Operating reserves fund

Started by SheliaH • 6 replies • 3703 views

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SheliaH (Indiana)
Posts: 6,964

Posted:

I've just been appointed treasurer of my HOA (mostly because I was doing much of the review of the financial report). One idea I have for the association is to set up an operating reserves account which could cover shortfalls in the operating budget instead of dipping into capital reserves (since that's not what they're for). I was wondering if anyone here has done this with their own HOA, how it's funded, etc. Is there a certain dollar amount you look for before deciding to tap into the fund? Any suggestions and opinions are most welcome!

Although we have lots of problems with slow pay and delinquencies, so far, we've been fortunate that we haven't had to cut back on services (it may be on the horizon, but we'll see). I do know that in the past, the board dipped into the reserves to pay for monthly shortfalls, and that's definately something I don't want to see us do again because the reserves are finally beginning to rise

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

SusanW1 (Michigan)
Posts: 5,202

Posted:

I question the idea of "dipping" into Reserve Funds.

Your board needs to re-visit its budget and make adjustments more often if you are having problems meeting obligations. You needed to build in a little "flex" amount also, each year.

Dues not being paid? Short of Revenues? Then Expenditures have to be cut!!

That's the reality of it.

Let your members know why their "services" are being cut back.

BradP (Kansas)
Posts: 2,640

Posted:

Shelia:

I think an operating reserve is a good idea. I personally think a goal should be to have enough in your operating reserve to fund the associations activities and necessities for several months. How do you get there...many ways. I think the best way is each year in your budget you should have some flex money that can be rolled into an operating reserve bank account, i don't know the proper way of accounting to do this though, others can help.

Bottom line at this point in the economy deliquencies are going to happen and so are foreclosures. Most associations should be tightening up the purse strings or using an established reserve account to get by. Until the economy gets better that is the way it will be.

GlenL (Ohio)
Posts: 5,491

Posted:

Our documents mandate a two month reserve operating reserve account. And while we can borrow from the capital reserve funds instead of taking out a bank loan, the money must be paid back with interest.

Studies show that 5 out of 4 people have problems with fractions

JosephW (Michigan)
Posts: 882

Posted:

Often this is called a "contingency reserve" and its always a good idea. Capital reserves should be never be used except for the purposes intended. Given the way costs are increasing, you will always have a hard time guessing which items are going to jump higher than anyone could reasonbly anticpate. Just ask the Florida condo boards and what happened to their insurance premiums a few years ago. The gas increase is going to impact everything, but predicting exactly what, when and how much will be beyond most boards. The same goes for delinquencies and foreclosures - predicting what will happen next year is also impossible. A contingency reserve is a must.

Joe

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DeeB (Arizona)
Posts: 18

Posted:

Sheila,

IRS Rev Ruling 70-604 is very clear in these matters. An operating reserve account would create an operating surplus. Per IRS Rev Ruling 70-604 operating surplus is subject to tax, unless 1) the operating surplus is returned to the HOA members. 2) The HOA members, (not the Board members) vote to elect that the surplus be carried forward to the next years operating budget. This election needs to be made yearly and must be made before the tax return is filed for that year. The election can be made any time during the tax year even before it is "known" if there will be a surplus or not. The election needs to be clearly documented.

For the needs as you state, your budget becomes very important. You can amend the budget if during the year certain operating expenses increase, and if per your gov docs, increase your operating assessements accordingly. Most gov docs also allow the Board to assess "special assessements".

For tax consequences you want to be very careful in establishing any operating reserve accounts that leave you with an operating surplus at the end of the year.

RogerB (Colorado)
Posts: 5,067

Posted:

Dee, I think your posts related to IRS Rev Ruling 70-604 are misleading. This Rule only applies to IRS form 1120. It does not apply to form 1120-H; and most HOAs file 1120-H. Meanwhile the Reserve fund and its budget should be maintained separately from the Operating fund its budget. For 1120-H taxes are usually only due on outside income. See attachments for more.

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