Last July I was speaking to a group of 200 board members on the importance of protecting and enhancing the value of the condos and homes in their associations. It’s the central responsibility of the board, but it didn’t take long for us to turn to the central question asked by most board members. Thirty five minutes into the conversation, a young lady asked, “I was just elected as the Treasurer of my Homeowners Association…I didn’t really want the position, but no one else was running. What is my liability?”
It’s a common question we have all heard or asked ourselves, and it is an important one. We are all concerned about the legal liability that we take on as board members, and perhaps more importantly, we want to do a good job; we want to be good stewards of the community that we are a part of.
I have come to recognize there are three central areas of focus when properly managing your non-profit corporation: (1) banking and investments, (2) taxes and accounting and (3) insurance.
Banking and Investments
When investing your association’s funds, the number one rule to remember is, it’s not your money! You are a fiduciary who is responsible for the funds of the association, and the individuals who make up the association. Your first priority is the safety of the funds. When considering an investment option, ask yourself, “will anyone thank you for getting an extra percent of interest?” Now ask yourself, “what would happen if you lost just one percent of the principal?”
It is also important to develop an investment policy. This policy should address the amount of money that will be kept in your checking account and what action should be taken if the account goes over or under the target balance. It should also address how your reserve funds should be invested. For example, all funds should be kept in FDIC insured CD’s with maturities less then one year. By having an established policy the board does not have to meet every time a CD comes due. The treasurer and manager already have direction from the policy that dictates the action to be taken with the funds. Many banks have products like CDARS (Certificate of Deposit Account Registry Service) or other CD placement programs that can insure all your funds are FDIC insured, thus eliminating the need to run all over town looking for another bank to place $100,000 CD.
I encourage associations to ladder their CDs to maximize interest income while at the same time maintaining a certain level of liquidity within the reserve funds. If you have $100,000 to invest, consider opening a 3, 6, 9 and 12 month CD each for $25,000. As they mature roll them into a 12 month CD. In nine months you will have four one year CD’s that mature every 90 days.
Associations that keep high balances in their checking accounts and spend more then $100,000 per month should consider a sweep account. In a sweep account the association can set a target threshold that is constantly meet by sweeping funds in and out of the checking account and investment account. These are often money market funds that are made up of short-term treasures and thus backed by the full faith of the federal government.
Taxes and Accounting
Associations typically only pay taxes on interest income and other non assessment related income such as income from vending machines, rent etc. Because interest is taxable, the association can deduct any financial advice that they may purchase. You may talk to your CPA about deducting some of your management fee if your manager assists with investment policies and decisions. There are many other deductions that can be found all the way up to becoming a tax free entity, similar to a city, which many large associations qualify for. It is also important to work with a CPA firm that understands the community association industry, one that is involved in CAI on both the local and national level.
As a board member you should review your association’s financial statement at minimum, once a quarter. With that being said, your financials are produced once a month, so take a moment each month to ensure their accuracy, and ALWAYS review your reconciliation. You should always be able connect the balance sheet to bank statements; this is a must. Do not be afraid to ask questions. Most management companies know board members want to understand their financial statements, and they want to help you do that. Finally, I am a strong believer in using modified accrual for financial reporting. Full accrual does not allow timely production of financial statements, but modified allows items such as utilities to be paid and reported when due while large one time expenditures such as insurance can be spread out over the year.
Insurance
Insurance is perhaps the most important components of the non-profit association, yet it is often entirely overlooked. When elected to a board your first question should be, “may I review the Directors & Officer Insurance (D & O)?” If your association does not have D & O Insurance resign today! No one should volunteer their time if it puts them in a position were they could be sued. Yes, there is protection from most lawsuits for volunteer boards, but that does not always stop someone from filing a suit, which will be expensive to defend against right or wrong.
When in comes to the fire and liability insurance of your association, be sure to review the limits. With the ever-increasing cost of construction, I have seen many under insured associations that have policies based on decade old reconstruction forecasts and costs. It goes without saying that the new premium will be more, but if you need to use the insurance, you will be glad you elected to pay the higher premium.
Remember you are a fiduciary. Do not risk safety to get a little more interest, review your financials on a regular basis and do not be penny wise and pound foolish when purchasing insurance.
