What if the Economy Tanks?

Reserve funds: How much is enough?

Although how much to have stocked away will be different for every association, many follow The Seven Measurements from the American Society of Association Executives, which has become the benchmark for a large portion of the association world. According to The Seven Measurements, the formula—or minimum goal—recommended for associations is 50 percent of annual operating expenses. For example, an association with $100,000 in annual operating expenses would strive to maintain at least $50,000 in operating reserves at all times.

REALTOR® associations often strive for more than the minimum and how much, exactly, should be spelled out in association policy.

Consider what other associations do, consult financial experts, and then have an in-depth dialogue with leadership to determine how much is needed to reach a collective level of comfort.

Your financial contingency plan should outline a comprehensive menu of cost-saving initiatives that could be implemented in the event of a downturn.

Update your policy on spending reserves

Some AEs say their members want reserves used for lowering dues in tough times. Other AEs say their members would rather see deeper cuts in programs, services, and operating expenses before resorting to tapping into reserves. Save a lot of debate and discussion at critical times when tensions are high by writing a reserve policy today that prioritizes how to spend reserves.

A good reserve policy, experts agree, addresses investment practices and guidelines for use of principal and yields once the benchmark amount has been reached and maintained. For example, after your minimum balance is achieved, will the yields be used for capital improvements, spent on new program development, saved for one-time unexpected expenditures, or used for something else?

Your reserve policy and reserve levels should be reviewed annually by the finance committee, which can make recommendations to the Board of Directors, as necessary.

Tell members how you’re helping

Even the most well-thought-out contingency plan can fail if it’s not transparent or not communicated effectively to members. As the last downturn showed, members who are struggling economically can become critical of each dues dollar spent. Some may resent your stable paycheck and fail to see your empathy with their situation. After the last financial crisis, some association executives volunteered to take a pay cut or pay freeze even though their associations were actually in a safe financial position. Many inauguration balls and holiday parties were canceled or scaled back in solidarity with members, not out of association financial necessity. Associations also established benevolent funds during the last downturn to aid members in financial hardship (see the Benevolent Funds Toolkit at nar.realtor).

If you’ve planned well, your association can weather the next downturn without much disruption, but the same may not be true of your members’ businesses. Plan now for how you can help members through the tough times with education focusing on doing more with less or cutting business expenses, a new menu of free services, or a temporary dues reduction. Make sure your contingency plan is ready when the time comes—and it will come.

Save a lot of debate and discussion at critical times when tensions are high by writing a reserve policy today that prioritizes how to spend reserves.