It begins with piggy banks. As children, birthday money, allowance, and loose coins from the floor of dad’s car were placed for safekeeping in the small slit on top of a ceramic animal until it was time to smash it open, meaning enough had been saved to buy the coveted toy or electronic. As teenagers, bank accounts held the wages from after-school jobs, some saved for a car or college, and some used at the mall on weekends because mom no longer fell for the “I really need $20” act. In college, saving money was often put on the backburner, as getting through with as little debt as possible was what mattered. As adults with retirement accounts, investments, and savings accounts serving different purposes, it seems that saving money was much simpler with one goal and one piggy bank. However, at the end of each life phase or savings goal, the money is used for its intended purpose.
Reserve funds are no different – they are saved to be spent. In the simplest terms, reserve funds are used to replace the reserve components in a community association. These funds, made up of the monthly dues paid by each unit owner, fund the replacement of components that the association owns, such as roofs or amenities, or the non-routine maintenance of components, such as re-paving streets. These components’ upkeep or replacement are generally expensive, which is why reserves are built up over many years. However, because maintenance or replacement schedules are predictable, reserve funds should not be looked at as a rainy-day fund – they are meant to be saved and spent on a timeline.
Reserves, like any other savings fund, often have too little money at any given time, leading to issues such as special assessments or deferred maintenance. But unlike retirement accounts, which benefit from having as much cushion as possible, it is possible that reserve funds contain too much money. It is understandable for board members to see reserve funds as any old savings account, not wanting to spend the money and just aiming to watch it grow. However, this is not their purpose.
While a healthy reserve balance is obviously desirable, 100 percent funded reserves are not generally necessary nor an indicator of health. The truth is, the amount an HOA should have in reserves differs year to year, and there isn’t a specific percentage at which reserves need to be consistently funded. Targeting an arbitrary balance relative to the fully funded balance does not offer a complete picture of overall financial health. While maintaining a 100 percent funded balance is generally a safe strategy, it typically results in over-funded reserves as it is incredibly rare that all projects would need to be completed at the same time.
Let us take it back to the piggy bank. To be fully funded, or 100 percent funded, you would need to have enough money for the new toy, a car, college, a house, retirement, and all of life’s other major expenses before breaking it open. First, there would simply not be enough room in the piggy bank for that amount of money. Second, you would eventually be doing yourself a disfavor. If you waited until you had enough money for everything before spending anything, you would be 60 years old and have never owned a toy or car, been to college, or bought a house. That money would still be sitting in the piggy bank, useless and waiting.
Similarly, an association does not necessarily need to have funds in reserves for all its expenditures at the same time, because each reserve component has a different lifecycle. It would be incredibly uncommon for every reserve component to need replacement simultaneously. Instead, associations need to look at the cash flow. Expenses should be covered over time through stable and adequate reserve contributions that consider these lifecycles.
If reserve funds were meant to sit in an account forever, communities would suffer. Potholes would expand, shingles would fall, and structures would deteriorate. Your community is a living, breathing entity that ebbs and flows, and your reserve funds should be too – don’t be scared to use them!
