What is the Difference Between Operating Funds and a Reserve Account?
These dollars are used for day-to-day operations of the association. One category of operating expenses is contracted services – such as landscaping, property management, elevator and gate maintenance, and security services. Contracted services are one of the easiest areas for the board of directors to save the association money. Other operating expenses are insurance and taxes, as well as administrative costs such as postage, accounting and legal fees, and other office expenses. Regular maintenance and repairs of the common area systems (lighting, plumbing) and structure (roof leaks, carport repairs, etc.) also fall under the operating budget. Each year’s “actual” expenses will help to establish next year’s “proposed” budget.
These funds are kept in a separate bank account, and are only used for maintaining or replacing the community’s major components. The reserve funds generally have strict criteria around their use (see your community CC&R’s and By-Laws), as well as rules of accountability. Basically these funds are earmarked for the existing components that are listed in the reserve study however they can be used for any major component that the association owns. For example, an underground drainage line may not be listed but if it fails and needs replacement an association can use reserve dollars for that purpose.
The required reserve contribution each year is most often based upon a Reserve Study (which determines the estimated timeline and replacement cost for the common area’s systems and components). An annual Reserve Study takes a fresh look at all the new factors to be taken into account; for instance, making sure components that are prematurely reaching the end of their useful lifetime are budgeted for as needed. Sometimes a new component is added to the community, such as a tennis court or Jacuzzi. These projects cannot be funded through reserves however once they are constructed they can be maintained with reserves.