Finance Committee

I believe the more likely scenario is 2 board members are authorized to sign for the HOA and the investment decision is approved by the intire board. Also I doubt there are many HOAs investing in bonds with a broker. Most are FDIC insured CDs.

Anyone who knows about this topic should be able to advise you, Susan. I'm not that person except to say that our Board makes the investment decisions at Board meetings just as Dean & Mark say. We do have a Finance Comm. chaired by the HOA treasurer, but the current one and a few past ones are/have been worthless. I see no need for a FC. Your Board of three can handle this. I see no point in two of the 3 being an FC.

Others will probably be of more help.

-- How to handle this issue very much depends on the interest rate climate; how hands-on the treasurer is permitted to be; how knowledgeable the board is; and more.

-- Below are a few thoughts on how to proceed in this particular interest rate climate.

-- Please understand, renewing (rolling over) a CD to whatever the institution that offered the original CD is now offering is not always wise. Most of the time I would say this is actually unwise. Why? Because there is plenty of competition out there. The HOA treasurer or two-person committee should be able to track the maturity date of a bond or CD; check what CDs/bonds are going to be available shortly after the current CDs maturity date; and get the best deal. This may require some actions without a meeting (if allowed), or careful scheduling of open meetings a few days before the maturity date.

-- What Mark describes in general seems like a good approach. I mean: His HOA really has its act together on this subject (and no doubt others), IMO.

-- I think one option is for Board Meetings to be pointedly scheduled a few days before any CD is set to mature. The finance committee or treasurer should report the approximate interest rates available for three-month CDs and what she is aiming for.

-- There is a danger of micromanaging here. Hopefully the treasurer is competent enough and trustworthy, so that, after a report of what is available, the Board can give him/her carte blanche to get the best 3-month (or maybe longer) CD available. Or if this would result in too many meetings, set a policy aiming for certain terms (3 month? 6 month? et cetera) which the board will choose, roughly, and give the treasurer some leeway, with an obligation to report what he/she has done.

-- Does Morgan Stanley have crummy money market interest rates (for either MM funds or MM accounts)? If so, this is a problem. As Lori pointed out, the difference between money market rates right now and 3-month CDs is pretty small. It's so small that I do not mind my own cash sitting in a money market account for ten days while I wait for a certain, good-yielding CD purchase to happen. Nor should your Board mind the cash sitting in a money market account for several days.

-- Historically, the longer the term of a CD or (high grade) bond, the higher the interest. However in the last 24 months or so, the yield curve has been inverted or close to inverted. This means shorter term CDs (3 months) are mostly paying better than long term CDs (a year and longer).

-- Now a "just saying": I profane any HOA buying corporate bonds. I do not care how highly rated the corporate bond is. Corporate bonds are not appropriate for HOAs, IMO. The risk is there, and the risk is more than a CD or treasury.

-- Care to share what your Morgan Stanley guy is charging for his services?

-- To be blunt: People are so financially illiterate these days that I can hardly blame the board for paying a professional. It is not rocket science but arithmetic skills must be sharp, and such skills are lacking these days. People reach for a calculator or computer but lack "math sense." As well many directors do not understand their duty when it comes to investing the HOA's money. What happened at Lori's HOA (losing money because some officer/director thought it was okay to invest in other than CDs and treasuries) is a case in point.

Laddering CDs is a strategy that allows people to maximize the income they get from CDs. In theory if you invest when CD rates are low, you will be rolling over CDs as rates rate and will end up with more money than you would have if you'd simply put the entire amount into a single CD. In addition, ladders keep your money a bit more liquid than it would be if you tied up the entire amount. For example, if you have your projected reserve spending needs in a spreadsheet, you can match your CD maturity dates to keep pace with your planned spending.

Re: CDARS, I think the name has changed.

Here is an article that explains the program that allows clients to maintain FDIC insurance on deposits exceeding $250,000: How Investors Use IntraFi to Keep Money Insured

Having read through the article above, I'm not sure that the program is any simpler than just moving money to a second local bank. The hardest part of dealing with multiple bank accounts is keeping track of changing board members and authorized signers, and that's not going away. Is the convenience of only having to do that with a single institution worth the added complication of dealing with the IntraFi network? It may depend on how much money we're talking about. Up to $500,000, you're only dealing with two banks. HOAs that have over a million in their reserve accounts would be dealing with multiple banks unless they use something like IntraFI.

It's interesting that the IntraFi network also includes credit unions which have their own equivalent to FDIC (NCUA). Credit unions may offer higher CD rates than those available through banks, and some institutions offer their own insurance on top of the NCUA limits, so a single depositor can insure up to $500,000, for example.

In another note, it's possible for brokered CDs to lose principle. They are traded on the open market, and as interest rates rise the older CDs that paid less become less valuable to investors. Same thing happens to bonds. Of course when interest rates are falling, the older investments can become more valuable and you can actually make money in addition to the interest rates being paid. But you have to know what you're doing with this, so leave this to the professionals (even they lose money regularly).

As others have said, boards should stick to plain vanilla, fixed rate investments like CDs or money market accounts (not money market funds). Bonds that are held to maturity are also OK. These don't pay big bucks, but that's not the goal for reserves. The reserves will be spent at some point, and the most important thing is to have the money you need when it's needed - otherwise you're looking at special assessments or loans.

(Disclaimer: not financial advice)

We just went over some of our investments in a meeting this morning. Back in 2019 and 2020, when interest rates were very low, our investment advisor with Morgan Stanley suggested we go for some long-term CDs with penalties for early withdrawal. The way it was explained to me, you can withdraw the funds, but because the interest rates are so low compared to what are paid now, we would pay a huge penalty and basically lose all the interest. We have at least one CD that doesn't mature until 2030 and the interest rate on it is less than 1%. Our treasurer did the calculations and it simply wasn't worth it to cash it in early for this type of CD.

As you can tell, I am not an investment expert.

I know that laddering CDs is a common investment tool. And I know that most likely no one would have predicted in 2020 that interest rates on money markets in 2024 would be close to 5%. But really, investing in a CD that pays less than 1% for 10 years?

One trick with CD ladders is sticking to shorter maturities when interest rates are low. When we started our ladder in 2018, our longest maturity was 5 years because we wanted to be able to roll over or redeem sooner and move into longer-term CDs when interest rates rose. At the other end, if interest rates are higher than historical averages, then you can go longer.

We asked the company that did our last reserve study to provide the results in a spreadsheet, and I added columns where we could also track reserve balances and other things. This is also helpful because you can estimate how long you can safely tie up money.

But I don't blame anyone for guessing wrong about interest rates. The Fed likes to keep inflation in the 2-3% range. But in the last 15 years a couple serious and unusual events forced their hands: the Great Recession with the zero interest rate policy and the pandemic at the other end.