Can we Choose to Under-Reserve?

Boards are free to choose how to fund Reserves. Typically Governing Documents require the Board to collect “adequate” or “sufficient” Reserves to care for the association’s common areas. And I like that characterization… because Reserve contributions are not for a future expense, they are to offset the ongoing deterioration at the association. When appropriate Reserves are collected on an ongoing basis, the funds will exist, at some future time when needed, to execute the repair or replacement project.

But back to the question: Can a Board Choose to Under-Reserve? Yes. It is their association, they can set the budget as they see fit. But just because they can, doesn’t mean it is a correct, or safe, choice.

Typically a Reserve Study will clearly articulate the Reserve contributions necessary to offset the ongoing deterioration and “set the association up for success”, preparing them to have enough cash for upcoming expenses without reliance on future special assessments. Armed with this knowledge, if a Board chooses to fund the Reserves to a lower amount, they run the risk of putting the association on a course towards deferred maintenance and special assessments. Ongoing deterioration is occurring. That “bill” is as real as any other cost facing the Board. If that “bill” is not being offset with appropriately sized Reserve contributions, that “bill” will eventually be paid by future owners in the form of a special assessment.

This last week we presented a webinar on D&O Insurance and Reserve Studies, with guest expert Kevin Davis of Kevin Davis Insurance Services (the country’s largest provider of D&O Insurance coverage for community associations). If you missed it, you can watch the webinar by clicking here. Kevin clearly describes the financial decisions Boards make as wise, casual, or foolish. A Board can be sued for any of their decisions, but they significantly increase the risk of being sued if their decisions on financial issues are casual or foolish. In addition, defense of casual or foolish decisions are much more difficult and time-consuming than defending a wise decision. Finally, if a decision can be shown to be willfully in disregard for the association’s Governing Documents or State Law, those Boardmembers are at risk of not being defended by the association’s D&O insurance.

So Boardmembers seeking to run the association according to their Governing Documents and desiring to keep their personal liability to a minimum need to fund the association’s Reserves adequately. As I like to say, there is no “oops” in being a Boardmember. Running the association responsibly is the job of a Boardmember. As a Boardmember you are playing with other people’s homes and their money. They will be upset if you run the financial ship of the association into the rocks.

So don’t be foolish. Don’t under-Reserve.

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3 Responses to Can we Choose to Under-Reserve?

  1. Very interesting subject, thanks for posting.

  2. MTR says:

    Thanks for the post. Just a quick point to add since you offer reserve study services in Florida. In Florida, at least with respect to a Condo Association, the Board doesn’t have discretion to under-reserve. It requires a membership vote. It’s probably the better rule to curtail the Board’s discretion because as your article correctly points out it’s foolish to under-reserve.

    • Michael – good comment, but my thinking had more to do with under-Reserving (thinking the Reserve needs of the association could be met with less-than-necessary Reserve contributions) than lack of Reserve planning. Members regularly have less information about the subject than Boardmembers, so it is still up to the Boardmembers to Reserve appropriately. The financial needs of the association move forward each day, whether the Board or the members vote to acknowledge and respond to those needs.