Reserving Activity

One of our clients asked the following:  I know that we transfer a fixed amount into the reserve account monthly.  My confusion is handling excess operating income and properly reporting the funding of capital projects.  In years where excess revenue exists, do you do an end-of-year transfer to the reserve account?  Should all capital projects be placed in the operating budget?  If so, this will create a net deficit.  Does this mean that instead of having a monthly transfer into reserves we then have to transfer from the reserve fund back into operating?  I don't see the point in doing both.  If there needs to be a transfer from the savings/reserve account, does that take place monthly, as needed or end of year?

Should reserve activity be included in the operating reports?  Communities with large volumes of capital reserve work often set up a separate set of reports to keep up with reserve activity.  Smaller communities with no amenities frequently roll in all reserve activity on the regular operating budget comparison report.  The Board should select whichever method is the least confusing for it to follow.

How often should funds be transferred in to reserves?  For smaller communities, it makes sense to just do a single transfer of funds into savings at the end of the year.  Otherwise, it is best to schedule transfers to occur throughout the year.  Failing to plan is planning to fail, so Boards should actively plan for future large expenses by being disciplined in their savings pattern.

What about the problem of net deficits because of reserve expenditures?  If you are combining your reserve activities with you regular operating budget, your comparison report should have a sub-total line that captures the net effect of your regular day-to-day operating expenses, which hopefully is always a surplus.  If instead you are keeping track of capital expenditures separately, you definitely need a line item showing reserve fund transfers.  In either case, if there is a negative net total at the bottom of your report, this indicates that money is coming either from past year savings, or a bank loan.  You can trace this answer back to your balance sheet (the place that keeps track of all your money), under the line item ‘Net Income’, which should always match what appears on your budget comparison report.  

So why should we do transfers to a reserve account, if we are just going to move the money back to operating?  It used to be ‘standard procedure’ for communities to shuffle budget numbers to make it appear that money was being saved (and actually saving this money, not spending it on capital projects), when often there was no intention or ability to actually do so.  Bank loan underwriters are now savvy to this ploy, and have been rejecting home loans because of it.  Do not set up a monthly reserve transfer if you know that the money will have to be spent during the current annual operating cycle.

Obviously, financial reporting for an HOA or COA substantially differs from that of personal finances or even many for-profit businesses. It is extremely important to partner with a 3rd Party Expert (in this case a CPA) that actively deals in the Association industry. Reach out to your manager or your local CAI chapter for more info/recommendations!