Because of the new FHA and Fannie Mae guidelines, our board wants to set up a fund for insurance deductibles. We have a disagreement, some want to put it in the budget and others in reserves. Where should the money go?
Insurance deductibles don't fit comfortably into either category.
Insurance deductibles do not fit into operations because they're not an annual expense. The payout of a deductible depends on the filing of insurance claims and associations can go for years without a claim. I don't like putting it in the budget because it means the deductible must be fully funded in the 12-month budget cycle, which may put a strain on some budgets. It also creates a surplus at the end of the year, assuming no claims are made. Nonprofit corporations are supposed to break even, not run planned surpluses.
Because deductible payouts are periodic, they seem to fit into reserves. However, they don't meet the definition of a reserve component. Their life-cycle is not predictable and may not involve repair or replacement of a major common area component. Even so, the reserve fund appears to be the better place for insurance deductibles--it allows funding over 2 or 3 years and avoids annual budget surpluses.
The best way to handle the issue is to create a separate fund, but keep the monies in the same account as the reserves. Associations can a line item in their budgets for "Insurance Deductible Fund" and contribute to the fund over 2 or 3 years. If the insurance deductible is $10,000, boards could budget a modest $278 per month to the fund. At the end of three years, the insurance deductible would be fully funded. At that point, the contribution could be discontinued until an insurance claim is made, at which point the deductible would be replenished with new contributions.
In the alternative, the contribution could be permanent so as to avoid ups and downs in the budget. At the end of the three years, and thereafter, any excess funds in the deductible fund could flow into the reserves. This provides for a smoother budget and has the added benefit of building the reserves.
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