Each year at this time Association Boards, Community Association Managers and Treasurers begin planning for the association’s financial needs for the coming year. Many of you will be preparing preliminary budgets during the month of September. In addition to projecting operating expenses, reviewing the reserve funding needs, and making sure there is enough cash available for any emergency, you should also be looking at the “revenue” side of the budget.
If your bank has a community association specialist on staff, this is the time to meet with your banker to discuss ways to get your money working for you.
As you all know, although the maintenance assessments are collected monthly or quarterly, either in four or twelve equal payments, your expenses are much heavier in some months than in others. If you are not carrying an operating cash surplus, it can create a real cash flow problem. Your banker may suggest a line of credit as a low cost way to meet cash flow needs, with the line being paid off as soon as you “catch up” on the revenue during the fiscal year. For example, many associations receive their large insurance bills during the last quarter, borrow from their line, and repay it with the money that comes in for the first maintenance assessment in January.
Other associations keep adequate operating cash reserves, but many do not pay enough attention to how much this money is earning. Your banker can suggest several alternatives to keep the funds available if a need arises, but earning higher interest rates than are typically offered in an association checking account.
Probably the most common practice is to move excess operating cash (cash not needed for the current month) to a Money Market Account. Although these accounts limit the number of checks that can be written in one month to six, this is usually an adequate number of withdrawals to move to operating checking in a month if the funds are needed in case of emergencies or large planned expenses.
In addition to Money Market Accounts your association may buy short term Certificates of Deposit (30 days) or less to earn more interest on excess operating cash. Although they offer less liquidity than a Money Market Account, they usually pay a bit more interest.
Earning more on Reserve Funds is the goal of every Treasurer. The second goal is the safety of the funds. This is the time to meet with your banker to discuss what types of banking products can best meet your goals for safety and high earnings. Many of our local banks offer the CDARS program. This program allows your bank to purchase CDs for your association in other banks that are members of the program. The CDARs network will place funds in banks, keeping deposits in any one bank under the $100,000 maximum FDIC insurance limit. Your association will receive one consolidated bank statement from your bank which will show you the Name of the Bank where your CD is held, maturity date, rate and interest earned for the month.
Utilizing CDARS you can fully FDIC insure funds at your bank up to $15Million. Your bank will quote you interest rates for the five basic maturities offered. The CDARS are offered in 28 day, 91 day, 180 day, One Year and Two Year Maturities. This allows maximum flexibility on investments, and can safely boost your earnings, with the convenience of working with your local association banker.
Disaster planning…a Treasurer’s nightmare! How do we make sure we have cash available to meet our needs after a disaster? Do we keep a “reserve fund” against our insurance deductible? For some associations, this is the obvious solution, but for others unit owners object to reserving for an event that they hope will never occur.
Your Banker may have some solutions you had not thought of. Do you want to consider a “stand by” emergency line of credit? Some banks that work with community associations are offering a new low cost loan product to meet this need.
Example: Your association’s wind storm insurance deductable is 3% or $2 Million. Your board does not want to incur the expenses to carry a $2 Million line of credit. One solution being offered is a stand by line of credit. The association applies for and gets approved for the $2 Million dollar line, but actually closes on a line of credit for a much lesser amount, say $50,000. This keeps closing costs minimal, however, if a disaster strikes, the association can submit updated financial information and draw up to the $2 Million they were approved for. All additional closing costs and fees are advanced with the line. In the event of a draw on the line for a disaster, the association would enact a special assessment within 90 days of the draw, to collateralize the loan. Thus saving upfront costs, on a line that may never need to be drawn, but making funds immediately available when needed.
A final word, your banker is available to work with you on all of these challenges. An experienced banker can be a valuable part of your management team.
Florida Shores Bank is a fast-growing local bank with state-of-the-art lockbox processing and expertise in community association banking. Call Janet at 941-237-2050.