What must a Virginia association budget say about reserves?

Budget season in a Virginia association usually means a treasurer, a manager and a spreadsheet that has grown one tab a year. The reserve part of that budget is not left to taste. Two sections of the Virginia Code, one for property owners’ associations and one for condominiums, list what it must contain once the reserve study says reserves are needed.

Where the rule lives

For owners’ associations the text is in section 55.1-1826. For condominiums it is section 55.1-1965. The wording of subsection C is practically identical in both. The one difference elsewhere in the condominium section is its opening phrase, “unless the condominium instruments provide otherwise”, which means a condominium’s own documents could set a different arrangement.

Two other parts of the same sections frame the budget:

• Subsection A: before the fiscal year starts, the board must make the budget, or a summary of it, available to owners.
• Subsection B: the board must have a reserve study done at least every five years, review its results every year, and adjust the budget and assessments as needed.

Subsection C then says what the budget has to contain.

The four items, one at a time

1. Cost and life of each capital component

The budget must show the current estimated replacement cost, the estimated remaining life and the estimated useful life of each capital component. “Capital components” are the items the association must maintain and for which the board decides funding is needed, whether or not they sit in the common area (55.1-1800).

In practice this is the component table from the reserve study. Most boards attach it as a schedule rather than retype it. If the study is three years old, carry forward the remaining lives by three years and say so; better still, have the firm send an updated table.

2. Reserves on hand and this year’s contribution

The budget must state, as of the start of the fiscal year, the amount of cash reserves accumulated, and the amount the association expects to contribute to reserves during that year. Two numbers: the opening balance and the planned deposit.

Use the bank balance on the first day of the fiscal year, not the balance on the day the budget was drafted. If part of the reserve is set aside for a named project, show that too; it will matter later on the resale certificate.

3. How the estimates were made

The budget needs a statement describing the procedures used to estimate and accumulate the reserves. Boards often skip this or write one line. A useful version answers:

• Who prepared the study, when, and at what level (full study, update with a site visit, or update without one).
• Which funding method the plan uses, for example a component method or a pooled cash-flow method, as CAI’s standards describe them.
• What inflation and interest rates the plan assumes.
• How the board turned the study’s recommendation into this year’s contribution.

4. Recommended reserve against cash held

Finally, the budget must state the reserve amount the study recommends and the cash the association currently holds for replacements. Put them side by side. If there is a gap, owners will see it; it is better that they see it with the board’s plan for closing it.

A layout you can reuse

Here is a simple one-page reserve schedule that covers all four items:

Lines A and G answer item 3. Lines B and C answer item 2. Lines E and F answer item 4. Schedule H answers item 1.

When the study says no reserves are needed

Subsection C applies “if the results of the study indicate a need for reserves”. For almost every association with roads, roofs, a pool or a pond, the study will. A very small association with nothing to replace might find otherwise, but it still needs the study, every five years, to show that.

What the yearly review should change

Subsection B asks for a review of the study’s results at least once a year. The budget is the natural place for that review to land. Each year, ask:

1. Did reserve spending last year match what the study expected?
2. Were any components replaced early, put off, or added?
3. Has the reserve balance moved closer to, or further from, the recommendation?
4. Does the contribution need to change to stay on plan?

Write the answers into the minutes. If the review shows a large drift, an update from the study firm is often cheaper than a special assessment later.

Common mistakes

• Copying last year’s table. Remaining lives drop by one every year. A static table is a sign nobody looked.
• Mixing operating and reserve cash. The figure in item 2 is reserve cash only.
• No method statement. It is a required item, not decoration.
• Budget out before the study. If the new study is due this year, time it so the report arrives before the budget is adopted.

The short version

Four items, every year, in every budget where reserves are needed: component costs and lives, reserves held and planned, the method, and the recommendation against cash. Get the study done on time and those items almost write themselves.