AZHOC - Arizona Homeowners Coalition
Voice for homeowner rights and justice.

400% funded reserve

I have encountered a situation in our HOA. 2 neighborhoods in our HOA are assessed a monthly assessment and a separate quarterly assessmnet tagged “LPSS (low pressure sewer system) assessment” . The money collected for the LPSS assessment is retained in the Operating Fund. There are rarely any LPSS expenses budgeted in the operating budget and to date, only $15,621 of the $131,700 collected via the LPSS asessment has been spent. This LPSS assessment have been assessed for 7 years and 1 quarter and will continue to be assess throughout 2023.
The LPSS replacement is also included in the Reserve Study analysis which is used to calculate our monthly assessment. The reserve analysis shows the LPSS system has been fully funded at $36,000. On neighborhodd has erroneously used their LPSS funds (which were sitting in the operating account untagged and appeared as if they were avaialble for other things. So my question, (1) can the operating continue to hold the LPSS money in the operating account year after year and continue to assess the residents for this item? (2) What recourse does the neighborhood who unknowingly spent the LPSS money in the operating fund on non LPSS items? Is anyone responsible? If so, what who would I contact to help us with this issue?
We have met with the financial committee and they have voted to keep things as they are since we don’t know how inflation and costs increases will affect the replacement cost in 2024.

Thank you very much for your advice.


1 Response

  1. Dennis Legere

    it is difficult to answer without knowing the specifics of your CC&R’s but generally the association is entitled to charge assessments for whatever it needs to operate the association and for a year and to raise the money for reserves to fund long term maintenance and upgrades of common property. But the operating account must be maintained separate and distinct from the reserve accounts. While the association may borrow money from the reserves to cover short falls in the operating budget it must repay the reserves the following year. Intermingling of funds is a violation or IRS rules, and bad financial management and will result in depleting the reserve funds with expenses not intended for those reserve. The association has no right to charge assessment in excess of it’s own established predicted needs. If its expected cost considering inflation is $40,000 and they have collected $100,000 they have no right to do that. While there are many applications for reserves that is why an overall reserve account is so important it is not limited to one expenditure but to fund all the expected longterm needs of the community. While accounting for inflation is appropriate this is a mathematical analysis and not guesswork, especially in such a short term consideration. Let the association know that their practice of co-mingling funds is inappropriate and if they do not change this you will be forced to report the association to the IRS and they will be audited fined and could lose their non-profit corporation status.

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