The board shall exercise prudent fiscal management in maintaining the integrity of the reserve account. (Civ. Code §5515)
Investment Strategy. Prudent investments of reserve monies should focus on the following parameters in their order of importance:
1. Safety. A board's primary goal should be the preservation of the association's reserves against loss. Sometimes an association's governing documents may limit investment opportunities by requiring that funds be kept in FDIC insured accounts. Following is a hierarchy of risk to the principal:
2. Liquidity. Liquidity refers to the ability to quickly convert investments into cash. If reserves are tied up on long-term investments, they will not be available in the event the association needs to (i) use funds for emergency repairs, (ii) borrow for short-term operating expenses or (iii) repair or replace large common area components that reach the end of their useful life earlier than expected. Accordingly, investing all of an association's reserves into a jumbo 3-year CD would not be prudent. A more prudent strategy is to invest in smaller CDs and stagger them to mature every six months.
3. Yield. Yield is the return received on an investment. Boards should seek a reasonable return on the association's reserve accounts but should never adopt a strategy that emphasizes return over preservation of capital (as occurred with Orange County in the 1990s and resulted in bankruptcy when the investments collapsed). Bank savings accounts may be too conservative due to their low rates of return. Using non-interest bearing accounts is viewed by some as mismanagement because the funds are not earning any income at all. The most common form of investment used by homeowner associations is the certificate of deposit.
Out of State Banks. Unless an association's governing documents restrict deposits to California institutions, the monies may be kept in out of state institutions.
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