Association Funds – Operating vs Reserve

Since most associations are on a calendar fiscal year, your Board of Directors and Management have been working hard on setting the 2016 Operating Budget. This budget sets your “dues” – so we thought it would be a timely opportunity to explain the difference between the “operating budget” and funds vs the “replacement reserve” schedule and funds. Operating Budget – Each association varies, of course, but an overwhelming majority treat “operating” and “reserve” (or “capital”) funds differently. Your association works within an operating budget to pay for your necessities and recognized amenities. These items are set by your Governing Documents. Common examples include lawn care, landscaping, snow removal, insurance, management services, repairs and maintenance, association covered utilities, amenity costs for pools or other recreation, etc. These are the costs to run your association on a day-to-day basis. This budget makes up your monthly assessments – commonly called “dues.” Little known fact – for most associations, did you know that your monthly “dues” payment is technically called an annual assessment? The common practice is to break it up into 12 equal monthly installments and call them “dues.” For most associations, the adopted operating budget and your share of those expenses (be it by ownership percentage in a condo or your equally divided share of the planned community) is legally recognized as a yearly assessment. Reserve Fund – The association’s “reserve” or “capital” fund is the savings account to pay for large replacement projects such as re-roofing, re-siding, concrete, and asphalt replacement, etc. Most associations work off of a professionally developed “Reserve Study” that lays out the plan for which components should be replaced which year, and a funding plan to pay for those replacements. Now that you know the difference between the two funds – how do they work together? The reserve fund is “contributed” to via an expense listed in the operating budget. If the Reserve Study says in 2016 the association should contribute $120,000 to the Reserve Fund, typically each month the association will take $10,000 generated from your dues revenue and deposit it into the Reserve Fund account. This is a set line item in the budget. It’s a lot like a savings and checking account. You deposit your paycheck into your checking account which you use to pay your regular bills. It’s your “operating account.” You might also plan an amount each month you send to your savings or retirement account to pay for those big expenses down the road. It’s your “reserve account.” Hopefully this helps to explain two very different funds your association is working with!