Reserve funds are an important part of the HOA Boards financial responsibilities. And how HOA’s collect that money is through monthly dues provided by members. A small chunk of monthly dues goes into a reserve fund or a major backup fund that is used for unexpected costs. The amount varies, but what is consistent is the dispute about how too much to spend, and when to spend. There is much debate needed on how much to put into an HOA emergency fund, for example, should it be a rate, or just a standard amount each month? The next conversation is what constitutes an emergency in an HOA? The list continues, but a solid strategy from the HOA Board members and planning can help elevate all those pains.
Reserve Funds Made Simple
The first of all, reserve funds are collected for the benefit of the community. The purpose of the reserve fund is simple: to be reserved. The reserve fund is dedicated to the major responsibilities that lie under the purview of the HOA. This includes maintenance, security, social functions, equipment replacement, etc.
Although it may sound obvious, one of the biggest causes for complaint in an HOA is the due rates. It’s not unusual to encounter a candidate every election that runs on the platform of promising lowering dues. An enticing offer, but all that does is exchange the future security and health of the HOA for an immediate bump in pocket money for you and your neighbors.
Low Dues = Low Reserves
One of the misconceptions is that people who argue for a lower reserve fund and lower dues believe that the Board members have full control over HOA expenses. Not so. Indeed, much of the costs that go into maintaining an HOA are dictated by market prices. For example, a maintenance company hired by an HOA for pool repairs will be at a competitive rate. An HOA cannot simply choose how much they want to pay for repairs. If you’re looking for quality services for your community, then an HOA must pay at a quality price.
HOAs have a fiduciary responsibility to their community to plan for the future and the unexpected. A drought may cause water prices to increase, which may be offset by the reserve fund in order to keep the neighborhood green. A particularly damaging summer storm can roll through and the reserve fund can cover the cleanup. Of course, luckily, disasters don’t happen very often, and a reserve fund may end up collecting dust for a while. It’s a legitimate concern to want to know where your dues are heading. That’s why California passed laws to help ensure transparency and proper governance. They include:
1. The obligation to conduct on-site reserve studies completed and published every 3 years
2. The obligation to plan for future expenses of the HOA
3. The obligation to disclose the amount of reserve funds that are required to meet the HOA’s responsibilities over a 30-year period
Reserve For Your Community
Transparency and information can go a long way when it comes to an emergency fund. Natural disaster, although uncommon in Sacramento, do happen and can cause contention when comes to property damage. Helping members understand that those types of damages can be fixed with reserve money can fix a lot of headaches. The Homeowners Association Board is in charge of how the money is spent, but setting different types of parameters is helpful.