It is common for HOA Board members to have issues relating to properly understanding a homeowner Association’s operating fund and reserve fund. Properly maintaining the two funds is crucial for the long term financial success of the Association.
What is the Operating Fund used for?
The operating fund is the annual budget for recurring expenses such as landscape contract, utilities, insurance, management fees, etc.
What is the Reserve Fund for?
The reserve fund is used for assets that require maintenance over a longer period of time such as painting, asphalt repairs, roof or wood replacement, etc. Disclosures and notices must be provided each year to determine how the reserves are being funded. The Davis-Stirling Act requires the Association to update their reserve study every year and obtain an on-site reserve study every three years.
Reserve studies are required to be updated in order to anticipate increases in replacement costs that may be unforeseen and prevent reserve funds from falling too low.
Where do funds come from?
Each owner must begin to pay HOA dues after they join the Association. Dues are typically monthly, quarterly, semi-annually, or yearly.
The Board has the authority to raise the combined operating and reserve budget up to 20% above the previously approved budget. Unforeseen circumstances such as a natural disaster, new laws affecting Associations, or increases in operating costs may require the Board to take drastic measures.
Who oversees the funds?
The Board of Directors has the responsibility of overseeing both the operating and reserve budgets. They are required to review all financial information every quarter, if not every month.
How is an HOA Board responsible?
The Board is not expected to be experts in every field related to the Association but should make reasonable business decision as it is their fiduciary responsibility for the good of the Association. Boards should work with experts such as property managers, accountants, and lawyers to help understand the law and civil codes related to Homeowner Association.
A Board should consider meeting with a qualified management company to help them with the budget process and provide financial services. This assures the Association is making cost effective decisions to maintain strong financially while still keeping the quality of the property to its member’s standards.
How can an HOA manager help?
A qualified management company can help direct a Board to anticipate unforeseen expenses, make sure operating/reserve funds are not overly funded or not funded enough, and verify all actions by the Board are legal and follow civil code described on the Davis-Stirling Act.