How Do We Tell If It Is an Operating or Reserve Expense?

Deciding whether an expense should be paid out of operating or reserve monies is a common dilemma. Like many issues within associations, there is no “one answer fits all”. Here are three questions to ask to start the process of determining the answer to this question.

1. Is it an ongoing or annual type of expense?
   Generally, an expense is considered to be an operating fund expense if it occurs at least annually. This would include such obvious items as utilities, management fees, landscape contracts and insurance.
2. Is it a minor dollar amount, generally less than approximately $1,000?
   (The $1,000 could be higher for very large associations) The operating fund usually pays for those minor dollar amount expenses even when they may be reserve in nature. Examples would include sprinkler heads or pool filters.
3. Does the item appear in the operating fund budget or in the reserve study?
   This is the most important factor – where was the expense budgeted? Was it included in the short term operating budget or the long-term replacement fund budget? The Board needs to be aware of the type of expense. For example, there is an expense for roof repair. Is it operating or reserves? There is a roof line item in the reserve study. The Board needs to be aware of what was intended by inclusion in the study. Usually, the reserve fund is meant to cover those expenditures which either replace a common area component or extends the life of that component. Thus, minor roof repairs are usually operating expenses while major repairs which extend the life of the roof or delay replacement of the roof may be reserve expenses.

The Board does have quite a bit of discretion with regards to the expenditure of Association monies. This is especially true with regards to operating funds. It may be the Board’s decision to spend operating monies rather than reserve monies due to the financial position of the Association. Using reserve monies is more restrictive. For this reason, we recommend that all reserve expenditures be documented in the Board meeting minutes.
Judgment is necessary when determining whether some expenses are operating or reserve in nature. Using the above guidelines should assist in the decision making process. Ultimately, the Board of Directors is responsible for the final determination. Hopefully, the Board will look to the Association’s professional advisors – the manager, the reserve study preparer, the accountant and/or the attorney – in significant decisions where there is no clear-cut answer.