How often Should we Update our Reserve Study?

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Good question. While I’ve answered this other places before such as in our document library, which can be found here, it is a common enough question that it deserves being answered repeatedly.

Reserve contributions typically comprise 15-40% of an association’s total budget, making it one of the association’s largest, if not the largest, budget line item. In the annual budget process, it makes no sense fussing about the little line items (just a few percentage points each) if you neglect reviewing and updating your Reserve contribution line item.

From a liability exposure point of view, the Business Judgment Rule dictates that boardmembers need to act within their area of authority, after reasonable inquiry, in the best interests of the association. For a budget line item as large as Reserve contributions, that means looking at, and adjusting it as necessary, annually.

Fundamentally this is necessary because each year reality creeps into an association’s best laid plans. The Reserve balance is never quite what one presumed it would be, deterioration is often not exactly at the rate one presumed it would be, and repair/replacement pricing is always moving more (or less!) than you presumed it would move, and sometimes in the wrong direction. So the whole situation is in a state of constant change… the cash available, the timing of the expenses, and the size of the expenses.

Bottom line: it is appropriate to update your Reserve Study, which means review your Reserve components, your Reserve Fund strength, and your Reserve contributions annually as part of the annual budget process.

Special note – the individual asking this question was from California, where the law says that Reserve contributions must be evaluated and adjusted annually, that key figures (Reserve balance, Reserve contributions, and Reserve Fund Strength) must be reported annually, and that the annual update process must be based on a “diligent visual site inspection” at least every third year. Most of this can be found in California Civil Code Sections 1365 and 1365.5.