By Robert O. Jester
Chair, Finance Advisory Committee
As published in The View, January 2024:
Question of the Month: Why do we have separate accounts holding Association funds, and are those accounts dedicated?
As we enter the Board election cycle again, we always hear from a “vocal minority,” whose allegations about the financial health of our Association many times are not true. I hope to give you some basis for testing these unsupported allegations during this election period.
The Association operates in compliance with the California Davis-Stirling Act that controls how an HOA is to handle its financial and governance affairs. As required, this Association, confirmed by its annual outside audit, has three distinct accounts to hold Association funds. They are the Operating Fund, the Major Repairs and Replacement Fund, and the North Channel Flood Control Project Capital Improvement Fund. Each fund is accounted for separately each month and reviewed for accuracy by the Finance Advisory Committee (FAC).
The first question that you might have is, “Why do we have three separate funds?” The answer is easy since each fund has a dedicated purpose. I will briefly examine each for you.
The Operating Fund: The audit defines this account as the fund to be used for general operations, the chartered clubs, and for property and equipment maintenance needs that are not a part of the Reserve Study. This fund is the primary focus of our yearly budget as each department determines its needs for the coming year. This fund also has an impact on our monthly assessments, so the FAC always carefully analyzes it.
The last two years have seen significant inflationary factors that must be carefully considered to ensure that we have sufficient “operating cash available.” In this valley, electric and gas rates have doubled in the last five years, our property insurance premiums have significantly increased, road resurfacing costs have skyrocketed, and average wages have increased 15% from 2022–2024. The local labor market remains extremely tight with new housing complexes like Disney Cotino being built.
We need always to have sound financial planning. Our “operating cash available” in this fund is always to be a minimum of 2 to 3 times our monthly average expenses. We find this minimum standard in the “Green Book” that provides HOA’s accounting guidance consistent with the Davis-Stirling Act. I mention this because this is that “excess cash” that we so often hear about from the “vocal minority.” Well, fellow residents, there is a sound, required, and necessary financial reason that the “operating cash available” exists, and it is not to be spent unless an operating expense necessity requires it.
Major Repairs and Replacements Fund: This is commonly known as our Reserve/Replacement funds that by law are reviewed every year by qualified experts to assure the Association that we are properly funding for the replacement of 834 components. We will probably never be 100% funded for these items that have a useful life of 30 years or less, but we try to maintain a “percent funded” of 70% going into the new budget year.
Our funding this year will not reach the goal of at or near 70% until year ten in the reserve study, and the FAC will be very watchful that this funding metric is monitored in the 2025 budget season. This has been another “vocal minority” subject, as it is suggested we are not constantly examining the 834 components to determine replacement cost and useful life. This is not correct. The Vice Chair of the FAC for the Replacement Fund works diligently with the Maintenance Department Director and the Troon General Manager to review and evaluate each of those 834 components, and they will continue this practice annually.
North Channel Flood Control Project Capital Improvement Fund: This is the dedicated fund to cover the construction of an access road to the flood channel in our Association, and to reinforce or rebuild the Jefferson Street Bridge into our Association. This fund was dedicated by a Finance Advisory Committee (FAC) Motion to the Board on December 16, 2022, and reflects the hope that the funds preserved in this dedicated fund can cover the anticipated costs for all the areas that are the financial burden of this Association for this project. If it is not adequate, we run the real risk of a special assessment on all property owners.
The auditor designated this account in the 2022 audit as a specific separate fund, and the FAC will do everything possible to ensure it is maintained for its “dedicated” purpose. The FAC acknowledges that the Board has the ultimate control over Association funds, if those funds are not restricted by the Davis-Stirling Act, but a financially responsible Association Board will always try to honor dedicated funds unless there is some extreme and sudden need of the Association caused by disaster or other unexpected financial event. Conclusion: Remember that the FAC reports to the Board monthly in an open meeting where you may ask questions and test the statements of the “vocal minority.” In addition, you may submit questions through the Association website. The FAC is here to help keep you informed financially and to act as this Association’s financial “Watchdog.”
Contact the author at finance@scshca.com.