Condo Media - March 2017 - 24

BUDGETPLAN
■ The financial analysis.
The reserve preparers will gather information from the trustees and managers,
the site visits, and other resources. They
will compile this data into succinct descriptions of valuable information. All
the data is inputted and then compiled
by the database. A draft report is generated for the trustees and management
review. After adjustments and corrections have been made, a final report is
issued to the community as a long-term
budget tool.
The boards and managers will need
to review the information within the
reserve study and incorporate the
recommendations into the following
years' budgets. If the board doesn't
understand the information, the professional who prepared the report should
meet with the board and explain each
part of the report and how to interpret
the information. This report and explanation could be part of the unit owners'
annual meeting.

FUNDING GOALS AND OPTIONS
■ Fully Funded
Reserve study terms and definitions
can add confusion for the end users.
CAI defines "fully funded" as "100
percent funded, when the actual (or
projected) reserve balance is equal to
the fully funded balance." What does
this really mean? Do you need 100
percent funding in the reserve account
for every line item, even if it has 10 or
more years before replacement? The
simple answer is no. Instead of using
the term 100 percent funded, think of
"recommended balance." Both terms
have the same meaning. Fully funded
balance is a ratio of the current cost of
all the common elements multiplied
by the effective age, then divided by the
useful life.
Reserve funding goal terms can
be misconstrued. The funding goal

should be to have the required amount
of funds at the required timeframe to
pay for the replacement of the capital
items. As the asset depreciates or is
used up over time, the reserve balance
should increase at the same rate of depreciation. The main problem for most
associations is that interest earned
on bank accounts will not grow at the
same rate as inflation. Interest earned
on your reserve fund grows at a much
slower rate, because the funds placed
in the account are very small in the
beginning, while the effect of inflation
is on the total cost of replacement of
the capital items from the day that they
are installed. Even if both numbers are
the same, inflation outstrips the effect
of interest earned. At this time, inflation is about 3 percent, while interest
is about 1.25 percent.
■ Component Method of Funding
When we talk about the "component
method" of funding, we are talking
about the old "envelope" system of
budgeting for rent, food, gas, insurance,
and health care. Each pay period, you
would place cash into each envelope
to cover those expenses until the next
pay period. If you were short on food
money, you would not take it from the
rent or health care. You just had to
wait it out and purchase cheaper food
that you may not like to eat, until the
next payday. This is the same thought
process for the component method.
Money set aside for the roofs could not
be used for paving of the parking lot.
The board must wait until it raises the
required funds from condo fees, special
assessments, or bank loans. This is an
archaic method and is not used by many
associations. This method fails to take
into account the "time value of money"
(TVM). This principal is that money is
more valuable today than it will be at
any time in the future.

■ Baseline Funding

Another funding goal is called "baseline
funding." CAI defines baseline funding
as "establishing a reserve fund goal
of keeping the reserve cash balance
above zero." This is the most precarious
funding goal, as this leaves no buffer
if the cost of the repairs is more than
the projected amount. It is important
to remember that a reserve study is a
projected long-term budget based on
many assumptions that are not likely to
come out as exactly as projected many
years from when the calculations were
first made.
■ Threshold Funding
Since baseline funding is, by design,
to keep the reserve fund above zero,
and full funding is keeping the reserve
fund at recommended funding, the
third funding goal is a combination of
the two funding goals, called "threshold funding." CAI defines threshold
funding as "establishing a reserve
fund goal of keeping the reserve
balance above a specified dollar or
percent funded amount." This means
that you take the total value of what it
would cost to replace every item listed
in the reserve study in today's dollars
and multiply this by the threshold
percentage the board has selected,
below which the reserve account cannot drop.
■ Statutory Funding
The last funding goal is "statutory funding." CAI defines statutory funding as
"establishing a reserve fund goal of setting aside the specific minimum amount
of reserves required by local statutes."
Massachusetts requires the following:
"'Replacement reserve fund,' a separate
and segregated portion of the common
funds of the organization of unit owners
which shall be used to replace, restore,
or rebuild common areas and facilities.

The funding goal should be to have the required amount of funds at
the required timeframe to pay for the replacement of the capital items.
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CONDOMEDIA
Condo Media - March 2017

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