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| OHCC LIVING | MARCH 2020 | 5 OHCC HOA Reserve Funds By Greg Kusiak, MBA, Treasurer, gregory_kusiak@msn.com OHCC has just completed its annual budget cycle with the adoption of the budget for fiscal year April 1, 2020 through March 31, 2021. Questions and comments from homeowners during that process indicated a need for a better understanding of how we use our reserves and how we assess their need. The purpose of reserves as defined in the law is to repair, replace, restore, or maintain the major common area components. (Civ. Code Sections 5510(b) and 5565(b) (1).) Reserves do two important things for our HOA. First, they assure that we have the resources to properly maintain our diverse and wonderful facilities. Second, they avoid both special assessments and annual assessments ("dues") going up and down like a roller coaster. Operating expenses will vary a small amount from year to year, and the money collected from homeowners for these expenses is used very shortly after it is received. Reserves, on the other hand, are money taken from homeowners now for use in the future. They are based on estimates of when it will be needed and how much and are held in separate accounts in the meantime. Because of their special importance, they are regulated by law (the Davis-Stirling Act), including: • a requirement for an independent reserve analysis (Civ. Code §5550) • restrictions on what the funds may be used for (Civ. Code Section 5510(b)) • a requirement for two signatures on checks (Civ. Code Section 5510(a).) The Board has a fiduciary duty to act in behalf of the HOA to maintain the facilities in good repair both under California statute and OHCC CC&Rs. The Board's allocation of reserves is a part of the annual budget, and the expenditure of those funds to maintain the listed items is entirely at its discretion. We contract with a professional reserve analysis firm to do this work annually. They look at every single item or group of items worth $1,000 or more and with a life expectancy of 30 years or less. They determine when it is likely to need major maintenance, repair or replacement and estimate the costs involved. They forecast those collective costs for the next 30 years, including inflation and recommend how much needs to be set aside today to meet those forecast expenditures. Progress toward those goals is calculated as a "% funded" value. (The 2020-2021 budget and the reserve study are available on the OHCC website.) For example, if a refurbishment requires an expenditure of $100,000 five years from now, and we are placing 1/5 of that amount in the reserves each year ($20,000) such that we will have all of the required amount when the time comes, it is considered 100% funded. As of the end of January, our reserves were funded at 64%, which I consider to be a very healthy amount for our HOA. Even with the upcoming expenses of the Clubhouse and the golf course renovations and the lanai replacement, our reserve analyst forecasts our reserve balance will always remain above $3 million. Over the upcoming ten years of the 30-year analysis, they would grow to over $7½ million. Properly managed budgets and reserve contributions do not require spikes in dues during years with higher reserve expenditures. The Board did not need to increase dues this year because OHCC has planned properly knowing this day would come. Unlike the definition which would apply outside a common interest development, capital expenditures for an HOA are either a significant new amenity or a substantial discretionary improvement to an existing amenity. Funds set aside for capital improvements are kept in a separate account and treated much the same as reserve funds. Under both California statutes and OHCC CC&R's, projects using these funds require Member approval if their costs exceed 5% of the current annual operating budget. Based on the budget just adopted for next year, that threshold is just over $335,000.

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