Our association’s annual budget has two parts, the operating side and the reserve side. The operation budget covers items such as insurance, professional fees, payroll, management, and other day-to-day expenses.
The reserve side of the budget is for items that are usually addressed less than annually, called deferred maintenance and capital expenditures. The condominium statutes require that reserves be set up for building painting, roof replacement, pavement resurfacing, and any other capital expense or deferred maintenance item that exceeds $10,000.00.
Our recently completed reserve study, the only reserve study ever completed for the Conquistador’s, has shown that some of our reserve line items have been under funded. These include the railings, replacement siding and painting. To fully fund these line items under the straight line method would result in a special assessment of approximately $2400.00 per homeowner.
Roger has proposed a reserve funding mechanism that is often used by older communities faced with limited income and higher levels of expenses. This is a generally accepted and approved reserve funding mechanism resulting in less of an immediate financial burden to you, the homeowner.
Starting in 2004, the Department of Business and Professional Regulation Florida Administrative Code Chapter 61B allows for budgeting and maintaining a “pooled” account for reserves!
Prior to this change, Associations were required to budget for reserves by component for capital expenditures and deferred maintenance.
With the change, the Association is now allowed to pool the required reserve components.
Why is this important?
- There is no need to have a membership vote to reallocate reserve component balances once the pooled method is adopted.
- The funding in the pool can be used for any reserve component listed in the pooled budget.
- The budgeted funding requirement (annual assessment) using the pooled reserve account method is usually less than using the straight line item method.
- Affords and encourages Associations and Boards to have professional and accurate reserve studies.
- Allows board more flexibility in regards to use of funds in the pooled reserves. As an example, under the existing method, if the Association had funds accumulated for paving the funds could only be used for that purpose without a vote from the entire association membership. However under the pooled method, funds in the pool can be used for any reserve component listed as part of the pool.
- It will lower reserve-funding requirement.
Cons
- The mathematical computation utilizing the pooled method is more complex and managers will most likely need to obtain professional assistance when preparing the reserve budget.
- In utilizing a pooled reserve concept, the Association is funding based on total cash needs projections. In essence all the reserve funds could be used in a particular year bringing the pool to zero.
What has not changed?
- The Association still needs to determine and list each of the capital components, the estimated useful life, the estimated remaining useful life and estimated replacement cost on a yearly basis. It is recommended that Association’s utilize professionals in determining these components and amounts.
- Regardless of the funding method chosen, the reserve funds are assessed and collected based on estimates. If the estimates change in regard to timing, scope or amount of the project costs it may be necessary to special assess, obtain a loan or postpone the project.
What is required from membership?
In order to move the existing funds collected from a straight line method into the pool, a vote of the membership is required. The membership must vote to pool the reserves each year the reserves are to be pooled which should be part of the annual budget process.
While voting for future Board Members it is important that you select candidates that have an understanding of how budgets work and how to prioritize reserve spending. A wrong Board vote under this method could wipe out a reserve account resulting in huge future assessments.