(WHAT YOU DON’T KNOW YOU DON’T KNOW)
A clearly stated mission statement by design is intended to help each committee to identify their intended goal[s]. To that end, each Board member liaison should provide the committee chairperson of each of their liaised committees with at least one specific charge as to what item(s) is/are to be considered during their year of committee appointment. This is to ensure that any given committee focuses upon what the board as a whole expects of that committee, during the course of the year.
FINANCING AND BUDGETS
One of the most daunting topics surrounding the discussion of HOA responsibilities is that of understanding association financing. Financial forecasting requires budgets. Their creation, development, and the impact they have on the operation and maintenance of an association’s assets are vital. Since the association’s budget is expense-driven, each line item represents a projection or educated guess of what is being anticipated for the coming year. Remember, a budget is still a plan, subject to modifications and/or corrections, within established limits.
OPERATING FUNDS VS. RESERVES FUNDS
- Operating funds are for day-to-day expenses, such as contractual agreements for landscaping, utilities, payroll, etc.
- Reserve funds are designated for capital expenditures (money spent on acquiring or maintaining fixed assets, such as land, buildings, or equipment that obviously last more than 12 months) and for deferred maintenance.
- Reserve funds are established by using the results of a reasonably comprehensive reserve study that takes into account all the assets of the association with a best guess as to the life expectancy of each asset along with year of replacement at some point in the future. Normally, the projection of the use of the reserve funds for each item is placed in the year when it is expected to be replaced within the next 30 years. The replacement cost for an item this far into the future must be “guesstimated” taking into account the inflation projected for the appropriate time period. For items very recently replaced, this projection may be less accurate than one that should be replaced in the near future.
STRAIGHT-LINE VERSUS POOLED RESERVES
How to account for reserve funds is one of the most significant financial decisions Florida community associations must face. Should the homeowners, condominium or co-op association maintain separate accounts for each reserve component, or combine them into a single pooled fund? This choice affects not only which accounting practices (actual cash versus accrual method) is used, but also the degree of flexibility available when managing major repairs and replacements.
Straight-Line Reserves (also called “component method”) involve calculating and tracking reserve funds separately for each major component — pavement, roofs, lake maintenance, outside house painting, etc. Each component has its own reserve balance and funding schedule.
The Pros (P) and Cons (C) of Straight-Line Reserves include:
(P) Transparency and Accountability: Straight line reserves provide crystal-clear tracking of funds allocated for each component. Board members and owners can easily see if a specific fund is adequately funded or not.
(P) Disciplined Planning: This method enforces financial discipline by preventing the “borrowing” from one component fund to another. If a given fund shows insufficient reserves, that problem cannot be masked by surplus funds in other categories.
(P) Easier Reserve Study Implementation: Most reserve study professionals calculate recommended funding on a component-by-component basis, making straight line accounting a more natural fit for implementing their recommendations.
(P) Reduced Conflict: When owners can see that their assessments are funding specific, tangible needs, there tends to be less resistance to reserve funding and special assessments.
(C) Administrative Complexity: Tracking multiple reserve accounts requires more detailed bookkeeping and can be more time-consuming for association management and board treasurers.
(C) Inflexibility: If one component or asset should fail prematurely while another lasts longer than expected, you cannot easily redirect funds without formal action.
(C) Potential Cash Flow Issues: You might have adequate total reserves, but insufficient funds in a specific component account can occur when an unexpected expense arises, such as a water tower that fails before its planned replacement.
Pooled Reserves (also called “cash flow method”) combine all reserve funds into a single account. Rather than earmarking funds for specific components, the association maintains one reserve fund to cover all future major repairs and replacements.
The Pros (P) and Cons (C) of Pooled Reserves include:
(P) Flexibility: Pooled reserves allow the board to respond to unexpected expenses or changing priorities without the constraints of component-specific allocations. If the clubhouse roof needs replacement two years early, but the HVAC system lasts three years longer, the pooled fund can adapt.
(P) Simplified Accounting: Maintaining one reserve account is administratively simpler, reduces bookkeeping complexity and the potential for tracking errors.
(P) Efficient Cash Management: With all reserve funds in one place, associations can potentially earn better returns through higher-balance investments and reduce the number of accounts to manage.
(P) Better for Smaller Associations: Communities with limited reserves may find pooling provides more practical flexibility when every dollar counts.
(C) Less Transparency: Owners and board members cannot easily see whether funds for specific components are adequate, potentially masking underfunding problems.
(C) Risk of Misallocation: Without the discipline of component accounting, boards may be tempted to delay funding for less visible items, while addressing more obvious needs.
(C) Complicates Reserve Studies: While reserve studies can still be performed with pooled reserves, tracking actual versus projected funding becomes more difficult.
