April 2017
Condo directors may feel that all they do is put out fires rather than dealing with more important matters.
This can be the result of poor reserve fund planning.
Far too often, condo boards focus on the annual budget while placing too little effort toward ensuring their reserve fund remains fully funded.
Many of the fires condo boards address are preventable had the board taken time to formulate a longer term plan and better manage the funds entrusted to them.
The reserve fund study , while serving an important purpose, should not be used for budgeting. It is prepared by engineers based on engineering considerations. It may not reflect broader considerations of managing a condo corporation and budget.
Condo corporations should develop a reserve fund budget at the time they prepare the operations budget.
Lack of a reserve fund budget creates opportunities for fraud, mismanagement and theft.
The reserve fund is used for both planned and unplanned expenditures. Far too often, unplanned “non-reserve fund” expenditures are expensed from the reserve fund. This allows a board to claim they have presented a balanced budget without addressing the reserve fund. Without a reserve fund budget there are limited controls over the use of these funds. It becomes difficult for condo owners to identify misuse of reserve fund expenditures.
Unbudgeted reserve fund expenditures are funded through condo fees yet may not be reflected in a reserve fund study. They deplete the reserve fund which results in a lack of funds for planned expenditures. Refunding the reserve fund then requires an increase in condo fees, a special assessment or both.
Prudent condo boards are fully engaged when it comes time to prepare a reserve fund study. They ensure the reserve fund remains fully funded at all times. They prepare a reserve fund budget and adhere to it when approving expenditures from the reserve fund. When unplanned, or unbudgeted, expenditures occur prudent condo boards implement measures to replenish these funds.
