Borrowing From Reserves: A Primer From California Law
California law permits a community association board to authorize temporary transfers of money from the reserve fund to the operating fund if the association has a short-term cash flow problem or other expenses it must meet.
Since July 2, 2005, California community associations have had special notice rules to follow. Unless the board complies with these notice rules, the board may not borrow funds from reserves. The special provisions are at Civil Code section 1365.5(c).
Proper “Borrowing” Notice
A “borrowing” notice consists of the following: At least four days before the meeting at which the board is going to make the decision to borrow, a meeting notice needs to be posted in the common area. The notice needs to include ordinary date, place and time information about the meeting, of course, but also notice that this particular decision will be on the agenda. The notice must also explain why the money needs to be borrowed, discuss options for repaying the reserves, and whether a special assessment might be considered.
“Borrowing from Reserves”
“Borrowing from reserves” means using money in the reserve fund for things other than what the reserve fund was set up for in the first place. A typical example is temporarily using reserve funds to pay a large insurance premium due early in a budget year.
Another form of “borrowing from reserves” arguably happens when scheduled transfers to the reserve fund that were planned for in the budget are not made. If assessments that were intended in the budget for reserves have not been moved into the reserve fund as the year-end approaches and the board plans to delay those transfers into the future, the board is required to give the members notice of that meeting and decision as well.
The board has one year from the time it decides to borrow money from reserves (or to delay making a scheduled transfer) to put that money into the reserve fund. The law permits the board to delay restoring the reserves for longer than one year, but only if the board believes a delay is in the association's best interest.
Proper “Delaying Restoration” Notice
The board is obligated to give notice for the meeting at which a decision is made to delay restoring reserve funds. Notice needs to be posted at least four days before the meeting, including information that the decision will be on the board's agenda, explaining the reasons for delaying the restoration of the funds, and what options could be considered in the future, including a possible special assessment.
Calendaring the initial decision and one year out is very important.
Written Findings in the Minutes
Decisions to borrow from reserves are important financial considerations that need to be adequately documented in the association's permanent records. Either decision – whether borrowing funds from reserves or determining that delaying restoration of the funds is in the association's best interest – must be adequately supported by the board's reasoning. Such “written findings” must be recorded in the board's meeting minutes and both protect the board and create a proper historical record for the association.
The law underscores the legislature's concern about money being too easily borrowed from reserves and not being restored, or never saved in the reserves as budgeted in the first place, leaving too little cash in the reserve fund when work needs to be done. The law permits borrowing but also strongly encourages promptly replacing that money through increased regular assessments or by special assessment, as part of the board's duty to prudently manage association finances.
Templates for notices relating to borrowed reserve funds are attached with this summary.