HOA CD plan for next few years?

[stephenson]

Hi All,

We own house in a very pleasant neighborhood that is well protected by a well funded HOA with good management.

The question: given the HOA has suitable assessment income, very stable expenditure levels, and great reserve funding levels (much of which won't be needed for 4-7 years), what would your approach be?

I have been advising for the past three years to keep the CDs in closer - 12-18 months or so, looking for the inflection point. Now, however, my sense is to continue to ladder, but to start pushing part of the funds out longer.

Thoughts?

 

[Sunset]

is this for you or for the HOA ?

If for the HOA, as there is not too much flexibility should they need extra cash suddenly, then I'd want to be in CDs (or treasuries) that could be cashed if absolutely needed with some penalty.

I've often used Ally.com (bank) for this.

 

[Luvtoride]

Stephenson,
I’m on the HOA board of our beachfront condo (2nd home). We have adequate reserve funds for deferred maintenance and our Reserve study replacements in the future. Although we know approximately when the major items will be replaced, we keep our CD ladder of these funds no longer than 18-24 months. I would recommend staying with this approach for your well run HOA.

 

[stephenson]

For HOA.

This is a very well-funded, perhaps over-funded HOA, that has been underspending a bit each year and has built up carryover of about 50% of assessments over the past few years. We're dealing with this, but just noting to show operating fund status.

The Reserve Fund is also significantly overfunded for the same reason (we haven't spent enough on those items called out in the Reserve Study) - nor has the Reserve Study been updated for six years - for perhaps the same reasons. This longer term Reserve Fund is the point of this thread.

I have been on several HOA boards, been the president of several including the one in question (not my current neighborhood, but one in which I retained the property to rent), and understand the concepts of good management. Had gapped more direct involvement as I monitored the activities over the last few years, but was asked my opinion on financial status - so, whittling down the issues - and CD laddering is the easiest to deal with first.

So, given the excess-to-needs funding levels and perhaps continuing over-funding of the Reserve Fund, would you focus on a reasonable longer term oriented CD ladder (expecting rates to continue to soften), or maintain nearer term?

 

[stephenson]

A bit more now back at computer vs pad ...

Operating fund big items includes mowing/trimming, irrigation, electricity and rent for the streetlights.

Our big ticket reserve items are a few private roads, wood/painted perimeter fencing on both sides of a mile long Greenbelt with a walking path, the asphalt walking path itself, a few private roads (about 10% of the neighborhood roads, gazebo building, two playgrounds, maybe a thousand feet concrete sidewalks, and some landscaping.

Here's the reserve numbers story which relates to my question about CD ladders - not an expensive neighborhood, but nice - RS completed by an experienced reserve study company in Florida. All single family homes in three size/types. Noting the expected reserves at the end of 2024 were expected (in 2018) to be $172K - assuming we followed their recommendations for reserve transfers - we did. We actually have three times that; predominately because of less than expected replacements, less than expected repaving, and Boards for several years who "wanted to save money," but, didn't have a plan regarding the "saved money."

So, without getting off-track on Boards and the various interactions - and, back to my question re the optimum CD ladder - optimum related to expected economic conditions vs simply the need to keep funds available, longer vs the more normal 18-24 months? Load up a bit more on 4-7 year if warranted based on the rates?

And, yeah, next actions might be (didn't want to get too distracted by these):
(precursor - obtaining an updated reserve study)
- balancing the assessments-to-operating account levels via assessment, or maybe just waiting for inflation to take its toll
- getting the Board to spend more on those items reasonably needing replacement
- reducing the amount of operating funds transferred to the Reserve Fund (knowing this is appropriate)
- using a portion of the carryover for reasonably early maintenance (painting, landscaping, etc)
- adjusting assessments based on new Reserve Study recommended transfers: it could be a hiatus of a couple of years, even?

 

[teej1985]

I don't see a reason to take the term risk when treasury money market funds are paying more and HYSA negligibly less.

 

[OldShooter]

I would start by looking at liability matching. When and how much are future expenses and what would it take to match these with income from investments? Not everything needs to be a ladder; individual bonds held to maturity work too.

The difficulty in doing this may help you in looking at current maturities and what changes might be desirable.

I would not lose a lot of sleep predicting interest rates. The real wild card here is probably future inflation and its effect on your future projected liabilities. In fact, for the farther out liabilities you might want to consider TIPS.

 

[Luvtoride]

If it’s helpful, attached is a copy of our recently amended Reserve Fund Investment Account Policy. This was unanimously adopted by our board. We are very comfortable with this. Our treasurer is a former Wall Street investment professional who regularly selects and works with our management company to implement our cash reserve investments .

 

[stephenson]

I guess th

I would start by looking at liability matching. When and how much are future expenses and what would it take to match these with income from investments? Not everything needs to be a ladder; individual bonds held to maturity work too.

The difficulty in doing this may help you in looking at current maturities and what changes might be desirable.

I would not lose a lot of sleep predicting interest rates. The real wild card here is probably future inflation and its effect on your future projected liabilities. In fact, for the farther out liabilities you might want to consider TIPS.

I like the concept of liability matching, but frankly that might require more attention than the average board for this neighborhood could provide - it does allow a lot of flexibility, especially since some of the big ticket items are things like roofs and roads!

 

[stephenson]

View attachment 53129
If it’s helpful, attached is a copy of our recently amended Reserve Fund Investment Account Policy. This was unanimously adopted by our board. We are very comfortable with this. Our treasurer is a former Wall Street investment professional who regularly selects and works with our management company to implement our cash reserve investments .

This is a well put together amendment - and leaves little opportunity for someone to screw it up!

BTW, our management company works with and through (accounting software and connections) with First Citizens which has a community association group. This was formerly CIT. They have been helpful, but I'm having some difficulty getting the Board - or even the Treasurer to set up meetings for discussion - yeah, I know, we're all volunteers!

 

[Koolau]

Keep in mind that most CDs have a penalty of the last 90 days' interest if you take the funds early. That's not a huge penalty if the need arises. So I'm suggesting a longer term IF the interest is significantly higher. YMMV