By David Ford-Coates, Alliance Association Bank
When managing your association’s funds, the number one concept to remember is, it is not your money! You are a fiduciary who is responsible for the funds of a non-profit corporation, owned by all the individuals in the association. Your first priority should always be safety of principal, with return on investment as a secondary, or even tertiary objective. It is all too common where HOA’s flip these priorities.
The temptation for boards to “chase a higher yield” is always there and it can create more inherent risk, especially if it leads to the association making unsuitable investments. Chasing yield has been more prevalent over the past 12+ years, for several reasons. The most important being that as a society we have dealt with a historically low interest rate environment. This has affected savers a great deal (both corporate and individual). Even as we head into a rising interest rate environment, we will likely see bank interest payments on deposits lag behind. This is because there are also historically high levels of cash and banks are carrying these deposits. Therefore, the banks are not currently incented to increase interest payments to drive in deposits. The good news is this is cyclical. Interest rates will eventually rise, and if the principal is safe, your HOA will benefit. On the flip side, it can be tough to replace a market loss when making unsuitable investments. That’s why we always need to stay focused on priority number one – safety of principal.
It is a best practice for community association boards to establish and maintain a clearly defined Investment Policy, so the treasurer and community association manager always know what actions to take with the association’s funds. This keeps the board from having to meet every time there is a surplus of funds or a CD comes due. The Investment Policy will address the amount of money to be held in the operating account and what happens when the account goes over or under the target balance. It will also address how the reserve funds should be invested. Areas to consider when developing or updating the IPS should include safety of principal, time horizon for investing, liquidity needs, and target return on investment. You may notice that I listed return on investment last.
For example, some associations elect to keep funds invested in FDIC insured CD’s with maturities less than one year. This is a conservative approach, but it keeps funds liquid, generates some interest, and FDIC insurance is considered the “Gold Standard” when it comes to principal protection. For large balances over $250,000, some banks offer excess-FDIC programs like the IntraFi Network (Formerly ICS & CDARS), which offers liquid and certificate of deposit options to keep up to tens of millions of dollars in deposit balances FDIC insured. This eliminates the need to run all over town looking for another bank to place a $250,000 account and dealing with multiple signature cards.
Another common investment strategy for associations is to ladder certificates of deposit (CDs), which can maximize interest income, while at the same time maintain an ideal level of liquidity. Since we are likely heading into a rising interest rate environment, it’s currently common practice to keep the duration to less than 12 months. If you have $100,000 to invest, you could consider opening a 3-, 6-, 9-, and 12-month CD each for $25,000. As they mature, roll them into a 12-month CD. In nine months, the association will have four 12-month CD’s that mature every 90 days.
Associations that keep high balances in their checking accounts and spend more than $250,000 per month might consider utilizing a sweep account. In a sweep account the association can set a target threshold for their checking account that is constantly met by sweeping funds in and out of a separate investment account. These funds are often invested in money market instruments and backed by the full faith of the federal government. Many excess-FDIC programs offer this feature, as well.
In closing, I recommend being “boring” with banking and investments and “aggressive” with reserve contributions and capital planning. That simple philosophy will help you maintain a financially stable community in this ever-changing environment.
David Ford-Coates is Vice President of HOA Banking for Alliance Association Bank in Colorado.
