How much Reserves are enough?
Reserve adequacy is not measured in cash terms. Reserve adequacy is found when the amount of current Reserve cash is compared to Reserve component deterioration (the needs of the association ). Having enough means the association can execute its projects in a timely manner with existing Reserve funds. Not having enough typically creates deferred maintenance or special assessments.
Adequacy is measured in a two-step process:
1) Calculate the value of deterioration at the association (called Fully Funded Balance, or FFB). 2) Compare that to the Reserve Fund Balance, and express as a percentage.
Each year, the value of deterioration at the association changes. When there is more
deterioration (as components approach the time they need to be replaced), there should be more cash to offset that deterioration and prepare for the expenditure. Conversely, the value of deterioration shrinks after projects are accomplished. The value of deterioration (the FFB) changes each year, and is a moving but predictable target. There is a high risk of special assessments and deferred maintenance when the Percent Funded is weak , below 30%. Approximately 30% of all associations are in this high risk range. While the 100% point is Ideal (indicating Reserve cash is equal to the value of deterioration ), a Reserve Fund in the 70% - 130% range is considered strong (low risk of special assessment). Measuring your Reserves by Percent Funded tells how well prepared your association is for upcoming Reserve expenses. New buyers should be very aware of this important disclosure!
Association Reserves, #6510-0
21
7/29/2022
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