Posted by IKO Community Management on June 5, 2019 at 9:00 AM
Board members must understand that monthly fees go toward two financial accounts, an operating and reserve account. It’s improper for account-specific transactions to cross between funds. Check out a clear explanation from IKO Community Management:
An operating account is a financial fund that’s used to pay for the services that carry out everyday functions of a community. This includes (but is not limited to) the following services:
- Contracted services, including landscaping, general maintenance of common areas, security, and property management
- Insurance and taxes
- Utility expenses, including plumbing, heating, and cooling of common area buildings
- Office expenses, including postage and office supplies
- Accounting and legal fees
A reserve account is a savings fund that’s set aside by the association to meet future costs of upkeep and any unexpected costs that arise around the community. Unexpected costs include the following examples:
- Roof replacement on common area buildings
- New pump at the community pool
- New playground equipment at association's tot lot
- Painting of common area buildings, such as the community clubhouse
- Major landscaping projects
- Construction and major renovations, such as sidewalk removal or parking lot refurbishing
The board has a fiduciary and legal responsibility for the allocation and spending of HOA fees and financial separation between these two accounts. Here’s a list of basic benefits to putting more money toward a community operating account:
- An operating account provides proof of payment. Like a checking account, an operating account allows for direct deposit or payment via checks. This leaves a digital record (and a handwritten record, if a homeowner choose to send a hard copy) for homeowners or the homeowners association to access in case of emergency or legal trouble.
- The homeowners association can pay bills more easily. Most operating accounts, like personal checking accounts, come with free bill pay. This means that homeowners associations pay bills quicker, more conveniently, and with less hassle. It’s also better for the environment, because the board isn’t wasting paper checks every month.
- A digital account is safer. This is a benefit for both operating and reserve accounts. Storing any financial records or hard copy checks in a physical safe is risky in the event of a robbery, fire, or natural disaster.
According to NetCredit, an online financial services provider in Chicago, “Consumer bank accounts at federally insured institutions [which can include a homeowners or condominium association], are subject to protection thanks to the FDIC’s standard deposit insurance, which covers up to $250,000 per person, per bank, for each account ownership category.
Since the creation of the Federal Deposit Insurance Corporation (FDIC), consumers have enjoyed the security offered by FDIC insurance and the knowledge that their deposits are safe up to the FDIC coverage limit.”
- The HOA board is prepared, and the community is covered. An operating account allows the board to budget for and analyze expenses to prepare for the next fiscal year. When the board is prepared with an approved budget, the community continues to smoothly operate and its residents don’t expect a surprise increase in fees to cover regular maintenance.
It’s important to understand the difference between an operating and reserve account and why the former is beneficial to HOA financial management, resident happiness, and regularly scheduled community upkeep.
For more information about operating and reserve accounts for your association, download IKO’s Guide To Financial Management. This guide shows you how to properly manage HOA finances; develop a well-thought-out HOA budget; and integrate strong, long-lasting financial habits. Click on the button below to download:
Topics: HOA Board