Not putting budgeted amount into reserves

My HOA board with concurrence of lawyer determined that not putting budgeted monthly transfers to reserves did not constitute borrowing from reserves and thus avoided the necessary steps for borrowing reserve funds to cover operations . They further concluded that deciding this during an open board meeting constituted sufficient notification of residents and there was no obligation to refill reserves.

Seems like a huge loophole for HOA’s to move funds from reserves to cover operating cost overruns. Was board correct?

There is no California law requiring specific amounts to be put into reserves. Readjusting the budget during the year is typical, and as long as the funds are being used for the proper purpose and they are dealt with properly year-end, I don't see an issue.

Our board recently announced that it's had to skip reserve deposits for the same reason (operating expenses are exceeding assessment revenue, mostly due to delinquent assessments). You're correct in your concern that it can put the association at risk. Too many associations have underfunded reserves (some don't have any), so when it comes time for major repairs or replacements to the common area like roof replacement, boards may find they have to consider special assessments. We all know how much chaos and disorder that can cause when put to the homeowners who have to approve them.

What else has the board said about operating expenses - you did ask, didn't you? Have some line items increased faster than others - have you looked at income/expense statements to see where the money's going? Do you have issues with delinquent assessments - it costs money to pursue collection and those costs have gone up. So has insurance - I know California has had issues with wildfires, and so that's increased.

From there, you can ask the board if it's considering any alternatives. Our board has said it will look at the net income/loss over the next two months or so to see if it can transfer a certain amount in reserves to catch up. Perhaps your board can consider putting in half of the budgeted amount (which I will suggest to my own board) - something is better than nothing.

Indeed. Like special assessments, I prefer to look into everything else before you conclude not funding reserves is your only options. Sometimes you do all you can and the choices are bad, ick and “you have chosen death” so you have to opt for bad and work hard to get out of it as soon as possible. To wit, some choices may involve reducing or suspending certain services, such as closing the community’s swimming pool for a season (our community did this for two years before having a homeowner vote on whether to keep it, and we ended up closing it permanently).

Your board should be candid about what it’s done and is doing, and showing homeowners the numbers. If they’re sidestepping the issues, it may be time for you to consider if this group should continue to run things. That will mean a new set of board members – you may need to be one of them and I hope you’re thinking about various options. You might also suggest a few and even offer to help with researching them.
A long look at the budget is also necessary because there are some things for which you have no choice but to pay for. That means setting priorities – if your states defines major components as gas water and electrical services, check the documents to note who’s responsible for what. Some things may need to be split between the homeowner and the association, which will require amending the documents and more homeowner approvals.

Every little bit can help, like encouraging everyone to pay assessments electronically (you get the money faster and reduce postage and printing costs on coupon books). For something like water/sewer lines, homeowners should be mindful of what they flush and perhaps throw in some root kill, depending on how many trees you have and how close they are to the unit. Better to spend $50 or so on a bottle or two to flush every 6 months, than $$5,000 on sewer lines disrupted by tree roots. Get two or three of those type of bills and you may have no choice but to consider if you can fund even a portion of reserves for the next 6 months.

Yup, I figured this was going on. I suspect this board would really like to use the reserves as a slush fund to cover the shortfalls, but that's not what reserves are for (lots of associations get that wrong). Hopefully the association attorney pointed that out - especially if something to that effect is written in your documents. And so the alternative is not to fund them at all - the board (and lots of homeowners) probably figure by the time the ish comes down, they would have already moved out or are taking dirt naps so none of this will matter. Who cares if you're leaving a massive pile of poo for other homeowners, especially the newbies, to clean up?

It's time for your community to have a come to Jesus meeting with this board to discuss the budget and what needs to be done to stabilize finances because you're heading in the wrong direction. This may also mean homeowners need to consider a change in leadership and whoever comes after them will have to have the guts to tell people the unvarnished truth and back it up with data. For one thing, people need to do basic math and keep inflation in mind - it's great to have "low assessments", but that only works if you have few or now common areas to maintain. Even then, you have to remember when you're repaving the streets five or 10 years from now, labor and material costs won't be as they are in 2026. You already had to do a special assessment to pay the bills, so homeowners will have to accept that regular assessment increases are necessary and here to stay.

HOA tax rules are different from businesses.

Our new manager came from HOA’s that let him use reserves as he wanted to maintain an operating budget that appeared low compared to other HOA’ s. There were financial committee members who objected to usage of reserve funds for operating costs

Can you site the law you are quoting please

If your HOA is filing as a corporation this applies. We are not and don’t see why an HOA would want to file that way. Maybe I am missing something or it may be something related to state law or how you were Incorporated.