ZERO RESERVE FUNDING

QUESTION: As a manager, I find that reserve funding continues to be an issue with my boards. It seems to me that 100% funding is the goal but there is no real law requiring any money in the reserves. If an association chooses to have no reserves and pay for everything by special assessment, it may not be prudent but it is not illegal. Is that correct?

    ANSWER: It is not yet "illegal" to have zero funding as long as everything is fully and clearly disclosed to the membership. Even so, disclosure will not insulate the board from being sued for mismanagement and breach of fiduciary duties. As a manager, you should make sure that you are on record either in the minutes or with a letter to the board urging them to fund their reserves. That way when lawsuits start flying, you can show that you were not negligent as the managing agent.

QUESTION: An additional and related question, if the fund is at a very low percentage is the board liable in any way? As always, thank you for your help!

    ANSWER: Sometimes there are temporary swings that take reserves to low levels. If, however, the reserves are at dangerously low levels through board inaction, it is entirely possible that a jury could find a board liable for acting outside of industry standards. If the board has proper D&O insurance in place, the directors will probably not be personally liable. Even so, the risk is not worth it. It is much better to put a funding plan in place and stick to it.

Updated by ADAMS KESSLER 4/26/2008