By Mike Whelan
Vice-Chair for Investments
As published in The View, February 2023:
Question of the month: In what Association accounts is cash held and for what purpose?
In discussions regarding the Association’s cash holdings at the most recent Finance Advisory Committee (FAC) meeting, it became apparent that an explanation regarding cash accounts might be helpful for the community’s understanding. Much of the confusion stems from the Statement of Cash in the general manager’s report. As I will explain, much of this cash is dedicated to specific expenses and is therefore not a summary of excess amounts or “found money.”
There are three separate accounts that hold cash. They are called (1) General Operations, (2) Replacement Fund, and (3) Capital Improvement. This third account is now formally dedicated to known and potential expenses of the North Channel Flood Control Project (NCFCP).
The Operating account receives and disburses approximately $900,000 each month. There are basically two commercial bank accounts that are both FDIC insured and covered by a Private Deposit Bond maintained by DRM for amounts in excess of FDIC limits. Some have looked at balances in these accounts (averaging approximately $3 million) and considered this to be “surplus” cash. But some of this cash does not belong to the Association. Some examples are expenses we have incurred but not yet paid, assessments paid in advance, club funds we hold, and cash held by Troon in their operating account. These items are shown as current liabilities on our balance sheet and average between $1 and $1.5 million.
The FAC calls this difference between cash and current liabilities “net working capital.” It is available for unbudgeted expenses, expenses that exceed budget, or other unplanned but necessary operating expenses. HOA consultants and accountants recommend that a conservative but reasonable amount of “working capital,” which should be held by the Association, is 1.5 to 3 months of operating expenses. Our operating budget assumes about $900,000 of expenses each month, so adequate net working capital would be between $1.350 million and $2.7 million. At less than $2 million, our average net working capital is comfortably in the middle of the recommended range.
The Replacement Fund is dedicated to worn out or damaged common area property. It is currently valued at about $14 million. Each item of community property is evaluated based on assumptions of useful life, cost, and inflation. In addition, we assume a net investment earnings rate. As a result of the Replacement Fund’s activities, there is always some cash (between $1 and $2 million at any given point in time) in the fund but, because this cash is dedicated to replacement, it is not available for any other purpose.
Finally, the Capital Improvement Fund account holds only cash. It was created by a Finance Advisory Committee recommendation and the acceptance by the Board and funded with $1.5 million of excess working capital previously held by the Association. In addition, $3,450 ($1 per household) is dedicated to this fund each month from the residents’ assessment payments. Approximately $354,000 of flood control project expenses have been paid by this fund, leaving a current balance of about $ 1.3 million. As the flood control project continues, we expect to incur significant additional expenses.
I hope this explanation lets you know that the Association does hold cash, but it is held and specifically dedicated to the needs of this community. In the future, when someone asks, “What about all that surplus cash the Association holds?” you will be able to tell them that there is no “excess cash.” It is all cash dedicated to a purpose and not to be used except for the specified dedications indicated in this article. The FAC monitors these accounts monthly to assure you, the resident, that the Association and the Board are in compliance with their use of all dedicated funds.
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