Diverting Reserve Contributions
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DIVERTING RESERVE CONTRIBUTIONS

Unexpected Expenses. Once the board has adopted a funding plan, it should follow it as best it can. However, there may be instances when there are unexpected operational expenses, such as sudden, significant increases in insurance premiums. If that occurs, some boards opt to stop funding the reserves and use that money to cover operations. There are two views on whether this is appropriate.

Proper Notice Required. One view is that diverting reserve contributions to other uses is the same as borrowing from reserves. As such, before diverting the funds, the board must provide notice of its intent to transfer funds in a noticed meeting of the board. If the board authorizes the transfer, the board must issue a written finding, recorded in the board's minutes, explaining the reasons the transfer is needed and describing when and how the monies will be repaid to the reserve fund. (Civ. Code §5515(a).)

Board Discretion. The other view is that the law simply does not require associations to follow a reserve funding plan. A reserve funding plan is simply that – a “plan.” Similar to a line item on a budget, an association may end the year over or under, with appropriate justifications. The limitations on borrowing from reserves are not applicable until the funds are actually deposited into the association’s reserve account. However, because the members have a reasonable expectation that the board will follow the reserve funding plan, the board should be transparent about its decisions to divert reserve expenditures and its plan for maintaining healthy reserves.

Recommendation: Boards should have legal counsel review their governing documents and advise them how best to handle this issue in light of their own documents.

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

Adams Stirling PLC