QUESTION: Can a board use reserve funds designated for a particular line item in the reserve study for another reserve item if it needs attention immediately? If so, do funds have to be paid back?
RESPONSE: The reserve fund is a pool of money and funds can shift between line items in a reserve account as-needed to meet reserve funding needs. It is normal to make adjustments from year to year to reallocate funds to cover items that fail prematurely or cost less than was anticipated.
Reallocations. For example, if a boiler fails in year eight instead of year ten as projected by the reserve study, funds can be shifted from other line items to cover the unexpected early expense. Or, if a pool heater replacement ends up costing half the projected cost, the left-over funds can be assigned to other reserve line items. Such reallocations are not unusual.
Unexpected Expenses. There are three primary reasons why an association may be in a situation to overspend from reserves:
- the repair/replacement expense is higher than expected,
- the expense is earlier than expected, or
- the expense was not anticipate and no reserve funds were set aside for the expense.
When that occurs, the reserve study is updated and, if necessary, allocations to reserves are increased to cover the shortfall.
Significant Unexpected Expense. If the unexpected expense is significant, the board may need to impose emergency special assessments. For example, The plumbing system is expected to last 50 years and no funds are set aside because the development is only 15 years old. The entire system begins to fail in year fifteen due to latent construction defects and the system requires repairs that will cost $1 million--the entire amount currently in the reserve account.
Recommendation: When this occurs, boards should work with legal counsel, management and their reserve specialist to determine how best to address the issue. Rather than depleting the reserve account, any unexpected and unreserved major expense is better addressed through an emergency special assessment. Or, in the alternative, "borrowing" from the reserves and using a combination of regular and special assessments to accelerate repayment of the funds.
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