As the year comes to a close, homeowner associations (HOAs) and condominium associations (COAs) face the important task of reviewing their financial standing and making decisions that will impact their budgets and long-term financial health. One key area that requires careful attention is the management of the association’s reserve account. With interest rates currently ranging between 4.0% and 4.25%, associations have a valuable opportunity to maximize their returns on excess cash. Here are several tips to help your HOA or COA make end-of-year accounting a breeze.
Review Your Reserve Fund Status
Before making any decisions about transferring funds or investing in certificates of deposit (CDs), it’s important to review the status of your reserve fund. Reserve funds are crucial for covering future large-scale maintenance or repairs of the community’s common areas, such as roofs, pools, roads, and landscaping. An association should have enough money set aside in its reserves to meet these future needs without having to levy special assessments or take on debt.
Take the time to assess the following:
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Reserve Fund Adequacy: Does your reserve fund have enough to cover anticipated repairs or replacements in the upcoming years? If your reserve study indicates a shortfall, consider allocating additional funds to ensure that future projects are covered.
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Budget Surplus: Has the association generated a budget surplus throughout the year due to savings in operating expenses? This surplus may provide an opportunity to increase the reserve fund balance.
Consider Transferring Excess Cash to the Reserve Fund
The end of the year is an ideal time to consider transferring excess funds to the reserve account. The Budget Comparison Report is available to all board members via the Eclipse Owner Portal. It will show the Net Operating Income, which is the association’s income less expenses:
If this amount is positive, the association will be adding to the operating bank account balance by the end of the year. The board may consider transferring some or all of this amount to the reserve fund as an additional reserve contribution. Doing so will help ensure that your reserve fund is adequately funded for future maintenance and emergencies.
When determining how much cash to transfer, consider the following:
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Reserve Study Recommendations: Reserve studies typically include a schedule of recommended funding levels. If your current reserves are below the recommended levels, transferring additional funds will help ensure you can meet future obligations.
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Financial Health: It’s essential to balance contributions to the reserve fund with the overall financial health of the community. While it’s crucial to ensure sufficient reserves for future projects, your association should also have enough cash flow to cover ongoing operational expenses.
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Impact on Dues: If you find that your reserve fund is underfunded, an additional transfer might reduce the likelihood of future special assessments or dues increases.
Investing in Certificates of Deposit (CDs)
With interest rates at 4.0% to 4.25%, associations now have an opportunity to make their reserve funds work harder. One viable option is investing in a certificate of deposit (CD), a safe and low-risk financial instrument that offers fixed interest rates. CDs are an excellent way to earn a predictable return on your association’s reserve funds while maintaining safety and ensuring preservation of assets.
Here are some benefits of investing in CDs:
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Higher Returns Than Traditional Savings Accounts: Traditional savings accounts offer lower interest rates in comparison to CDs. With current rates ranging between 4.0% and 4.25%, your association can earn a higher return by moving cash into a CD, which could add a significant amount to your reserves over time.
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Low-Risk Investment: CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per institution. This makes them a safe option for HOAs and COAs looking to preserve their funds while earning interest.
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Short-Term or Long-Term Flexibility: Depending on your association’s needs, you can select CDs with various maturity periods. For example, if you anticipate needing access to the funds within the next 12 months, you can choose a short-term CD.
However, there are a few important factors to consider when investing in CDs:
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Liquidity: The biggest trade-off when investing in CDs is the lack of immediate access to the funds. Once a CD is purchased, the association cannot withdraw money without penalties before the maturity date. If your association may need to access funds quickly, it might be better to keep some cash in more liquid accounts.
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Laddering Strategy: If your association has a large amount of funds to invest, consider using a strategy called “laddering.” This involves purchasing multiple CDs with varying maturity dates, ensuring that a portion of your funds becomes available at regular intervals. Laddering helps improve liquidity while still earning competitive returns.
Our partner banks, First Citizens Bank and Alliance Association Bank offer accounts through the Certificate of Deposit Account Registry Service, or “CDARS” for short. CDARS is a program that allows investors to earn interest while protecting their investments with FDIC insurance: CDARS provides access to FDIC insurance for deposits over $250,000, which is the standard amount insured by a single bank. Associations can make a single deposit and have their funds automatically distributed to multiple financial institutions at the most competitive rates available on the market, while still receiving a single consolidated statement. Current CDARS rates are as follows:
Plan for the Future with a Reserve Study
A reserve study is a comprehensive financial analysis that evaluates the condition of the association’s assets and estimates the costs of future repairs and replacements. This study should be updated regularly and serve as a key tool in your financial planning. By understanding the costs associated with long-term maintenance and capital projects, your HOA or COA can better allocate resources and avoid surprises down the road.
Consider scheduling a reserve study update at the end of the year to align your financial strategy with the needs of the community.
Conclusion
Year-end accounting is an essential time for HOAs and COAs to review their finances and make strategic decisions that will benefit the community in the long term. By carefully assessing your reserve fund, considering transferring excess cash to the reserve account, and exploring the benefits of investing in CDs, your association can ensure that it is financially secure and well-prepared for future projects.
With interest rates offering favorable returns on safe investments, now is the perfect time to make your reserve funds work harder, creating a stronger financial foundation for the year ahead. Interested in learning more? Feel free to contact us and a member of the Eclipse Community Management team will be happy to review your association’s financial situation and offer recommendations to make the most of your cash on hand.
