operating vs. reserve

Started by CarolR7 • 10 replies • 1672 views

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CarolR7 (California)
Posts: 1

Posted:

Our board, along with many other boards, are gearing up for the new year with proposed budgets. Our account manager is saying large ticket items that do not need repair on a regular basis is reserves. We, as a board, take this to mean that the monetary value does not apply. If an item (or service) has a minimal amount of monetary value and will not be replaced (or used) for a long time, this should come from reserves, regardless of monetary value.

GlenL (Ohio)
Posts: 5,491

Posted:

Carol I'm not sure exactly what you're asking here but yes a Board needs to set aside money for the eventual replacement of capital items, this is above the yearly operating costs.

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

MaryA1 (Arizona)
Posts: 7,043

Posted:

Quote:

Posted By CarolR7 on 10/30/2008 7:52 AM
Our board, along with many other boards, are gearing up for the new year with proposed budgets. Our account manager is saying large ticket items that do not need repair on a regular basis is reserves. We, as a board, take this to mean that the monetary value does not apply. If an item (or service) has a minimal amount of monetary value and will not be replaced (or used) for a long time, this should come from reserves, regardless of monetary value.

Carol,

In answer to your last statement which I think you meant as a question: "Yes". The reserve study for my assn has an item valued at only $2,000;however the future replacement cost is valued at $4,000. So, it really doesn't matter what the value is today, when the life expectance of the item in question is at an end the value may have doubled, tripled, etc. So, IMO, all assets should be placed in the reserve. Frankly I wouldn't rely on the word of the manager regarding what should or should not be placed in reserves. That's best left to the discretion of whomever is conducting the reserve study. Reserve monies should only be used for the repair, replacement of those assets shown in the reserve study.

RogerB (Colorado)
Posts: 5,067

Posted:

Carol, I agree with the intent expressed by the manager. However, the Board decides what is a big ticket item. If something needs major maintenance or needs to be replaced every 5 or more years which will cost 1% of the annual budget then I would not include it in the long range reserve plan. If 5% possibly, and if 10% probably.

KirkW1 (Texas)
Posts: 1,665

Posted:

In our reserve study the sprinkler controller was included. And no, it wasn't something special.

Now if it were to break, I would be inclined to take the money out of the operating budget partly because they simply are not that expensive. But it doesn't hurt to have it in the reserve budget.

My view is that if you can manage it never hurts to have a large reserve budget. And if you can replace an item from operating funds then you leave more in the reserves for that rainy day that may come. But as so often is the case, you do what you can afford to do.

RogerB (Colorado)
Posts: 5,067

Posted:

Kirk, I agree. You provided a good example. Sprinkler controls periodically need to be replaced and may cost up to $1000 depending on the number of stations. What if you only replace one timer control at a cost of $500 approximately every 10th year? This blurs whether it is an operating or reserve item. If there were 10 timers I would build a yearly operating budget to replace one each year and if not spent I would place the money in the reserve fund; and if ten were replace at the same time reserve funds could be used. Contrastingly, to replace a $10,000 roof every 30 years on a townhome this is paid from the reserve fund.

The bottom line is the operating and reserve budgets are best estimates which are not set in stone. They are tools used to manage predictable and unpredictable finances.

KirkW1 (Texas)
Posts: 1,665

Posted:

Something that comes to mind here is that we have decided to update our landscaping at the entrance. Now is this to come from our operating funds or reserve?

To be honest, in most cases I would say that it should come from the reserves. We are spending several thousand dollars and this is something that doesn't occur each year. But, we happen to have plenty of money in operating to cover the expense. We don't really "need" to make the changes in landscaping and I believe this should come out of operating since we can afford to do it this way.

The whole thing is that when we approved the money to be spent we didn't specify where the money would come from. Our president has made a choice, but I intend to revisit said choice at the next meeting because I believe that regardless of the answer, it is a choice that should be made by the whole Board not just one person.

I guess the whole thing is that like Roger I figure this is really a rainy day fund. And if it ain't raining then we should leave it alone. If we can afford to pay for it from operating then we should pay for it this way. (We are very unusual in that we have plenty of money in bother operating and reserve funds.)

GrahamO (Ontario)
Posts: 55

Posted:

The idea of taking funds out of the operating budget, even if it looks "fat", is generally regarded as NOT a good idea. If you have what appears to be excessive funds in the operating budget it would be far better to simply use this information to generate a lower fee structure for it the next year.

The idea, too, of somehow tying the funding of the reserve fund to a percentage of the overall budget as John suggests, is also NOT a good idea. The two have virtually nothing to do with one another.

We have an as-yet-unpublished chapter for our book on the distinction between operating budgets and reserve funds. It lays out how independent of each other they really are. If anyone would like a free copy please contact us.

We also have a free Components List which helps decide which items should be reserve fund items and which should be operating cost items. Ask for one of these as well, if you'd like.

SusanW1 (Michigan)
Posts: 5,202

Posted:

If you can re-do your landscape (because you want to update for esthetics sake), then take it out of the annual budget for that year.

Signage might be a whole 'nuther things, and IMO would be in the Reserve Fund, since the sign panels, etc. do have a measurable "life."

KirkW1 (Texas)
Posts: 1,665

Posted:

Quote:

While I totally agree with you, I am but a single voice on a Board of five. And the property manager is passing on the developer's notion that somehow the level of HOA fees will affect the overall level of people who purchase properties.

Having said that, I have been pushing hard for us to expand what we do for the neighborhood. To that end, I am working with another Board member to get a proposal to buy an undeveloped lot and make it a small park. We have the funds and this would improve the neighborhood. In my opinion the single act would give a far larger bang for the buck then our property management contract would. It would also put us much closer to spending what the dues have been generating.

If that fails, then I intend to put forth a proposal to rebate back almost 1/3 of this year's dues to the membership since we won't need them. IF need be I will throw other members of the Board under the bus. We have been accumulating funds at a rate that is uncalled for in a non-profit organization. In talking with my neighbors I believe that many would rather see amenities in the neighborhood then a reduction in dues. Since we have the money, that is what I am working toward.

SusanW1 (Michigan)
Posts: 5,202

Posted:

Kirk - establish a park?

Nice idea, but there will be costs and costs in the future that have to be considered. I'd ask to see a 10-year plan to justify this purchase.

With the economy the way it is, extra padding in the annual general fund or emergency fund is not a bad idea.

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