I was recently contacted by an association explaining their strategy of not funding their Reserves according to the recommendation in their Reserve Study. They looked at that recommendation, then decided on a smaller contribution rate that they felt was reasonable (about half, they explained). When a Reserve expense occurred, they paid for the expense figuring that half of the expense was being paid with contributions they had been making, and half of the expense was being paid with “leftovers” in the Reserve Fund from prior years.
Folks, that’s faulty thinking. The money in Reserves got there because boardmembers in prior years put it there to offset ongoing deterioration at the association. While the actual expenses from Reserves occur rarely, deterioration is ongoing, every day. The design of a successful Reserve Funding Plan is to set aside Reserves at the rate your assets are deteriorating. In this way, your Reserve Fund will be ready to handle the expense when it comes due.
If you regularly under-contribute to Reserves, supplementing with funds “left over” in the Reserves from prior years, what you are really doing is spending money that has been set aside for other purposes. It is very similar to going on a diet. Dieting is fundamentally taking in (eating) less calories than your body burns. You lose weight when your body is burning its Reserves.
So in this new year, when many people resolve to go on a diet and lose those 5 or 10 pounds they picked up over the last year, make sure your Reserves are not on a diet. Make sure you are sustainably putting enough cash into Reserves. Don’t use up the Reserve cash so sacrificially put there by prior owners!