Budgeting and Contingencies

Ok, so here's another post and hopefully it's easier that the Rules/restriction post. My questions is about contingency funds (not reserve) and left over monies. Before I behind I do have an MBA and understand financial statements and responsible for a sizable budget at work. But, handling the budget for a "for profit" business is difference in some aspects that a Not for profit HOA maintenance corporation. I had touch on this topic a little in a previous post but didn't get into specifics. In that post someone mentioned, the contingency should be 3% of the total budget.

Ok so that you can better understand the question here is some background. First, the development has only been fully builtout for about 2 years, perhaps a little longer. The builder has set the original assessments. We have not roofs, roads, or any major structures (i.e. pools, or tennis courts) other than a small playground set. The only real expenditures is landscaping (grass cuttng, etc) and a stormwater management pond, but the county also maintains some responsibility for that. As of this month we have about $130K in cash (approx $65K in operating account, $40K+ in the "reserve account", and $20K in a "improvement account"), only about $20K in current liabilities. I, and most residents, have not seen the reserve study so I am not if the reserve account is fully funded or not.

So on the budget side, 8% ($10K+) of the assessments are allocated to a "continugency account", another 11% is allocated to the "reserve account". The balance is distributed across the various expense (operating) accounts. As of the beginning of the month, most of the expense accounts are running under budget, only one or two slightly over. The total underspent is probably another $20K-25K on top of the $10K in the contingency which has not been spent. This same scenario occurred last year.

So my question are these:

1) How much of the annual budget should be identified as contingency (one post indicated 3%) not reserve?
2) How do most of you handle when the expense accounts are running under, and the contingency account is not spent? Keep adding to the cash on hand every year? If so when does that stop? Remember I'm not referring to the reserve account which should be based on the reserve study.

Thanks. If anyone needs more info I will try and provide.
Gerry

Gerry the amount of the contingency fund will vary from Association to Association we carry 90 days worth of assessments others have more. As to the left over funds look first to your governing documents to see if it is addressed there. Until Ohio changed the law to allow COA's to put excess funds into reserves our documents required us to credit H/O's against future assessments until the excess funds were used up.

Can't find a limit in our docs, but that one thing that has been proposed.

In terms of "normal scope of duties", if it's a maintenance corporation and the primary purpose is the management the "maintenance" of the common areas wouldn't that limit the "scope of normal duties"? In fact the county code which also governs this org, states that the computation for the assessment is the total costs or repair and maintenance for the common areas divided by the number of homes.

It just seems to me that either one of two things can occur 1) that the case balance could end up being a 1/4 or 1/2 million dollars in no time, and 2) there is no requirement to prohibit pet or special projects without a vote? I would also think that if the money just sat there, that a homeowner moving out could potentially request there portion of the money back.

In your prior post you indicated that the prior law in OH regarded that you credited the homeowner for future assessments? Do you mean that if there was say a $200 per homeowner balance, and the monthly payments were $50, that they would not pay for 4 months?

Thanks

Wow, thanks GlenL, I need to see if anything similar is any code or law here. I did notice that the highlighted section stated in excess of the amount require for actual expenses and reserves.

SusanW, I had mentioned this in another thread, but this is also one of the problems. Although the by-laws are not really clear on this, the county code which governs maintenance corporations, indicates that the annual budget must be reviewed and approved by the members at the annual meeting. The two years I've been there, that has never occurred. It also requires the full 12 months of actual expenditures be reviewed, that has not occured either. At the last annual meeting only 10 months were reviewed.

I think the one question was when do you stop with the contingencies, or what if the reserve fund is fully funded?

I was traveling last week and didn't have much time to reply. I did find out some interesting point regarding this topic that I thought i would share.

GlenL's (Ohio)s post actually made me look at some specific aspects. But I was also able to get some contacts from other maintenance corps in my area, and dug up some laws. For sake of summary, here is what I found out.

* First, the articles of incorporation for the maintenance corp (MC) specifically states the sole purpose is to maintain the common areas and associated expenses.
* The law specifically states that the assessment must only be for the annual maintenance expenses plus the appropriate reserve for long term repair.
* The MC DOES NOT have the authority to perform any improvements WITHOUT the approval (via vote) of the entire community.
* As GlenL stated, the law (not by-laws) state that any surplus of funds in excess of the normal expense and appropriate reserve allocation, MUST either be refunded to each homeowner or credited back to the next years assessments. They can not just keep adding to another fund.
* In fact, any improvements must be voted on by the community. If the board proceeds with an improvement which is determined not to be expense, the board may be held responsible to reimburse the community.
* The law is also specific in that each year the full years actual expenses must be presented to the entire community for review, and the next years budget must be ratified and passed by the appropriate community vote.
* In fact, the law also indicated that if a special assessment is approved for a element in a common area which only benefits a few homes, the assessment can be allocated only to the homes impacted by the benefit.

Anyway I thought I would post these findings, and I wanted to thank Glenl for his post because it allowed me to focus my search.