This is a very common question. Most Boards want to know how their Reserves are doing, and how their Reserves are doing compared to other associations. Fortunately, there is a straightforward way of finding out.
Each association requires a different amount of cash in Reserves to perform the anticipated Reserve projects on time without requiring outside assistance (special assessments or loans). Even so, an association’s Reserve Fund strength can be measured, and compared to other associations. Just don’t try to measure your Reserves on the basis of cash!
If an association’s actual Reserves on hand are compared to its current Reserve requirements, a relative measuring scale called Percent Funded is established. Just as we find clothes which “fit” us based on our own particular measurements, this relative measuring scale allows us to measure how well an association’s Reserve fund “fits”, and meets, its Reserve needs. Thus we can confidently measure strength or weakness of the Reserve Fund.
An association’s Reserve requirement is a computed figure based on the Useful Life, Remaining Useful Life, and Current Replacement Cost of each component. For each component, you multiply the current cost by its fraction of life “used up”. The result of this computation for all Reserve components is summed for an association total, called the Fully Funded Balance.
To provide a measure of your Reserve Fund, you calculate the ratio of your current Reserve Balance to your Fully Funded balance, expressed as a percentage. It doesn’t matter if you have $73,251 in Reserves and another association has $1,159,111 in Reserves. What you need to find out is your Percent Funded. If your Percent Funded is 73% and the other association’s Reserve Fund is 52% funded, your Reserves are in better shape than theirs. Even though they have more cash.
Submitted By:
Robert M. Nordlund, P.E., R.S.
Association Reserves, Inc.