FEATURE
When It Comes to Reserve Funds, How Much Is Enough? By Roxi K. Bardwell, PCAM
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hen other states (not CA) passed laws that required “adequately funded”? As communities aged, replacement reserve funds to be “adequately funded,” those states reserve funds were not adequately funded, resulting in the turned to the Community Associations Institute (CAI) for assis- inevitable special assessments - which nobody appreciates, tance. Industry attorneys and directors and officers (D&O) least of all the board members forced to make those deciliability insurance carriers also needed this defined in order sions. Disgruntled homeowners wanted something done. to advise and defend their clients. CAI then turned to a group Their property values had declined. The new owner who of CAI Business Partner reserve specialists from across the just purchased had no idea a special assessment was coming country and asked them to define “adequately funded reserves.” and lawsuits were filed. Homeowners across various states Here is the definition this group of very experienced reserve complained to their elected officials resulting in a myriad specialist’s provided: of laws regulating HOAs. These com“Adequate Replacement Reserves “Adequate Replacement Reserves plaints also resulted in California is defined as a Replacement is defined as a Replacement Reserve passing laws requiring, among other Reserve Fund and a stable and Fund and a stable and equitable things, the Disclosure Form, answerequitable multi-year Funding multi-year Funding Plan that together ing questions such as whether or not Plan that together provide for provide for the timely execution of the a special assessment is anticipated, the timely execution of the association’s major repair and replacealong with the other documents to be ment expenses as defined by National mailed annually to all owner-members association’s major repair and Reserve Study Standards, without replacement expenses as defined informing them of the current status of reliance on additional supplemental their Reserve Funds, and the 30-year by National Reserve Study funding.” ** Funding Plan to add to and spend those Standards, without reliance on If you were expecting a simple additional supplemental funding.” funds. The intention of the stable and answer, like 75%, sorry. It’s just not equitable multi-year Funding Plan is to quite that simple. But, let’s break it down and try to simplify spread the funding of the cost of the repairs and replacement of it. This definition is making two key points: (1) have a Reserve reserve components evenly over the years, so each owner pays Fund (money in the bank) and a Funding Plan that is multi- their “fair share” annually. This avoids special assessments year, stable and equitable (keep making annual deposits, or large increases to “catch up” after not adequately funding equitably over time) that does not rely on special assessments reserves on an annual basis. or loans and (2) that together (the Fund and the Plan) provide In addition to legislative involvement, prospective buyers for the timely execution of the association’s major repair and and real estate agents have become more knowledgeable replacement expenses. about reserve funds. Some buyers have experienced or heard A simpler interpretation is: (1) have the Reserve Funds stories about special assessments. They are inquiring about available in the bank, funded fairly and equitably over time, the reserve funds and requesting a copy of latest reserve study. without special assessments or loans and (2) execute the Plan, In talking with realtors, the current percent funded does i.e. spend the Reserve Funds when the repair or replacement come up in discussion more and more, as does the financial is necessary or due. condition of the community. A Funding Plan is an association’s plan to provide income Percent funded is the measure of the reserve fund “health” to a reserve fund to offset anticipated expenditures from that expressed as a percentage at a given point in time, typically the fund. Let’s go back to the key wording in the definition about beginning of the fiscal year for which the reserve study was the Funding Plan – stable, equitable, and multi"A reserve fund that is 100% funded has accumulated the year. These words are significant as they may proportionately correct amount of money, to date, for the be at the root of the very question - how did we reserve components it maintains. While a current years’ get to the point where state legislatures passed percent funded is important, the plan is also important." laws requiring Replacement Reserve Funds be
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Quorum July, 2019
