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Feldsott Lee Pagano & Canfield
Orange County Homeowners Association Law Firm

What To Do with That Big Pool of Money (aka Reserve Funds)

All associations have (hopefully) an adequately funded reserve. These funds are primarily used to pay capital improvements. Just like your 401(k) or any other savings fund, a common question becomes, what can we do with this big pool of money? We all know that a board of directors has a fiduciary duty to its membership and must therefore prudently protect the principal of a reserve fund, but the law does not provide an investment plan.

The law, Civil Code ยง5515(c), simply says this about what to do with your reserve fund:

"The board shall exercise prudent fiscal management in maintaining the integrity of the reserve account, and shall, if necessary, levy a special assessment to recover the full amount of expended funds within the limits required by this section. This special assessment is subject to the limitation imposed by Section 5605. The board may, at its discretion, extend the date the payment on the special assessment is due. Any extension shall not prevent the board from pursuing any legal remedy to enforce the collection of an unpaid special assessment." (Emphasis supplied.)

Admittedly, this is a law firm and not a money management firm. We are writing as lawyers and not financial managers. However, it is worth it to investigate the issue of "prudent fiscal management." Frequently, we see reserve accounts being held in money market accounts, certificates of deposit, or simply savings accounts. While these investment products definitely protect principal, are they necessarily prudent?

Inflation rates are roughly 2.3% (between 2013 and 2014; see inflation calculator). Savings accounts barely exceed .05%. With inflation growing the way it is, it would actually seem not to be prudent to keep your reserve fund there. You might as well stuff your reserve fund in your mattress.

Some board of directors wonder why they can't simply invest the money and try to make up the inflation in an alternative way. Although an association may invest money in equities or riskier investments, the question becomes whether it should invest the reserve account that way. A director's duty to the membership is to protect the reserve account so that the money is there when the association needs it. This duty outweighs the potential benefit that may be derived from any profits from riskier investments.

For the sheer practical purpose of diminishing liability from losing any of the reserve account money, we typically advise our clients to only put reserve funds investments guaranteed by the federal government (e.g., FDIC). A money manager could be helpful in identifying a product that has the highest rate of return that is also backed by the federal government. If your board of directors is working with a money manager, we recommend also seeking advice of counsel.

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