Budget Season: How is your HOA handling reserves?
After a wonderful holiday weekend, it’s time to saddle up and get back to work! For management and boards of homeowners’ associations (“HOAs”), that means budget season is now in full swing. While community association managers play a pivotal role in assisting boards with the creation of budgets, it’s ultimately up to each board to adopt a budget that’s in the best interests of the association they serve. That means boards must be fiscally responsible when creating their budgets.
Over the past few years, boards have understandably been reticent to do anything to increase assessments. For some HOAs, especially some condominium associations, that has meant making a decision to defer routine maintenance and to either not fund reserves at all or to fund them at a low level. While kicking the reserve can down the road may seem like a short term solution to an assessment increase, if put off too long, this can become a recipe for a fiscal nightmare.
When facing the question of whether – or at what level – to fund reserves, boards should ask themselves the following questions:
- What does our Reserve Study Policy say regarding the funding of reserves? Are we in alignment with our Policy? If not, why aren’t we complying?
- In order to save money, have we been deferring maintenance on components the HOA is responsible for repairing and replacing? If so, how does that affect the current analysis in our reserve study? Has the remaining useful life on key components been reduced since we have not been following a routine maintenance schedule?
- Have we been realistically funding our normal operating expenses? If not, have we been forced to dip into reserve funds to cover normal operating expenses? What has that done to the balance of our reserve account and are we prepared to cover the expenses of major repairs or replacements that can no longer be put off?
- Are we planning to utilize a loan as an option for covering the costs of major repairs and replacements? How will this affect the ability of our condominium association to obtain FHA certification? Has the association been keeping assessment delinquencies at a level where we would even qualify for a loan? Is the lender going to require that we levy a special assessment as a condition of obtaining a loan?
- If we decide to not fund reserves or fund them at a low level, will our owners be able to pay a special assessment in the future when we have no option but to make major repairs and replacements to components the association is responsible for? Are small incremental assessment increases preferable to a special assessment? If we are planning to levy a special assessment in the future, as opposed to increasing assessments to fund reserves, have we notified our homeowners of the plan so they can begin budgeting for a future special assessment?
While creating a budget for an HOA is not fun, it’s an opportunity for managers, boards and homeowners to take a real look at the state of their reserve funds and to make some tough – but necessary decisions. Kicking the reserve can down the road is only putting off inevitable tough fiscal decisions and will likely make matters worse. After all, money really doesn’t grow on trees. . .