Overfunding HOA reserves isn’t a problem faced by many homeowners associations in San Diego, but it’s still an important issue to pay attention to. The reserve fund is meant to maintain all the common area components of the community that are expected, but are not normal operating expenses.
As a simple example, here’s how the reserve funds usually work.
If the association expects to replace the community’s roof in 10 years, they would plan on putting one-tenth of the estimated cost in the reserve fund each year until it’s time to replace the roof.
However, if 10 years pass and the roof is still in good shape, that money might just sit in the reserve fund. If the HOA board doesn’t adjust how they’re allocating member dues, the reserves would eventually get overfunded. This can also happen if the HOA wins a large settlement in a lawsuit — if the money they receive isn’t required to be spent on something specific, it will likely go to the reserve fund.
So why is it a big deal to have too much money set aside?
Homeowners Associations are technically not-for-profit organizations, so having too much cash on hand could lead to consequences with the IRS. It’s possible that homeowners could seek lower dues or refunds or demand a capital improvement project if they feel their money isn’t being spent appropriately.
The best way to determine if a reserve is overfunded (or underfunded) is to look at the reserve study. This is completed (or at least updated) yearly and includes a comprehensive analysis of the community’s components and its reserve funds. By evaluating the physical state of the community, an independent reserve analyst can anticipate potential repair and replacement projects and estimate the cost of those projects. Then, the analyst looks at the HOA’s current budget, funding and operating costs to determine the health of the reserve fund.
The reserve analyst can be the best resource when it comes to figuring out if reserves are overfunded and what to do about it. He or she may recommend adjusting the budget or completing a capital improvement project to spend some of the money in reserve. A HOA board may also want to consult with an attorney who has experience working with HOAs for recommendations.