The reserve fund of a homeowners association is often misunderstood by members and sometimes the HOA board as well. Some see it as a slush fund that is to be used on a "rainy day"' when the association gets low on cash in the operating account. Others, although they may understand the need to have some measure of reserve cash, do not make the connection that reserve funds are being reserved for the particular components within the community that the association is responsible for, such as roads, roofing, siding, fencing, painting, and equipment replacement.
These misconceptions can often be compounded by the well-intentioned but misguided attempts by some to keep HOA fees as low as possible. When someone runs for the Board on the platform that they're going to reduce fees to 1985 levels, the best advice is, "don't drink that Kool-Aid...run the other way!" That candidate is living in a dream world, equivalent to someone who thinks that next month they'll be able to drop the price of a gallon of gas to fifty cents and a loaf of bread to a quarter.
Board members simply do not have that level of control over the expenses of their association because most expenses will be driven by the marketplace. They may want the handyman that will work for $6 per hour and a cold beverage, but good luck in getting them.
Although they may be able to cut expenses by conserving costs such as PG&E, sewer, water, garbage, insurance, equipment or hourly contractor rates, building materials and more are typically not going down and certainly not to 1985 levels. What is the solution for these shortsighted, misguided members? They cut adding to the reserve fund and perhaps neglect other amenities. The result would create a mess that others would have to clean up.
Board members have a fiduciary duty to ensure their homeowners association has adequate reserve funds. If a person is not willing to do this, then they should refrain from running for the Board. Thinking they would be doing a service to the association by keeping the fees low at any cost, they would actually be costing their association dearly. This is the pathway to special assessments, borrowing, and unpleasant emergency conditions.
Because of the tendency of too many Boards to inadequately set aside reserve funds for their association, the State of California has continued to adopt laws that homeowners associations must follow in this regard.
A few of these include:
- The requirement to have an on-site reserve fund study completed every three years
- The need to have a plan to meet the future obligations of the association
- The requirement each year to disclose the sufficiency of the reserve funds to meet the obligations of the association over a subsequent thirty year period.
The state of California has chosen to take the failure of too many Boards seriously. You should as well.
Become a Board member or support one who will protect your ownership interest by being committed to adequately funding your homeowners association reserve funds. You will sleep much better at night!