Winston Churchill said “Saving is a very fine thing, especially if your parents have done it for you!” But how much “savings” does it take to provide an adequate level of comfort? How much Reserves are adequate?
Each Association requires a different amount of Reserve funds to perform the anticipated Reserve projects on time without requiring outside assistance (Special Assessments or Bank Loans). In addition to the difference in Association types and ages, when one also considers the difference between Reserve plans and reality, measuring Reserves adequacy has the reputation of being a shot in the dark. But an Association’s Reserve Fund “adequacy” can be measured. The problem in the past has been using the wrong kind of ruler to make the measurement!
A Reserve Fund balance that is adequate for one association is not necessarily adequate for another Association. But when an Association’s actual Reserves on hand are compared to its computed Reserve requirements, a relative measuring scale called “Percent Funded” is established. Note that this relative Reserve Fund strength measurement is independent from any Funding Plan (Cash Flow, Straight Line, etc.) method.
% Funded = Reserve Fund Balance (actual)/Fully Funded Balance (computed)
% Funded = 100 (ideal)
when the Reserve Fund Balance (actual) is equal to the Fully Funded Balance (computed)
Note: The Fully Funded Balance (FFB) is computed by multiplying the current replacement cost of each component by its fraction of life “used up” and summing them all together
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 “matches”, and meets, its Reserve needs.