Are You Securely Invested?

By Lorena Sterling, CAFM

About three months ago, many communities were overly invested in a financial institution that failed. That means they invested funds exceeding the $250k FDIC rule. Boards pacified concerns raised by managers with the phrase, “Not us,” and now we’re hearing, “I never thought it would happen to us.” So, this is a clear opportunity to buckle down and assess our clients’ investment accounts with three words: safety, accessibility, and interest.

Investing HOA Funds: Certificates of Deposits

Last year, CD interest rates yielded about 0.15% for a 12-month term. Those were safe times to invest, knowing the 1120H IRS filing kept the initial $100 of earned interest income exempt from taxation. After that, expect investment income to be taxed about 38% by the state and federal governments.

But the days of earning $150 off a $100,000 investment are over! Financial institutions are now offering up to 5.05% CD rates for promotional terms of 13 months. So, that same $100,000 investment is now worth $5,050, less the 38% that goes to taxes. So, instead of netting $131, associations net $3,131 for every $100,00 invested. When associations invest half a million dollars or more, investment profits can accumulate quickly.

Create a laddered investment plan according to the reserve study, and stay organized with maturity dates; sometimes, an auto-renewal can cost you a lower interest rate versus closing that CD and reinvesting into a new rate and term. What is laddering? Laddering is purchasing CDs at different times or staggering maturity dates, so funds are continuously maturing and being rolled over or reinvested.

It’s essential to consider upcoming spending for reserve repairs and any planned capital improvements, as once invested, funds are “locked in,” and there could be penalty fees for early withdrawal. So, make sure to keep sufficient funds liquid to cover upcoming expenses.

Things to consider before “locking in” funds:

• Ensure invested funds can be liquified for emergency expenses if necessary.

• Stagger maturity dates for multiple CDs.

• Consider the $250K FDIC-insured investment per institution and aim to ensure that you aren’t investing more than that in any one bank.

Taking the P for penalty:

What would it look like if your maturity date is a few months away and you want to take advantage of the highest interest rate we have seen in over two years? Time to be risqué and take the letter P for penalty. Yes, for once, you can advise clients to think outside the box, safely.

Early withdrawal penalties differ by bank institution, the amount invested, and the length of the term. You can expect penalties to range anywhere from 30-180 days of interest based on the amount initially invested. So, for that $100k CD that accrued $150 in 12 months, you will be penalized at most half of its annual interest.

Let’s do the math:

$100,000 yielding 5.05% for 13 months = $5,050

$5,050 – $75 (Penalty Fee) = $4,975.00

$4,975 - $1,508 (Taxes) = $3,467.00

$150 vs. $3,467.00 in interest!

Advising Clients About Investing

Homeowner association funds should avoid risky investments at all costs. Boards have a fiduciary duty to ensure that funds are protected, and managers have an ethical obligation to advise their clients of their commitment. As managers, we must recommend that our boards invest with capital preservation in mind and consider safeguarding reserve funds. But we can also advise them to take advantage of investment income opportunities that are safe and secure. So, consult with your financial managers, bankers, CPAs, and reserve analysts to assist you with choosing suitable investment strategies for your community.

Average CD rates: 2020-2023

As the COVID pandemic emerged in early 2020, the Federal Reserve lowered interest rates, but inflation cause a reversal of those decreases in 2022.

Blue: Six-month CD; Green: 1-year CD; Purple 5-year CD

Source: Bankrate national survey

We now have the creative ability to invest HOA funds, even if that calls for a penalty to maximize your CD rate of return.

Lorena Sterling, CAFM, is the Controller at Community Association Financial Services (CAFS).