Reserves versus operating expense?

Started by DavidG32 • 16 replies • 215 views

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DavidG32 (California)
Posts: 10

Posted:

We have a new manager and he has ruled that any expenditure associated with a line item that is listed in HOA reserves MUST be charged to reserves and may not be charged to operating costs. I agree they may be listed there I do not read law as they must be charged there. This is a change and will let operating budget show a decrease to home owners. HOA lawyer has concurred with manager. Budget committee is concerned with this change misleading homeowners on budget performance. For example he has reclassified charges for maintenance on security cameras, gate repairs, sidewalk repairs, minor maintenance on slopes (in the past we only charged large slope failures to reserves but not contractor studies on slope stability, small repairs or replanting that did not involve major portions to slope, … all to reserves

DavidG32 (California)
Posts: 10

Posted:

Forgot to mention we are a California HOA

CathyA3 (Ohio)
Posts: 6,299

Posted:

You'll have problems if your last reserve study was done assuming that repair costs under a certain dollar amount would come out of operating. This is how you end up underfunded. Reserve specialists in my area ask about this when they're beginning work on a new study. On the other hand, it's probably safer to assume that any repairs to reserve items will be funded by the reserves. In practice that tends to be what happens regardless of choices made during the study.

So the short answer is that you should be consistent. Don't assume one thing and then do the other.

KerryL1 (California)
Posts: 14,550

Posted:

Welcome to the forum, David. Are you on the Board? Or the Committee? What size is your HOA?

Anyway, the Board must NOT let the manager "rule" on anything! The Board makes decisions. It "rules." They should make these decisions, sometimes, based on expert opinions. In your case, neither the manager nor the atty are experts! Reserve specialists are. The manager may not "reclassify" anything, your Reserve Specialist makes those recommendations. And the Board generally votes its agreement or seeks modifications in an open mtg.(in CA).

Based on certain criteria, CA HOAs must by statute have an onsite visual reserve study done every three years. Has your HOA had such a study done???? I'm wondering b/c reserve studies do not contain small components like "small repairs or replanting that did not involve major portions to slope, …" This would, just e built into your operation budget under the landscaping line item. BUT sidewalk repairs and gate repairs MIGHT be reserves components if expensive. Gate placement probably should be reserves components if large & substantial (ours are automatic, for instance.) Contractor studies now often are legitimate reserves components.

Normally, owners' contributions to reserves ARE expensed from the operating budget. About 31%* of our operating budget goes into the reserves account.

The funds to pay for reserves components DO get expensed from reserves, but then that is an expenditure from your operatiing line item called "reserves."

I don't comprehend th part about owners thinking they're paying Less so my responses might not be useful

You might find a thread started by "Patrica" called "Reserve Study" helpful.

* We knocked a big hole in our reserves a couple of years ago and are rebuilding in case 31% seem like a lot.

DeanJ
Posts: 1,786

Posted:

Quote:

Posted By DavidG32 on 03/23/2025 1:15 PM
We have a new manager and he has ruled that any expenditure associated with a line item that is listed in HOA reserves MUST be charged to reserves and may not be charged to operating costs. I agree they may be listed there I do not read law as they must be charged there. This is a change and will let operating budget show a decrease to home owners. HOA lawyer has concurred with manager. Budget committee is concerned with this change misleading homeowners on budget performance. For example he has reclassified charges for maintenance on security cameras, gate repairs, sidewalk repairs, minor maintenance on slopes (in the past we only charged large slope failures to reserves but not contractor studies on slope stability, small repairs or replanting that did not involve major portions to slope, … all to reserves

Two issues.

1. The board sets fiscal policy not the manager and the board needs to direct the manager accordingly. The easy solution is in resolutions for contract approvals to stipulate the accounts the funds are to be paid from and advise the manager accordingly or pass a resolution that no funds are withdrawn from reserves without board resolution.

2. Most HOAs have both a reserve study and a reserve budget. The reserve study will indicate the value of the reserve contribution and balance for each year. The board may resolve to move more funds from operation accounts to reserve accounts to maintain the reserve balance when they decide to. If the mangers actions have messed up reserve funding, resolve to move the funds back.

DavidG32 (California)
Posts: 10

Posted:

I am on finance/ budget committee. The budget is set for 2025. but by moving funds based on these new rules we disappeared an operating overrun of about $150,000 for 2024. The budget is set for 2025 so applying new rules we will look much better on operating budget in 2025. Historically it was felt the majority of homeowners did not really understand what the reserves were and we have had contentious discussions on percentage funded. Focus of most homeowners has been on operating budget. We share operating budget with homeowners. But have historically under focused communication on reserves spent as explaining the swings can be complicated. Our reserves are well funded as we target 80%. With these changes we are drifting into 70’.

We have over 900 homeowners and a yearly budget approaching 4 million.

CathyA3 (Ohio)
Posts: 6,299

Posted:

You can drive yourselves crazy with "percentage funded". It's a calculation based on the assumptions of the reserve study - it's not static and it will change depending on what happens with your reserve components and the broader economy. I understand why they do the calculation. But it can give you either a false sense of security or a false sense of panic.

Anecdote: we received the results of our new reserve study back in December. So what happens in January? Turmoil in the economy, that's what happened. Needless to say our reserve study didn't account for tariffs or sharp increases in cost of building materials or whatever nonsense awaits us. But we look fine on paper.

MarshallT (New York)
Posts: 414

Posted:

This does sound like a big step in the wrong direction. Most communities would probably agree that those expenses are part of regular maintenance/operations.

It's concerning that, given the current state of the economy, there will be a decrease in regular assessment fees. Just remember that the manager works for the association, not the other way around. It's ultimately up to the board to approve the budget, and if the manager can't provide a reasonable explanation for the changes, the community should not support them.

ElleN (Idaho)
Posts: 1,334

Posted:

Quote:

Have you pointed out to the manager and HOA attorney that reserve funding is expressly based on the dollar figures in the reserve study, and the dollar figures are replacement costs not run-of-the-mill maintenance (per se) costs?

Consider asking the reserve study author to write a short note explaining this.

Owners trusted that the annual budget is based in part on the reserve study. Owners get statutorily required notice of the annual budget every year. The way the manager and HOA attorney want to do this amounts to (some flavor of) defrauding owners. The manager and HOA attorney are messing up those who prepare the annual budget (using in part the reserve study) big time.

JeffT2 (Iowa)
Posts: 880

Posted:

An article on the subject:
Reserve Expenses vs. Operating Expenses

An excerpt from the above:
"So, is it an Operating expense or a Reserve expense to repair a sprinkler, light fixture, lobby chair, or roof? …

"...If maintenance (such as a significant repair to a roof, fence, or section of carpet) is needed and is not listed as a Reserve Component, determining whether the work should be paid from the Operating or Reserves account can be difficult. The critical question is: Does doing the work extend the component’s Remaining Useful Life (RUL)? If the answer is “yes”, the project should be paid from Reserves and your Reserve Study provider should be notified to make the appropriate life extension change in the next update."

Anyway, the manager is wrong to put everything in reserves, although some stuff can go there.

KerryL1 (California)
Posts: 14,550

Posted:

We have a national reserves specialist company, whose well-respected founder actually is a rocket scientist. Before this firm, we had 3 previous ones and just weren't with them.

Near the front of our 200+ page study is: ""A project [reserve component] cost [is commonly considered material if it is more than. 0.5% to 1% of the total annual budget. This limits Reserve components to major, predictable expenses. Within this framework, it is inappropriate to include lifetime components, unpredictable expenses (such as damage due to natural disasters and/or insurable events), and expenses more appropriately handled from the Operational budget"

This screw s with Marshall & Jeff.

So.....we have very large automatic gates for vehicles to enter/exit our gated high rise HOA. The contract to maintain and repair them is in our operational budget. Replacing them and painting them is a reserve item. We also have several small gates & their replacement is a reserve item. Repairs are in our op.budget. As are some the kinds OP mentions.

So... is it possible the Mgr. was following the advice of the reserves specialist? You do have a reserves specialist, right??? AND an update by the RS every year??

The OP wrote "This is a change and will let operating budget show a decrease to home owners" I still don't get this. Whenuour Board sent put the salute-rqured annual budget before your fiscal year. It had to have stated what'sging into reserves and the total op v budget. did it??

DavidG32 (California)
Posts: 10

Posted:

You have all been very helpful.

yes we have a reserve analyst. Items were listed but the whole board did not review item by item. A board member, and representatives from my finance committee did review. Then the resulting study as approved by both board and my committee after further review. Even then rolling things like sidewalk repairs into reserve for concrete replacement was not done because we had traditionally expensed these items.

It seems as if there is no right or wrong answer but the policy should be clear and known before budget was developed and applied consistently from year to year. This is a change for us as manager is applying rule from his last HOA. So now I feel like we are misleading homeowners by appearing to decrease expenses But it is valid approach. I am probably over analyzing

ElleN (Idaho)
Posts: 1,334

Posted:

This is basic financial math coupled with what your HOA's reserve study takes into account. There is a right answer, financial math-wise, and it is not the way the HOA manager and HOA attorney say to do this.

The manager and attorney are also messing big time with the HOA's tax reporting. The IRS does consider how reserves are used, ya know.

The manager's and attorney's approach is "valid" only to the extent that no one wants to say to the manager and attorney, "Show me where the reserve study takes into account these regularly occurring maintenance expenses. Then explain to me how the annual budget does not rely on the reserve study. Finally does the law require the HOA to share the annual budget with owners?"