Over 100% Fully Funded Reserves
Our HOA has a “good problem” in that our reserves are well over 100% fully funded. Since most HOAs in this country are in the opposite predicament, I haven’t seen any best practice recommendations on what to do in this situation. Three possibilities include
1) Continue to be over-funded in case of a rainy day or if high inflation persists indefinitely.
2) Lower monthly dues.
3) Enact a one time rebate to owners.
From your experience, what have most HOAs that are over 100% funded done?
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Nick,
Be very careful with any assessment that claims that the reserves are fully funded. The percent funding of reserves by most firms is nothing but a shell game where statistics are twisted and distorted to send the desired message. The first question is what are the maintenance and upgrade projects that are included in the long-term maintenance plan? Are those project a true and realistic representation of the predictable long-term maintenance that will be required by the community. Is the timing for each project legitimate and based on industry standards for that type of maintenance. Does 100% funded mean that you have all the money that you need today if all the projects were to be accomplished this year or does your long-term plan show that you will have sufficient money in the reserve account to accomplish any project scheduled to be performed for any individual year in the next 40 years of your future. The latter is the only thing that you should be considering. Do I have sufficient money in the reserve to pay for any project scheduled in the next 40 years. What are your assumptions for inflation? Are they realistic? have they been adjusted b assed on the current skyrocketing inflation rate? Association like to throw out % funded for reserves without any real understanding of what that means or why it’s important. I personally hate all attempts by anyone to classify % funded for any reserve account, because it can mean 100 different things none of which are relevant to anything. Like I said earlier there is only one condition that really counts relative to reserve’s and that is will, we have the money we need for every planned project for the next 40 years when we need it. If you don’t then you need rethink the subject and timing of your projects and review your assumptions for earnings and inflation, or increase your assessments now to ensure that you can fund every project.
Having said all of that if following a realistic review of all reasonable projects and the timing for those projects if you are funded in excess of your predicted expenses then the association cannot charge additional assessments for those future reserves until such time that your predictions show a deficit at some point in the future. The association is authorized to raise assessments to meet the financial needs of the association if you already have sufficient money raised to meet that need you cannot raise additional funds that your own predictions say that you do not need.
I don’t believe that any association has sufficient foresight to predict their true future needs of worse sufficient discipline to not use money in the reserve account for anything that was not in the reserve plan. That would include any association that pays thousands of dollars to professional reserve plan companies, who produce thick and pretty but totally useless documents.
As to your specific question I’ve never run across any association that believed that their reserves were fully funded for the next 40 years. Mostly because I don’t believe that any association would ever admit that they did not need to raise any more money for future long-term maintenance or improvements. Board like the fact that they have reserves and with that money they will always find ways to spend that money for things that were never in their long-term plan. This is discipline. You don’t have to look far for examples of governments constantly looking for more ways to raise money so that they can spend it on their pet projects. This happens when these association are given the unlimited ability to raise assessment at will.
Dennis
Dennis,
Thank you for your comprehensive and well thought out reply. Much appreciated!
IMO, if you don’t already have one, get a Reserve Study. Then look into putting monies over reserve into other kinds of accounts like short and longer-term CD’s for short and further out uses.