Reserve accounts

Why reserve money sits apart from operating money

Reserve funds pay for the big, infrequent items a reserve study plans for: a new roof, repaving, replacing a pool pump. Operating funds pay this month's landscaping and insurance bill. Keeping the two in separate accounts, rather than one blended pool, makes it easy to see at a glance whether the reserve is being spent down or quietly borrowed from to cover an operating shortfall. Your CC&Rs or bylaws may already require separate accounts. If they are silent on it, adopting the practice anyway is worth doing.

What FDIC coverage actually protects

FDIC insurance covers up to $250,000 per depositor, per bank, for each account ownership category, and your association counts as a single depositor. That means checking, savings, a money market deposit account, and CDs at the same bank are all added together toward that one ceiling, not given $250,000 each. Adding more board members as signers on the account does not raise this limit either.

"The standard maximum deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category."

Source: Your Insured Deposits, FDIC

If reserves are approaching $250,000 at one bank, ask about a deposit-placement service, which spreads the balance across a network of banks while the association keeps one relationship, or consider Treasury bills, which carry no FDIC-style ceiling because they are backed by the federal government instead. Also confirm which product is actually being held: a bank's money market deposit account is FDIC insured; a money market mutual fund is a security and is not, even though the two share a similar name.

Who can move money out of reserves

No source here sets a universal rule for how many signatures a reserve withdrawal needs. That is set by your governing documents, your bank's signature card, and sometimes state law. California requires the board to approve certain reserve or operating transfers in writing before the money moves, once the amount crosses a set dollar threshold under that state's Davis-Stirling Act. Check whether your own state or bylaws set a similar approval trigger.

"The lesser of ten thousand dollars ($10,000) or 5 percent of estimated income in the annual operating budget."

Source: California Civil Code section 5380, State of California

That is California's threshold for associations of 51 or more units; smaller California associations use a lower one. Whatever your state, the same principle from the rest of this Course applies: no single person, however trusted, should be able to move reserve funds alone. See Dual approvals.

Where reserve funds sit: safety before yield

A widely used framework for public-sector and association reserve investing ranks priorities in a fixed order: safety of principal first, then liquidity, meaning the ability to reach the money when a major component fails, and yield last. A high rate on an account that cannot be reached without penalty, or that risks the principal, is a bad trade if the roof needs replacing this year. Compare money market deposit accounts, CDs, and Treasury bills against that order, not against rate alone, before deciding where reserve balances sit. See Investment policies.