Why do we Care about Percent Funded?

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According to National Reserve Study Standards (see complete standards here), an evaluation of Reserve Fund Strength is one of the three primary results from a Reserve Study (the current component list, the current strength of the Reserve Fund, and the current recommendation for Reserve contributions).

Reserve Fund Strength is most appropriately measured in terms of Percent Funded, which reports the size of the association’s Reserves (as of the first day of the fiscal year) compared to the deterioration of the Reserve components (again, as-of the first day of the fiscal year). In this way, you are measuring how well the Reserve Fund compares to the deterioration it was designed to offset, not a vague notion about a cash balance that “feels” good.

It is important to note that a measure of Reserve Fund Strength is independent from whichever future funding objective is chosen, or whichever funding method is chosen. Those two things affect the future. You’ll want to know your current Percent Funded, because it clearly reports your Reserve strength now. National Reserve Study Standards support the philosophy that you should clearly know “where you are” before you strike out towards a future objective.

BTW – We consistently recommend our clients become Fully Funded. This is because Fully Funded is the “bulls eye” of financial responsibility, whereas Baseline Funded represents the edge of the target (barely enough cash to keep the Reserve Fund positive). On average, Fully Funded contributions are only 13% higher than Baseline contributions, so becoming Fully Funded is not cost-prohibitive. Baseline Funded associations regularly experience unsettling deferred maintenance or disruptive special assessments, so one could argue that there are no real “savings” by pursuing a Baseline Funded objective.