What Is a Reasonable Amount to Keep in the Operating Fund for Contingencies?

As far as what is “reasonable”, that is a question that would depend on the specifics of each association. If it is an older condominium project or a high rise development with lots of amenities the Association may need more accumulated funds than a small planned unit development with minimal common areas. On the other hand, an Association with a wealthier owner base may require less in the operating fund as the unit owners could more easily pay a special assessment, if needed.

CAI issued some standards and we have developed some guidelines based on 25+ years of experience. Both are very similar. These guidelines are as follows:

Guidelines for Accumulated Operating Funds for Contingencies
CAI – (as stated in the M-206 Financial Management Course)

Minimum - 2 – 5 % of annual gross assessments
Very Good - 10-15% of annual gross assessments

Our Firm
Minimum – 1 month’s operating expenses
Recommended - 1- 3 month’s operating expenses
Maximum - 4 - 6 month’s operating expenses

For the above guidelines, the Operating Fund (sometimes referred to as Retained Earnings) balance should be used. This balance should be computed on an accrual basis in compliance with generally accepted accounting principles. This ensures that all adjustments have been made for receivables from unit owners, allowances for potential bad debts, accruals of expenses and other adjustments that may be necessary. Thus, the year-end audited financial statement is the best resource to use in this analysis.

For those associations which do not have at least ½ to 1 month of operating expenses in the operating fund balance; this should be a goal at budget time. Without this “cushion”, the Association may find itself in the undesirable position of having to have a special assessment, to borrow from reserves and/or delay work on a project.

It is our opinion that funds in excess of six months of operating expenses should be justified; that is, the Board should document their reasoning for the need of these excess monies. Otherwise, the excess funds possibly should be transferred to the replacement fund. This decision, however, should be made after discussing the Association’s unique financial position with the Board, the manager, the accountant and the reserve professional. In certain circumstances, the Association may want to get legal advice, also.