Reserve Expenses – Unanticipated
The reserve fund is a pool of money permitting funds to be shifted between line items as needed to meet reserve funding needs. It is normal to make adjustments from year to year to reallocate funds to cover items that fail prematurely or cost less than anticipated.
There are three common reasons why an associations may experience unanticipated reserve expenses:
• Reserve repair and/or replacement expenses are higher than projected,
• Reserve expenses are incurred earlier than expected, and
• Reserve expenses were not anticipated and no reserve funds were set aside.
When any of these situations occur, the association's reserve study should be updated and, if necessary, allocations to reserves should be increased to cover any shortfall. If the unexpected expenses are significant, the board may need to impose emergency special assessments.
For example, if a roof fails in year eight instead of year ten as projected by the reserve study, funds can be shifted from other line items to cover the unexpected early expense. Or, if a pool heater replacement ends up costing half the projected cost, the left over funds can be assigned to other reserve line items. Such reallocations are not unusual.