Reserve fund v. Operating fund.

We are 97% funded in our replacement reserve fund with 10K taken out of the budget each month adding to that reserve fund. We have a reserve study done every year.

However we are negative each month on the operating fund. Upside down by several thousand dollars. I think the figure was 119K by the year end FY2009 in figureing the new budget. Therefore we are advised by our Mgmt Co to increase our dues for FY2009 by 18%.

Is it possible to allocate some of that 10K into the operating fund each month without causing a problem.

we are a single family home community with no amenities other than greenbelt.

NancyM2

Susan (you are up early it's 5:30 in Calif)

The reserve study recommended the 10K to be budgeted ~ Not the bylaws

IMHO Overspending and keeping an Ombudsmn and attorney on the payroll, as well as a Mgmt Co for about double the cost of what they should be. The board refuses to cut these items.

I am a "X" board member, that happens to be on the budget committee.
NancyM2

Thats what our treasurer has done ~~ Call a budget committee meeting. However he is the board member (with a vote)and he refuses to cut the attorney. He feels to change the Mgmt Co would be too disruptive. Also feels the other board members won't want to cut the Ombudsman. The Mgmt Co feels we need a Ombudsman, as he is taking some of their workload with owner disputes. However we seem to have more "hearings" for the BOD to handle since we have had an Ombudsman.

This hand to mouth way of handleing finances is what my grandchildren do. I have lived long enough to not do that anymore.
NancyM2

If an association's financial condition is not adequate to fund both reserves and operating than reducing the contribution of either is a stop-gap measure, not advisable, and exposes the association to a lack of fiduciary duty. Instead, all unnecessary expenses must be reduced, and if that is not adequate than a maintenance fee increase to offset the difference is necessary, and perhaps mandatory. In other words, borrowing from Peter to pay Paul is not the way to go.

MaryA1 - What prevents an association from increasing fees at any point during a year?

MaryA1 - As quoted, your ccr's permit an annual assessment but don't specifically prohibit a mid-term increase, do they? Waiting until budget time to correct a deficit is not wise, nor good business judgment. Don't you think?

Susan ~ Our owners don't know yet The board tresurer is taking about raising the dues for FY2009 just a little bit, just to squeeze by and then increasing it again in FY2010. They don't want to take the heat right now. I told him I think that's dishonest, as most people want to know what the bottom line is especally people on fixed incomes.

NancyM2

If you have some savings, then it is not always the best policy to raise dues mid stream in the budget year. Sometimes it is best to allow the year to run its course. Of course this assumes you can afford to do so.

Quite honestly, I don't see why the association has someone for hearing owner disputes. From what I have read I get the impression you are resolving disputes between two owners. (I think I read where you mentioned trees growing into the view of another owner.) I don't see that as a good function of the HOA. Let the owners pay for their own dispute resolution and stay out of it. That is what small claims court is for.

If you are going to keep the Ombudsman on staff, then you should start charging a fee to bring the case before the Ombudsman. Simply take the cost per year and divide by the average cases seen in the last couple years. (Or if the number keeps growing simply choose last year's figures.) From what you have said that should free up nearly $100k. For that matter, ask how many hours were actually used by the attorney.

I would take all of this to the membership if the BOD doesn't seem to get it. Point out that this is going to cost every member. Most HOAs don't have a staff attorney. They call their attorney when needed.

Gerald,

You may feel it's critical to do this, however, it may not be feasible. The Board can only raise the assessments so much. In AZ there is a limit of 20% over the last years assessment, otherwise a vote of the members is required. If the board is unable to cut expenses and raise the assessments to make up the difference then it is not feasible. It may take several years to get to the point where there is enough $$ to fund the reserves for the amount recommended in the reserve study.

Gerald,

There is more then one theory in reserve funding. And while I prefer the idea that each line item is 100% funded at 100% all the time, it is not always realistic.

And while dues may need to be increased, this should be done as smoothly as possible. The hard truth is that what is best for the neighborhood is not always a cut and dried easy recipe. They may need to look to cut some expenses (and services). And they may defer some items. And it could even be a legitimate option to decide that when the service life of an amenity is up the amenity will go away reducing the amount of reserves needed.

But the residents do need to be updated on the situation at hand.

Good point, George - and that's why every 3 - 5 years, the Reserve Fund Plan needs to be updated.

Nancy—
I want to go back to your original question and make a point or two

POINT ONE.
The Operating Budget (i.e., the unit-owners’ fees coming in, and operating expenses going out) and the Reserve Fund dollars (i.e., unit-owners’ contributions coming in and reserves-related expenditures going out) should be thought of a two distinctly separate exercises.

The amounts required for the Operating Budget should be calculated for the coming fiscal year in such a way that bank balances throughout the coming year will be sufficient to pay the operating costs, with enough of a cushion built in, for the unexpected. (“The unexpected” is usually not much since you’re only looking at the next 12 months which are largely quite predictable).

The amounts required for the Reserve Fund should be calculated for the coming 30 years in such a way that reserve balances throughout the 30-year period will be adequate for the predicted expenditures, plus including a substantial cushion built in, for the unexpected. (“The unexpected” with reserves can be quite large as you’re predicting costs way into the future — not a precise piece of work at all).

POINT TWO
It you’re doing the above two things right, and keeping the tasks separate from each other, there should never be a time when you’re transferring money from one account to the other. If you do, it’s a clear indication that the planning for Operating Balances or the planning for Reserves is mot being done well.

Edie,

Very good question!

I live in a planned community of 1,700 single family homes. We have no amenities either. But, we do have extensive common area (greenbelts, parks, etc) and a number of lakes that are quite expensive to maintain. Our reserve funding is $4,000/month and we are fully funded. By no amenities I think what is meant is no clubhouse, swimming pool, tennis court, etc.

Edie

We have v ditches ((to drain water) several park areas with just grass. We have some steps made out of rail road ties. Some benches, a monument ~ walking trails ~ Thats all I can think of.

NancyM2

George,

In my opinion, if times are good the best option is to consider each line its own fund at least for contributions. I would never say this should be held to if something comes up sooner then expected though.

But when times are tough it is a valid option to switch to another method of looking at the funds. It is a valid option to consider it a single fund the needs to have enough money for the next project.

What I think about is that some neighborhoods already struggle with the effects of foreclosures. They have a high number of people who are barely hanging on to their mortgages. And if this describes your neighborhood now is the time to avoid raising dues if at all possible.

I would not presume to decide how another neighborhood funds their reserves. (Other then to say they do need to be looking at the future expenses now. Things may not get better for awhile.) I wish all associations were in a situation like ours. (We are funded at more then 1000%.) But that is simply not reality. Our developer set things up such that we had a budget surplus and dumped said surplus into the reserves for several years. Few others seem to do this.

I tend to agree with you on all points.

Isn't a reserve fund at 1000% of the need excessive?

Our budget surplus also goes into to the reserve fund, rather than into an operating reserve. (The reserve is funded well over 100% based on the reserve study. Except for upcoming stream bank rip rap we have not had the need for any major repair/refurbishments.)

Yet, my sensibilities suggest that in rough economic times like these, we should be building operating reserves as a "rainy day" fund. If assessment payments fall short due to bankruptcies and foreclosures, we need to have some sort of operating fund that we can draw on to tide the association over. I would like to see our operating reserves at 6 months of expenditures, funded by budget surpluses.

I have made the argument, as yet unsuccessful, that the board can withdraw reserve funds that were placed there from budget surpluses, and use those withdrawals for operating expenses. They are, in effect, "funds functioning as reserves."

Our neighborhood has had its share of foreclosures and bankruptcies (but nothing as compared to adjoining neighborhoods. New purchasers received some incredibly great deals as a result.

Most of our foreclosures were in our "high rent district." People over bought and over extended themselves. Foreclosures on "the other side of the tracks" have been few and far between.

What we have seen, as a result, is the decline in market value of the "high rent district" homes, and the continued, albeit slow, appreciation on the "other side of the tracks."

Good question. Statutory law is silent on the issue for homeowners associations. I have to check if the condo law is different.. And there is nothing in the declaration of covenants that specifies how to handle surpluses. So the board is at liberty to do what they want, and that has been to put the funds into the reserve fund.

The surplus is a result of a reduced need for snow removal in the past several winters. The problem is that there is no operating reserve to handle a super snowy winter. The strategy has been to budget for an above average winter, but not a super snowy winter.

By the way, Fannie Mae is now taking a very hard look at condo associations. Some tightened requirements include

• The community association has an “adequate” budget.
  
• The budget contains a line item allocating 10 percent of annual revenues for the association’s reserves
  
• The association has available funds equaling the deductible under the association’s master insurance policy.
  
• No more than 15 percent of the common area fees are delinquent by more than one month.

As for the question about 1000% funding being excessive, yes it is. We got there bacuse the developer set the dues to an arbitrary figure. They felt that if you could afford a house in the association's neighborhoods you could afford $200 a year. And all money above the actual expenses were put into the reserve fund early on. Then they had a reserve study done and changed to simply place the excess funds into "unrestricted investments."

Currently only 2/3 of our income is being spent. And yes, I know this needs to be fixed.

As for IRS rules, they only affect the tax consequence of your choices on spending money. They do not make you spend or not spend in a particular way.

As my earlier postings explain, I am hugely devoted to keeping Reserve Fund matters and Operating Budget matters entirely separate. That includes ... planning, funding, maintaining, spending, banking, and whatever else is necessary.

So, with that position in mind, may I suggest an extremely simple policy for surpluses that may arise in the Operations account. CARRY THEM OVER to the next period! Depending on how fat or thin you like to run your operating balances, you may then decide that monthly fees can be adjusted downwards as a result of the carry-over, or you nmay decide to run with fatter operating account balances for a while.

Simple, but totally workable.

In any case, the OP's (original poster) Board should be required to give a complete financial report to the Members at a special meeting.

They should explain HOW they got into this mess and have the paperwork to prove it.

Raising assessments is the LAST thing that should be considered.

Mais oui. Graham, you previous posts have exhibited both astuteness and common sense. I agree with your thinking. Healthy, but not excessive, reserves are important for the well-being and efficient functioning of the association.

One of the judgments that the board makes is just how much cushion the association needs. A monthly cash flow analysis is a good tool to use.

I would think that a 6-month operating reserve would be sufficient, but some may opt for a 3-month reserve, while others may opt for a 12-month reserve. Some jurisdictions may have mandatory minimum/maximum limits on operating reserves set by statute or rule.

Gerald,

If the money isn't there, it isn't there! Would you rather have a fully funded reserve fund and delinquent bills or be able to pay all the bills by decreasing the contribution to the reserve fund? The assn is not always able to raise the assessments to cover the shortfall for the reserve funding.

And, I'll end on that note! I think we've really beat this to death so we should just agree to disagree. :-)

Kirk,

Unless you were born with a silver spoon in your mouth, I believe we've all had that experience at some point in our lives. I, too, feel fortunate that I don't have those problems at my stage of life.

I don't think anyone denies that creative financing will end up costing more. But the unfortunate reality is that sometimes people are stuck with a lack of reserve monies. And as they attempt to start building them, along comes problems that require creative ways to get out of them.