RESERVE FUNDING
REVIEW AND FINALIZATION OF THE FINANCIAL ANALYSIS Associations should review the reserve study before acceptance to evaluate the accuracy of the infor- mation presented. Associations should periodically review the reserve study and update as needed to ensure the reserve study remains accurate.
During this process, it’s important to consider:
1. Is the starting reserve balance accurate? 2. Are current-year reserve contributions accurate? 3. Do you understand the funding methodology? 4. Do you agree with the funding strategy, or does the community prefer to be more or less risk-averse? KEY CONSIDERATIONS: 1. The association needs to provide accurate financials so the reserve specialist has a clear understanding of the starting reserve balance, current operating budget, and current reserve contributions. 2. The cash flow method is typically preferred. With large variances in component costs and differences in useful and remaining lives, it is not necessary to fully fund each component as long as an adequate threshold is maintained. The fund balance is often compared to the total replacement cost of all reserve components. Some reserve professionals use 5%–10% of total replacement costs as the cash balance threshold. This provides a simple measure of financial exposure that boards can easily understand. 3. Adequacy can be addressed by using available funding goals. For example, a funding goal could be a fixed number developed by the board and analyst, threshold dollar amount relative to the expenses, or a minimum percent funded number. 4. Percent funded is a helpful indicator of reserve fund status, but it is not a stand-alone measure of adequacy. While percent funded measures the ratio of current reserves to the fully funded balance, it should be considered in the context of the association’s reserve funding plan, risk tolerance, and agreed-upon minimum reserve threshold. The association and reserve special- ist should establish this minimum threshold based on factors such as building characteristics, long-life components, environmental exposure, concealed-system uncertainty, contingency needs, and the board’s overall tolerance for financial risk. 5. If the association has an unexpected event such as major repairs, insurance losses, or con- struction defects and receives or spends funds outside the study recommendations, the study should be updated to incorporate the unexpected event. This can be an unanticipated expen- diture such as hail damage to roofs or financial change such as receiving a construction defect lawsuit payment. 6. If your reserve study provides multiple funding option recommendations, the association should select one funding plan to ensure clarity and consistency.
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