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May 25, 2005
Do Reserves Need to Be Fully Funded?
In some states, reserves must be 100% funded. In those states someone must believe that there is a fail-proof (or should I say fool-proof) system for identifying need in dollars for the next 30 years. In California, THERE IS NO LAW THAT SAYS RESERVES MUST BE 100% OR FULLY FUNDED. There, I said it. However, the flip side is that a Board has a fiduciary duty (and in case that one gets by you - it means a special duty related to protecting finances) to fund the (operations and) reserves accounts sufficiently to meet association needs. What does this gibberish mean? A board must do its best to estimate the needs of the association and avoid large special assessments that result from very poor planning. And it must do its best to collect the money from the members needed to pay the association's expenses including maintaining and replacing the infrastructure and major components. And it must do its best to avoid borrowing from the reserves unabashedly.
And last but not least, voluntary board members should use trained professionals to help determine what is money is needed to satisfy that duty. It is not something that can be determined easily. A reserve study with specific statutory requirements is required at least every 3 years. Borrowing from reserves also comes with specific legal requirements. And last, but not least (again), the "wise" board members who consult appropriate experts receive some statutory liability protection if things go awry.
Unanticipated expenses certainly arise that get in the way of even the best financial planning, but to find out more about what happens when a board pinches pennies too tightly, check out the Articles at http://www.californiacondoguru.com.
Posted by Beth Grimm at May 25, 2005 11:14 AM