Borrowing from reserves
Moving money out of the reserve fund is not automatically against the law, but it is not free either.
Yes, a board can move money out of reserves to cover a short-term cash shortfall, but it is not automatic. Where this is expressly allowed, such as California, the board must give notice explaining why the transfer is needed and how it will be repaid, then restore the funds within one year unless it documents a reason to wait.
Borrowing from reserves is allowed, not illegal
Many boards assume that touching the reserve fund for anything other than a reserve project breaks the law. That is not true everywhere. California's Civil Code lets a board authorize a temporary transfer from reserves to the general operating fund specifically to cover a short-term cashflow need.
"Authorize the temporary transfer of moneys from a reserve fund to the association's general operating fund to meet short-term cashflow requirements."
Source: California Civil Code Section 5515, California Legislature
Whether your state permits the same move, and under what conditions, depends on your own statute and governing documents.
The notice the board must give first
The board cannot move the money quietly. Under California's rule, the board must give notice at a board meeting that covers three things:
- The reason the transfer is needed
- Some of the options for repaying it
- Whether a special assessment might be considered
Skipping that notice is what turns a routine cashflow decision into a fiduciary problem.
Getting the money back: the one-year clock
Once the transfer happens, the association is on a deadline.
"Shall be restored to the reserve fund within one year."
Source: California Civil Code Section 5515, California Legislature
There is one way around that deadline: the board gives the same kind of notice again and documents a specific finding that a delay is in the association's best interest. A board that moves money out of reserves and simply forgets about it has not used an exception, it has missed a deadline.
Why documentation is what protects the board
A transfer like this sits inside the board's fiduciary duty of care. Directors who act in good faith, stay informed, and can show they reasonably believed a decision served the association are generally protected by the business judgment rule.
That protection depends on state law and the specific facts, so document the reasoning behind any reserve transfer the same way you would document any other major financial decision.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
Your board needs to move $15,000 out of reserves to cover an emergency roof leak repair before the annual assessment comes in. Under California's rule, what must happen first?
Sixteen months after a board transferred funds out of reserves, the money still has not been repaid and the board gave no further notice. What does California's rule say happened?
A fellow board member insists reserves can never legally be touched for anything but a reserve project. What is the accurate response?
Sources
- California Civil Code Section 5515, California Legislature
- Fiduciary Duties 101, Limiting the Liability of the Board, communityassociations.law
Reserves
If your association is already short on reserves, see what happens when reserves stay underfunded.
Whether a board may transfer money out of reserves, what notice is required, and how long repayment can wait vary by state and by your own governing documents. California's specific notice and one-year repayment rule may not apply where you live.