Is it Wise to Invest Reserve Accounts?
Yes, it is.
Reserve Studies usually assume some interest is earned on reserve account balances. The assumptions in Reserve Studies are typically very conservative, with interest earned (or investment yield – net of taxes) ranging from 1 percent to 3 percent. Interest earnings on reserve balances can be an integral factor in the long-term funding plans for reserves. The Association should have a strategy or policy for keeping the reserve balance in, at a minimum, some form of low-risk, interest-bearing account or certificate of deposit (CD) program.
Community Associations, particularly those with the potential for significant reserve, capital improvement, or operating savings account balances, should consider developing and approving an investment policy. The policy should define the Association’s financial goals, objectives, and risk tolerance. Most Associations adopt a very conservative investment strategic plan which protects Association assets from exposure to loss of principal. The policy also ensures that the cash liquidity needs of the association are met by limiting the duration of specific investments. The policy also establishes guidelines for cash management procedures designating responsibilities to the Board, Finance Committee, or Management Company. The policy should list permitted investments such as money market accounts, certificates of deposit, or U.S. Government obligations. Suppose risk-carrying investments are included in the policy. In that case, a threshold or limit on the percentage of risk-carrying investments can be built into the policy to limit overall exposure to investment losses. The policy may also list approved financial institutions and required coverages such as FDIC, SIPC, or Surety Bond-covered financial products. Before crafting an investment policy, review the association documents to determine if specific requirements must be included in the policy. Establish a process to review the policy periodically. Safety, Liquidity, and Yield are the focus of a well-designed investment policy.