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Reserve Summary

Included within an association’s annual budget report is a reserve summary that is prepared pursuant to Civil Code Section 5565. (Civ. Code § 5300(b)(2).)

General Requirements
Pursuant to Civil Code Section 5565, the reserve summary (1) must be based on the association’s most recent reserve study, (2) must be based only on assets held in cash or cash equivalents, and (3) must be printed in boldface type, and include all of the following:

Current Estimates of Major Components – the current estimated replacement cost, estimated remaining life, and estimated useful life of each major component. (Civ. Code § 5565(a).)
Cash Amounts – as of the end of the fiscal year for which the reserve study is prepared, the reserve summary must include: (1) the current estimate of the amount of cash reserves necessary to repair, replace, restore or maintain major components, (2) the current amount of accumulated cash reserves actually set aside for those purposes, and (3) if applicable, the amount of funds received by the association in connection with a construction defect action. (Civ. Code § 5565(b).)
Percentage Funding – the percentage that the amount of cash reserves actually set aside for the repair, replacement, restoration or maintenance of major components equals the estimated amount of cash reserves necessary for those purposes. (Civ. Code § 5565(c).)
Reserve Deficiency – the current deficiency in reserve funding expressed on a per unit basis. This figure is calculated by subtracting the amount of cash reserves actually set aside for the repair, replacement, restoration or maintenance of major components from the estimated amount of cash reserves necessary for those purposes, and then dividing that result by the number of separate interests within the association. This calculation method may vary somewhat if the association has variable, as opposed to uniform, assessments. (Civ. Code § 5565(d).)

Inadmissible as Evidence of Improper Financial Management
The reserve summary is generally not admissible as evidence to show improper financial management on the part of the association. (Civ. Code §5300(d).)

Reserve Funding Plan

Subject to certain limited exceptions, every association is required to prepare a reserve study at least once every three (3) years with a review to be conducted annually to determine if adjustments are necessary to the association’s reserve account requirements. (Civ. Code §§ 5300(b), 5550(a).) One item of information that must be included within a reserve study is the reserve funding plan. (Civ. Code § 5550(b)(5).)

Purpose
As a component of the reserve study, the association is required to estimate the “total annual contribution” to the reserve account necessary to “defray the cost to repair, replace, restore, or maintain” the major components for which the association is responsible and which have a remaining useful life of less than thirty (30) years. (Civ. Code § 5550(b).) The way in which that “annual contribution” will be funded is indicated by the reserve funding plan. (Civ. Code § 5550(b)(5).)

Schedule of Required Assessment Changes
The reserve funding plan must include a “schedule of the date and amount of any change in regular or special assessments that would be needed to sufficiently fund the reserve funding plan.” (Civ. Code § 5560(a).)

Procedural Requirements

Adopted at Open Board Meeting – The reserve funding plan must be adopted at an open board meeting. (Civ. Code § 5560(b).)
Assessment Increases and Limitations – If the board determines that an increase in regular or special assessments is necessary to fund the reserve funding plan, any such increase is subject to the provisions found within Civil Code Section 5605 (i.e., the board may not, without membership approval, increase regular assessments by more than twenty percent (20%), or special assessments by more than five percent (5%)). (Civ. Code § 5560(c); See also “Limitations on Assessment Increases.”)

Disclosures
Information from the reserve funding plan is disclosed in the association’s annual budget report, as well as the association’s Assessment and Reserve Funding Disclosure Summary form prepared pursuant to Civil Code Section 5570. (See “Annual Budget Report” and “Reserve Disclosures.”)

Summary of Plan Included within Annual Budget Report
A summary of the reserve funding plan must be distributed to the association’s members each year as part of the annual budget report. (Civ. Code § 5300(b)(3).)

Right to Request Full Plan
The summary of the reserve funding plan must include a notice to members that the full reserve funding plan is available upon request, and that the association must provide the full reserve funding plan to any member upon request. (Civ. Code § 5300(b)(3).)

Reserve Study

Except as provided below, all associations are required to prepare a reserve study at least once every three (3) years with a review to be conducted annually to determine if adjustments are necessary to the association’s reserve account requirements. (Civ. Code §§ 5300(b), 5550(a).) Once the study is completed, the study is used to prepare and publish a reserve funding plan. The reserve funding plan is in turn used to prepare and publish the association’s annual budget report that includes various reserve disclosures.

Preparation/Review Requirements & Exceptions
Every association is required to prepare a reserve study at least once every three (3) years:

“At least once every three years, the board shall cause to be conducted a reasonably competent and diligent visual inspection of the accessible areas of the major components that the association is obligated to repair, replace, restore or maintain as part of a study of the reserve account requirements of the common interest development…” (Civ. Code § 5550(a).)

Exceptions
The only instances where an association would not be required to prepare a reserve study are when:

(1) There are no common area components that the association is obligated to repair, replace or maintain;

(2) The association is an industrial or commercial common interest development, not a residential common interest development; or

(3) The “current replacement value of the major components” is less than “one-half of the gross budget of the association, excluding the association’s reserve account for that period.” (Civ. Code § 5550(a).)

Annual Review & Adjustments by Board
The board is also required to “review [the reserve] study, or cause it to be reviewed, annually and shall consider and implement necessary adjustments to the board’s analysis of the reserve account requirements as a result of that review.” (Civ. Code § 5550(a).)

Required Contents of Reserve Study
Civil Code Section 5550(b) sets forth the following five (5) items of information which, at a minimum, must be included within a reserve study:

Major Components – The reserve study must identify the “major components that the association is obligated to repair, replace, restore, or maintain that, as of the date of the study, have a remaining useful life of less than thirty [30] years.” (Civ. Code § 5550(b)(1).)
Remaining Useful Life of Major Components – The reserve study must identify the “probable remaining useful” of the major components identified in item #1 (above) as of the date of the study. (Civ. Code § 5550(b)(2).)
Estimated Costs of Major Components – The reserve study must include an “estimate of the cost of repair, replacement, restoration, or maintenance” of the components identified in item #1 (above). (Civ. Code § 5550(b)(3).)
Estimated Annual Contribution to Reserve Account – The reserve study must include an “estimate of the total annual contribution necessary to defray the cost to repair, replace, restore, or maintain” the components identified in item #1 (above) “during and at the end of their useful life, after subtracting total reserve funds as of the date of the study.” (Civ. Code § 5550(b)(4).)
Reserve Funding Plan – The reserve study must also include a “reserve funding plan that indicates how the association plans to fund the contribution” identified in item #4 (above) to meet the association’s obligation for the repair and replacement of all major components with an expected remaining life of 30 years or less, not including those components that the board has determined will not be replaced or repaired.” (Civ. Code § 5550(b)(5); See also “Reserve Funding Plan.”)

Utility Services as “Major Components”
The term “major components” for the purposes of Section 5550 includes gas, water and electrical service to the extent the association is responsible for repair or replacement of those lines pursuant to Civil Code section 4775. (Civ. Code § 5550(c).)

Reserve Account Required

There is no explicit statutory requirement for an association to keep and maintain a reserve account, though such requirements are commonly contained within the provisions of an association’s CC&Rs or bylaws. Even where such provisions are absent, the requirement to keep and maintain a reserve account is generally recognized to exist by virtue of related requirements found within the Davis-Stirling Act as well as California court decisions:

Required Special Assessments – Boards are required to “exercise prudent fiscal management in maintaining the integrity of the reserve account, and shall, if necessary, levy a special assessment to recover” funds expended from a reserve account. (Civ. Code § 5515(e).) Exercising prudent fiscal management of a reserve account would, by implication, require the establishment and maintenance of a reserve account.
Duty to Levy Assessments – An association has an affirmative duty to “levy regular and special assessments sufficient to perform its obligations under [its] governing documents and [the Davis-Stirling Act].” (Civ. Code § 5600(a); See also “Duty to Levy Assessments.”) Setting aside a portion of assessment funds in order to perform future repairs or replacements for which the association is responsible is arguably necessary in upholding this duty. Where a board fails to do so, it could constitute a breach of the directors’ fiduciary duties:

“…since the Association’s original directors…admittedly failed to exercise their supervisory and managerial responsibilities to assess each unit for an adequate reserve fund and acted with a conflict of interest, they abdicated their obligation as initial directors of the Association to establish such a fund for the purposes of maintenance and repair. Thus, the individual initial directors are liable to the Association for breach of basic fiduciary duties of acting in good faith and exercising basic duties of good management.” (Raven’s Cove Townhomes, Inc. v. Knuppe Dev. Co. (1981) 114 Cal.App.3d 783, 800-801.)

Not Subject to Fee Limitation Provisions – Civil Code Section 5600(b) does not allow for an association to “impose or collect an assessment or fee that exceeds the amount necessary to defray the costs for which it is levied.” In the case of Foothills Townhome Assn. v. Christiansen, a member of the association challenged a special assessment levied by the board to fund the association’s reserve account on the basis that such action violated the fee limitation contained within Civil Code Section 5600(b): the member argued that the special assessment “exceeded the amount necessary to defray the costs for which it [was] levied” because there was no explicit requirement for the reserve account to be funded in the first place. The Court rejected the member’s argument and held that restoring an association’s reserve account was a valid basis for levying the special assessment.
Reserve Study Requirements – The requirement to establish and maintain an adequate reserve account is further supported by the provisions under Civil Code Section 5550. In sum, those provisions require the board to perform reserve studies and to develop a reserve funding plan to address future repairs or replacements of all major elements with an expected remaining life of thirty (30) years or less.

Directors Serving on Committees

There are no general legal restraints on a director’s ability to also serve on a HOA committee, unless the provisions of an association’s governing documents state otherwise. Some sets of governing documents may even require a board member (typically the board president) to serve as a member of every committee (referred to as an “ex officio” member). However, as discussed below, if there are a sufficient number of directors serving on a committee to establish a quorum of the board, it may trigger the need to comply with Open Meeting Act requirements.

Open Meeting Act Issues
HOA board meetings are subject to the requirements contained in the Open Meeting Act. A “board meeting” is defined as:

“…A congregation, at the same time and place, of a sufficient number of directors to establish a quorum of the board, to hear, discuss, or deliberate upon any item of business that is within the authority of the board.” (Civ. Code § 4090(a) (Emphasis added).)

Thus, if there are enough directors serving on a committee so as to establish a quorum of the board, and the committee heard, discussed or deliberated upon any item of business that is was within the authority of the board, the committee meeting would constitute a board meeting subject to the Open Meeting Act’s requirements (i.e., requiring notice of the meeting and the posting of an agenda). These concerns are especially relevant in the context of executive committees that are comprised entirely of directors.

Committee Member Qualifications

There is no law that establishes qualifications for persons wishing to serve on a HOA committee. There may be qualifications established in an association’s governing documents; however, those qualifications typically pertain to directors wishing to serve on the board, not to persons wishing to serve as members of a committee. (See “Director Qualifications.”)

Establishing Committee Member Qualifications
Absent contrary provisions in an association’s governing documents, committees are appointed by the board and serve at the pleasure of the board. (Corp. Code §§ 7210, 7212.) Serving at the pleasure of the board allows for the board to appoint and remove committee members at any time, and to also establish specific qualifications that persons must satisfy before being able to serve on a committee. Qualifications commonly utilized by boards in this respect include:

Being a member of the association
Being in “good standing” (i.e., not in violation of the governing documents, delinquent in assessments, etc.)
Not involved in litigation with the association
Attending a minimum number of committee meetings
Being a director (for executive committees)

Executive Committees – Directors Only
The only qualification that would automatically apply to committees is in the context of executive committees. Pursuant to Corporations Code Section 7212(b), only directors (members of the association’s board) are permitted to serve on executive committees.

Committee Meeting Minutes

Most associations are formed as corporations under the California Corporations Code. Corporations are legally required to keep written minutes of board meetings, membership meetings, and executive committee meetings. (Corp. Code § 8320.) Civil Code Section 5210 further requires HOA committees with “decisionmaking authority” to keep and maintain minutes, and to make them available for inspection by the association’s members within certain timelines. With the exception of executive committees and committees with “decisionmaking authority,” there is no explicit legal requirement for other types of association committees to keep and maintain minutes of their meetings.

Executive Committee Meeting Minutes
Minutes of executive committee meetings are “association records” that may be inspected by the association’s members, subject to certain limitations. (Civ. Code § 5200(a)(8); See also “Records Subject to Inspection.”) Executive committees are comprised of directors and are given the authority to act on behalf of the board. (Corp. Code § 7212(a).) If an executive committee has “decisionmaking authority,” the minutes of its meetings must be kept and made available for inspection by members within fifteen (15) calendar days following approval. (Civ. Code § 5210; See also “Deadlines for Producing Records.”)

Committees with “Decisionmaking Authority”
Committees with “decisionmaking authority” must keep and maintain minutes, and must make them available for inspection by members within fifteen (15) calendar days following approval. (Civ. Code § 5210; See also “Deadlines for Producing Records.”) Committees with “decisionmaking authority” typically include architectural committees that have the power to approve or deny a member’s architectural application.

Committee Meetings (Generally)

Distinct from Board Meetings
HOA board meetings are subject to the requirements contained within the Open Meeting Act. Some of the more significant requirements are those which require the board to take action only at a properly noticed board meeting, and to allow the association’s members to attend open board meetings. However, those requirements do not apply to meetings of HOA committees; there are no provisions of California law which require notice of committee meetings or which allow for members to attend committee meetings.

Directors Serving on Committees
As referenced above, HOA board meetings are subject to the requirements contained in the Open Meeting Act. A “board meeting” is defined as:

“…A congregation, at the same time and place, of a sufficient number of directors to establish a quorum of the board, to hear, discuss, or deliberate upon any item of business that is within the authority of the board.” (Civ. Code § 4090(a) (Emphasis added).)

Thus, if there are enough directors serving on a committee so as to establish a quorum of the board, and the committee heard, discussed or deliberated upon any item of business that is within the authority of the board, the committee meeting would constitute a board meeting subject to the Open Meeting Act’s requirements (i.e., requiring notice of the meeting and the posting of an agenda). (See “Directors Serving on Committees.”)

Committee Findings, Recommendations & Reports
Most committees are purely advisory in nature; they provide findings, reports and recommendations to the board for the board to take action on a particular item of business. In general, such findings, reports and recommendations are heard and acted upon by the board in an open board meeting unless they pertain to one of the specified matters that the board may address in executive session.

Committee Meeting Minutes
With the exception of executive committees and committees that have “decisionmaking authority,” there is no explicit legal requirement for a committee to keep and maintain minutes of its meetings. (Civ. Code § 5210.) Committees with “decisionmaking authority” would include architectural committees that have the power to approve or deny a member’s architectural application. (See also “Committee Meeting Minutes.”)

Appointment & Removal of Committee Members

While directors are elected by the membership, committees are formed (and committee members are appointed) by the board, and thus serve “at the pleasure of the board.” (Corp. Code §§ 7210, 7212.) Serving at the pleasure of the board generally allows for the board to appoint and remove committee members at any time with or without cause, unless otherwise stated in the association’s governing documents. The creation/dissolution of committees and the appointment/removal of their members are actions performed by the board in an open board meeting since they do not fall within the specified categories of matters that may be acted upon by the board in executive session. (Civ. Code § 4935.)

Committee Composition

Those Permitted to Serve
With the exception of executive committees that must be comprised entirely of directors, there are no statutory requirements that govern who is permitted to serve on a committee. Such restrictions may, however, be found within an association’s governing documents or otherwise established by the board. (See “Committee Member Qualifications.”)

Size of Committees
There are no statutory requirements or limitations on the size of committees. Some sets of governing documents may contain provisions establishing the size of certain committees (i.e., an architectural committee to be comprised of three (3) members).

Executive Committees

An executive committee is a committee that: (Corp. Code § 7212)

is comprised entirely of directors (with a minimum of two (2) directors);
serves at the discretion of the board; and
exercises the authority of the board.

Only directors (members of the board) are permitted to serve on executive committees. (Corp. Code § 7212(b).)

Powers & Authority
Subject to certain limitations, most of the board’s authority may be delegated to an executive committee to act on behalf of the board. (Corp. Code § 7212; See also “Delegating Duties & Authority.”)

Open Meeting Act Issues
The Open Meeting Act places numerous limitations on how a HOA board may discuss and act upon items of association business (i.e., the prohibition on actions without a meeting found in Civil Code Section 4910). In order for a board to avoid some of those limitations, certain board actions are often delegated to association committees. Upon doing so, any task performed by a committee typically no longer becomes an “item of business” within the meaning of Civil Code Section 4155 that may only be taken by the board in a noticed board meeting. (See “No Action Without a Meeting” and “Delegating Duties & Authority.”)

However, if an executive committee is comprised of enough directors so as to establish a quorum of the board (typically a majority of the directors), any action which is delegated by the board to that committee may still be considered an “item of business”:

“‘Item of business’ means any action within the authority of the board, except those actions that the board has validly delegated to any other person or persons, managing agent, officer of the association, or committee of the board comprising less than a quorum of the board.” (Civ. Code § 4155 (Emphasis added).)

If an executive committee is comprised of enough directors so as to establish a quorum of the board, any meeting of that committee could constitute a board meeting that is subject to the Open Meeting Act’s requirements.

Executive Committee Meeting Minutes
Minutes of executive committee meetings are “association records” that may be inspected by the association’s members (Civ. Code § 5200(a)(8); See also “Records Subject to Inspection.”) Civil Code Section 5210 requires committees with “decisionmaking authority” (i.e., executive committees) to keep and maintain minutes, and to make them available for inspection by the members within fifteen (15) days following approval.