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October 27, 2006
Borrowing from Reserves - Not Contributing? What's the Difference?
Maybe this goes on in your association? It apparently happens alot, without too much worry.
Comment from reader: "Our Manager pays everything through the operating funds. We feel he must be borrowing from the reserves, but he says it is not borrowing - he just doesn't put the reserve money into the account because he needs the money for expenses. We've questioned the accountability of this, but again he sidesteps just says this is how it is done."
Is diverting reserve allocations from the reserves the same as borrowing from the reserves? It's understandable that some would distinguish the two simply because there are no funds removed from the accounts. However, the effect is the same. The action leaves the reserves funds short of what is budgeted, and that means short of the expectation of membes based on the annual budget projections.
And I would venture to say that this practice played a large part in the tightening up of the reserves law in California and lead to requirements to notify the members if the Board is considering borrowing from the reserves, before the decision is made.
Since the health of the reserves accounts is of utmost importance to the members, if action is taken by the Board that diverts funds or results in borrowing from the funds, the members should be made aware of this. As of this year, there is legislation that requires information be disclosed to owners on this kind of thing on an annual basis, including disclosure of loans when the payments are made from reserve allocations. Some of the disclosures are not effectively required until January 1, 2009. Still, the disclosure of events leading to a reserve shortage needs to be made in a more timely fashion if the diversion of reserve funds can be equated to borrowing or taking money out of the reserves for a purpose that is not related to budgeted reserve expenditures.
Posted by Beth Grimm at October 27, 2006 9:10 PM