What are Full Funding and Baseline Funding?

By: Robert M. Nordlund, P.E.

In the financial analysis portion of the Reserve Study, two pieces of key information are provided: a computation of the current Reserve Fund Status, which is a measure of current condition, and a recommended Funding Plan. The Funding Plan typically takes the form of a recommended monthly Reserve contribution. This "action plan" is developed to take the Reserve Fund from its current condition to the Funding Objective. But the question remains, which Funding Objective, and why?

When we purchase insurance, we manage our risk exposure by changing the coverage or the deductible. In a similar manner you can manage your Reserves risk by selecting between aggressive (high risk of special assessment) or conservative (low risk of special assessment) Funding Objectives. Boardmembers should evaluate their decisions in this area with respect to their obligations as corporate officers, similar to how decisions are made with respect to appropriate investment vehicles for Reserve Funds.

Baseline Funding means establishing a Funding Objective of keeping the Reserve cash balance above zero. Unfortunately, due to having little or no "margin for error" this is the Funding Objective exposing associations to the highest risk of special assessments. Fully Funding is typically the most conservative Funding Objective due to the Reserve Fund being "strong", at or near the 100% Funded point. Baseline and Fully Funding are the two most common Funding Objectives. Threshold Funding is the third most popular Funding objective. Threshold Funding means keeping the Reserve Fund above a pre-determined dollar or Percent Funded amount (a kind of "middle ground" objective). Statutory Funding (setting the specific minimum amount of Reserves required by local statues) is one specific form of Threshold Funding, where the threshold is set to that required by a local statute.

Because Reserve income and expenses never occur exactly as planned, decide in advance your risk strategy, and how distasteful you find special assessments. Decide your tolerance for risk before determining an appropriate Reserve Funding Objective for your association.


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