Budget Box: Percent Funded & Fully Funded Balance

The Landings Association recently received the results of the Reserve Study that was conducted by Community Advisors, an independent consulting firm specializing in community association Reserve Studies. These results were presented at the Budget Workshop on January 27, 2020, and the full Reserve Study Report is posted online. The recommendation from Community Advisors is that The Landings Association adopt a threshold funding plan which keeps Capital Reserve balances at a minimum of 30% funded. National Reserve Standards indicate funding plans that maintain a 30% to 70% fully funded reserve provide an adequate or fair level of funding. So, what is Percent Funded and Fully Funded Balance, and what does this mean for The Landings Association’s Reserves?

Percent funded is one of the methods to measure the strength of a Reserve Fund. The Community Associations Institute (CAI) defines “Percent Funded” as the ratio, at a particular point in time (typically the beginning of the Fiscal Year), of the actual (or projected) Reserve Balance to the Fully Funded Balance, expressed as a percentage. The Fully Funded Balance is the total accrued depreciation of the assets. This balance represents the cost of how much life has been used. The Fully Funded Balance is then used as an indicator against which the actual (or projected) Reserve Fund Balance can be compared, known as Percent Funded.

The following example illustrates how this works:

Let’s say that the cost to replace a roof is $100,000, with a useful life of 20 years. Each year 1/20th of the cost of replacement is set aside, or “reserved”. In year 5, the Fully Funded Balance is $25,000. If in year 5 you have $25,000, then you are 100% funded. If you only have $15,000 then you are 60% funded.

In total, Percent Funded measures the financial health of the Capital Reserve Fund, and therefore reflects on the financial health of the Association. It is a snapshot of the current balance versus the overall depreciation of all of the reserve assets.