Tutorial – Association Balance
How much do we need to collect and maintain in our reserve account???
For most association boards getting to this point is akin to looking at a tax return and checking to see if you will get a refund. In this case our report will tell you how much of a contribution each member will have to make to have an adequate reserve. However, the board and members can determine what adequate is and how much time they will want to take to get there. With our reports we can take a gradual approach or create a funding strategy to get you there as quickly as possible. While laws regarding reserves encourage an association to have full funding, it does not require them to achieve that. An association does have to disclose to the members the funding status and show the difference between current funding and full funding.
Independent of methodology utilized, the following represents the basic categories of funding plan goals:
Baseline Funding – Baseline Funding means establishing a Funding Objective of keeping the Reserve cash balance above zero. Although this may contradict using the component method analysis, the benefit is that it doesn’t tie up a bunch of cash for the association. It keeps only enough cash to fund the near future expenditures. Obviously this will expose the association to a higher probability of special assessments as there is no rainy fund unless the association maintains a minimum balance. We do not recommend associations use baseline funding.
Full Funding – Maintaining a Reserve Balance at or near Percent Funded of 100%. Fully Funding is typically the most conservative Funding Objective due to the Reserve Fund being “strong”, at or near the 100% Washington States new laws for 2012 stipulate that an association must plan to be fully funded within the 30 year study period.
Threshold Funding – Threshold Funding means keeping the Reserve Fund above a pre-determined dollar (a kind of “middle ground” objective). This is probably the most common method used. CAI encourages associations to have healthy funding. Healthy funding is considered to be between 60% and 80% funded.
Statutory Funding – Maintaining a specified minimum Reserve Balance per statutes. (Washington does not stipulate a funding level so this is not applicable here)