newly married couple has decided to make their first big monetary decision by purchasing their first home, which would be the largest asset they own. They have decided to buy either a condominium or a townhome. They looked at one unit online that they loved so they decided to make an appointment to see the unit and the association property in person. When they drove into the association, the first thing they saw was the freshly paved roads, the gorgeous landscaping and lighting, freshly painted buildings, and windows and roofs that looked brand new. Everything was so beautiful! Why was the association so attractive and well- maintained? The main reason is because the association had a plan.
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Reserve Studies and Planning for the Future
Because this association had and used a Reserve Study, which is a current and future plan, this couple most likely will decide to buy the unit in this association since they believe that the value of the unit will continue to increase.
If you want to have an association that you are proud of, you must have a plan to fund reserves. The key questions that get asked all the time are: how much should we fund each year into reserves, should we have a reserve study prepared by a professional, is there an Illinois law that requires a reserve study, and what is the right amount of reserves, should we be 50%, 75% or 100% funded, and how do we safeguard our reserves?
These are all great questions but let’s start by first discussing safeguarding your reserves since your reserves are usually the largest asset of your association. In order to properly safeguard your reserves, your association should have proper internal controls, an investment policy, a reserve study and fund accounting.
Safeguarding Your Reserves
Internal controls start with having an active board, since the risk of theft or fraud is higher in an environment with inactive or uninvolved board members. The board should be in control of the reserve funds and there should be dual signatures on check disbursements from the reserve accounts. The board should be reviewing their monthly financial packet and making sure that the reserve account statements (which can include checking, money market and other investment accounts) agree with your general ledger and financial statements or your reconciliations. Also, review the monthly reconciliations to determine if the budgeted reserve transfers from the operating fund to the reserve fund actually did get deposited into the reserve fund. Then, check to make sure all approved transfers from the reserve fund actually did get deposited into the operating fund. If these transfers are made at the end of the month but did not clear the financial institution by the end of the month, make sure they do clear within a few days after the end of the month. A CPA certified audit also
operating f the month b end of the m days after the
gives more assurance since confirmations will be sent out to the financial institutions in addition to reconciling these reserve accounts.
Every association should have an investment policy to safeguard their reserves. An investment policy discusses your association’s reserve funding goals and their investment priorities. A simple rule of thumb for prioritizing the association’s reserve funds is remembered with the acronym S.L.Y.:
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ment Policy nv
• Safety – Principal preservation is always the most important. • Liquidity – Having the funds available when you need them. • Yield – Earning a competitive return on your reserve funds.
If you are laddering certificates of deposits to get the highest interest rate and making sure the funds are available at the time the project is projected to be done, new board members will not understand your plan for these certificates of deposit without a documented investment policy. Every board should include the signature cards of the reserve accounts with your investment policy. When CPAs perform certified audits, they send out confirmations for bank accounts and other investments. Many times, they encounter difficulties in confirming the balances since the signer on record at the bank is not only no longer on the board, but might have even moved out of the association entirely.
Types of Reserve Funds
In order to safeguard reserves, the association should be using fund accounting. Those familiar with community association accounting usually know that associations have an operating fund and a reserve fund. There are two other possible funds that associations may utilize. One is an operating contingency fund which can be used for unexpected repairs or higher than budgeted operating expenses like higher utility costs during a colder than normal winter. It also could be used for cyclical maintenance items such as painting and caulking. The other fund is a capital improvement fund. This fund should be used if the association is building something significant, such as a clubhouse or garage, or is purchasing additional land. Reserve funds should not be used for these purposes.
The main purpose of fund accounting is to be paying and receiving funds out of the proper funds and not commingling funds. Often times during the annual certified audit process, CPAs discover that not all of the assessments budgeted for reserves were actually deposited into the reserve fund. Auditors may also find that the reserve expenditures paid by the operating fund have not been reimbursed by the reserve fund or the reserve fund reimbursed a round dollar amount instead of the exact dollar amount. They then have to determine the amount due between the two funds to make them whole. If the CPA had not been hired by the association to prepare the annual certified audit, the
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mations will be sent out tion to reconciling these
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