere $100,000 in the reserve fund has to figure out the implications of around $5000 of interest each year for the near future.

As well I agree boards need someone to pay attention to CDs and money market yada accounts and funds; set up a ladder; and so on.

Anyways: After reading what the D-S site said about this, I felt a little better.

We have an issue, our CPA is telling us we are not allowed to use interest income from CDs that were purchased with reserve funds. She is saying it has to stay in the interest account and cannot be transferred to a reserve account so that it can be used for future expenses. It was my understanding that one reason an HOA buys CDs with reserve excesses is to help build up the reserve accounts and to work toward keeping assessment increases to a minimum.

So what is this idiot CPA saying the interest can be used for? Generally, most HOAs are required to either return surplus funds at the end of fiscal year to the members or move the surplus to reserves. If you put the interests in the general account, the board can then move it to reserves at their discretion.