RESERVE FUND STRENGTH
ARE YOUR RESERVES ADEQUATE?
by Robert M. Nordlund, PE, RS
CEO/Founder
Association Reserves, Inc.
May 2010
www.reservestudy.com
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.
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Table 1 compares this % Funded measurement with the Risk of Special Assessment of thousands
of our Reserve Study clients. It is clear to see that among Associations with a weak (% Funded
less than 30%) Reserve Fund, the incidence of Special Assessments (i.e., inadequate Reserves) is
very high. We also found the opposite to be true: among Associations with a strong (% Funded
greater than 70%) Reserve Fund, the risk of Special Assessment was rare. Reserves adequacy
can only be accurately measured using a “Percent Funded” scale!
Percent
Funded
0-10%
10-20%
20-30%
30-40%
40-50%
50-60%
60-70%
70-80%
80-90%
90-100%
100-110%
110-120%
over 120%
Special
Assessment
Frequency
53.3%
39.8%
29.0%
17.8%
10.3%
6.2%
3.2%
1.8%
1.4%
0.6%
1.2%
0.9%
0.6%
Reserve
Fund
Strength
Weak
Weak
Weak
Fair
Fair
Fair
Fair
Strong
Strong
Strong
Strong
Strong
Strong
Table 1
For Associations in the 0% - 10% Funded range there is approximately a 50% chance that the
Association will have inadequate cash to perform its anticipated Reserve projects during the
year. Based on the Special Assessment Frequency, you can see why a Reserve Fund in the 0% 30% range would be considered "weak", and over 70% considered "strong". It is important to
note that It is not necessary to be 100% funded (i.e., Reserve Fund balance = Fully Funded
Balance) to effectively eliminate the risk of inadequate Reserves. Reserves "adequacy" occurs at
or above the 50% Funded level, where the Association’s exposure to Special Assessment has
been effectively minimized.
An ancient Chinese proverb states that “forecasting is difficult, especially about the future.”
Table 1 is evidence that Percent Funded is a reliable measure of reserve fund adequacy. Every
Reserve Plan is destined to be inaccurate, since future events are generally out of one’s control
and rarely occur exactly as planned. Designing for a relatively strong Reserve Fund provides a
margin of protection when Reserve expenses are higher or earlier than expected.
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