What is Percent Funded (and Why Should I Care?)

By: Robert M. Nordlund, P.E.

Instinctively, we all know that large associations with many common area amenities in need of replacement should have a high Reserve balance. Similarly, newly constructed small associations with only a few common area amenities have little need for much of a Reserve balance. Every association has different Reserve requirements depending on the size and timing of their Reserve projects. But is there any consistent way to measure the current status of the Reserve Fund?

We all understand cash. $2,000,000 seems like a "lot" of money, and relatively speaking we know that $100,000 is twice as much as $50,000. We understand those types of things. Cash represents an "absolute" measure of money. It is another question entirely to ask how much money is enough. This is a relative question, comparing the size of the Reserve Fund to the association's need. Percent Funded provides this information, comparing how the Reserve Balance (typically “as-of” the start of the Fiscal Year) matches up against the association's needs (the Fully Funded balance).

The association's actual (or projected) balance is simple: one can simply tally the bank or investment account statements. The Fully Funded Balance is the value of the deterioration of the association's common area assets, and is a computed quantity. The fractional age of each component is multiplied by its current estimated Repair/Replacement Cost, then summed together for an association total.

Let's consider a simple example, of an association with two components: roofing and painting. With seven years "used up" of a 20-year life and with a current replacement cost of $200,000, the roof's Fully Funded balance is 7/20ths of $200,000, or $70,000. Assuming the paint is three years old and has a five year life and a current estimated cost of $50,00, the paint project's Fully Funded balance is 3/5ths of $50,000, or $30,000. The association's total Fully Funded Balance is therefore $100,000. If the association's projected Reserve Balance is $40,000, you begin to see that they are "behind" with respect to getting ready for their upcoming Reserve obligations. Having $40,000 available to meet a $100,000 Fully Funded Balance means they are 40% Funded.

These simple computations help Boards gauge the relative size of their particular Reserve Balance. As a general guide, we have found that many associations under 30% Funded experience special assessments and deferred maintenance. On the other hand, when the Percent Funded is at or above the 70% point, special assessments and deferred maintenance are rare. In-between is a mid-range status.

This annual Percent Funded status will change from year to year as information about the Reserve Balance and estimates for Reserve Component Useful Life, Remaining Useful Life, and Replacement Cost are updated. Note that a Reserve Funding Plan itself cannot be described in Percent Funded terms, but a Funding Plan is what causes an association’s annual Percent Funded status to increase or decrease over the course of many years.

An association’s Percent Funded is a statement of condition, measuring the adequacy of the current Reserve Fund, reporting if it "fits" the needs of the association. Just remember: "85% Funded" says a great deal more than "we have $223,097 in Reserves"!


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