About Percent Funded in the Reserve Study

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Reserve Study Presentation: About Percent Funded Joel L. Tax, RS PRA Reserve Specialist https://www.reservedataanalyst.com

 

2. Presentation Topics

 

3. What is Percent Funded?

 

4. Percent Funded: The Formula Example: Paint Project Costs: $100,000 Age of Paint: 1 years Paint Useful Life: 10 years Reserve Account Balance: $5,000 **This community has half of the amount they ideally should have at this point in time.

 

5. Being 100% Funded  In 10 Years a Paint Project: $100,000.* *Interest and inflation omitted for simplicity 100% Funded = on track for project expense. ReserveAccountBalance

 

6. Being 50% Funded  In 10 Years a Paint Project: $100,000.* *Interest and inflation omitted for simplicity They are @ 50% Funded = Shortfall ReserveAccountBalance

 

7. Percent Funded Projections *Percent Funded calculations will fluctuate up and down over time based on annual contributions and project expenses occurring.

 

8. Common Percent Funded Ranges *Typical goal of the Reserve Analyst is to create funding model that increase the percent funded into a “Good” funding range over time.

 

9. Risk of Low Percent Funded K S I R Higher Risk Of: •Cash Flow Issues – Loans, Special Assessments, Emergency Financing •Deferred Projects •Marketability & Aesthetic Appeal Issues *Under 30% Funded equates to a much higher risk

 

10. Considerations for Percent Funded

 

11. Do you have any questions? ??? Joel L. Tax, RS PRA Reserve Specialist 

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Hi my name is Joel Tax I'm with Reserve data Analyst and today we're going to go over the Percent Funded calculation in a reserve study. Topics being covered today are what is percent funded, risk associated with remaining at low percent funded levels and other considerations for the percent funded calculation in the reserve study.

 

So what is percent funded? Well simply it's a mathematical calculation of the adequacy of the reserve account at one point in time. It's how much is actually in the reserve account at one particular point in time this is a simple formula percent funded equals in current Reserve account balance that's how much is actually in the reserve account / the fully funded balance which is an idealized amount in the reserve account it's an amount that offsets the accumulated deterioration of that component so let's just break this down real quick in this formula we have a paint project of $100,000 it's 1 years old the paint has a useful life of 10 years so at the end of 10 years we're going to have to recoat the paint and at the end of your 1 we have a reserve account balance of $5,000 so to create 8% funded figure for this scenario we take $5,000 which is the reserve account balance and we divided by $10,000 which is the fully funded balance at the end of year 1 in this scenario with a $100,000 paint project again because we're taking that $100,000 and we're dividing into 10 because it's going to last 10 years and we want to spread out that cost the most to 10 years so everybody is paying their fair share over that time. In this scenario $5,000 divided by $10,000 equals 50% their 50% funded they have half of the amount in the reserve account that they ideally would have at the end of year one they are not on track for paying off that paint project of $100,000 at the end of your 10 so let's look at here at an organization that is 100% funded each and every year for the 10-year. Chicken see here at the end of your 1 they have deposited $10,000 in the reserve account at the end of your two they have deposited an additional $10,000 and now they have a total of $20,000 at the end of your 3 they have deposited an additional $10,000 so now they have $30,000 so on and so forth to the end of your 10 they have $100,000 in the reserve account which is equal to the estimated project cost of $100,000 so they can pay this paint vendor for the project expense in this narrow they're 100% funded because they are on track the entire time for paying off this paint project the equally spread out the $10,000 and each year so that everybody pays their fair share overtime now let's look at community or an open that decides to half of what they have That lack of funds as you can see here in ribs that's $55,000 they need to get up to this $100,000 mark so they're 50% funded in this scenario because they have decided to allocate half of an ideal amount which would have been $10,000 instead they have allocated $5,000 it's important to note that they have your 1 through your 9 had no negative consequences for having a shortfall in the reserve account they were able to underfund the reserve account for 90% of the the life of this component with essentially zero repercussions it's only in your 10 when they realize or perhaps they realize before but it's when it comes to fruition the actual cost and the lack of the funds to pay for that project expense projections for the percent funded figures this is a typical of projection sheet from Reserve study as you'll see we have the current cost of components of annual contributions to the reserve account and taking account interest annual expenditures again annual expenditures if you only have a few components they may only happen every few years if it's a large project expense maybe only once every twenty-five or thirty years so the percent friended figures will fluctuate up and down over time based on when these project expenses occur and the annual contribution to the reserve account and whether that's increasing or decreasing or staying stagnant that's all going to have a significant impact on your percent funded figures which are calculated each and every given year it's important to remember that the percent funded calculation will fluctuate that's normal for to fluctuate up and down over. Time Comment funded ranges is 0 - 30% this is a low funded range or there's a high risk for special assessments Emergency financing Big necessary 30 to 70% this is where most organizations that we run into or situated essentially they can go many years or decades in this Fair funded range with little impact until they see a significant shortfall in one particular year we like to call the speak expense years and a good funding ranges where most communities and organizations have the least risk for Reliance on loan special assessments things like that it's also important to note though that you can also be high percent funded range say 70 or 80% funded and still run into Financial issues in respect to the reserve account if you're 80% funded and you have to make up 20% for a component expense that is projected to happen that very next year you have to make up 20% difference there to get up 2 again 100% of the cost of the the component so it's really important that we look at projections in the reserve study as well as 2% funded figured being low percent funded for extended period of time carry significant risk there's cash flow issues Alliance on Lone special assessment emergency financing campaigns every organizations a little bit different on how they raise funds but there's a very high risk associated with that if you remaining low percent funded range for significant. Time and you can be an even Affair funded range for many years and now not have any apparent negative consequences to it till all the sudden you have a large expense that that occurs and they're just are not the funds in the reserve account to cover it deferred projects are very very common in a community or organization that has a low percent funded range they just do not have the money in the reserve account to pay off that project expense so they push it out if you push out see it a paint project for five years you may have flaking paint you have water intrusion issues and then all the sudden you have siding that needs to be replaced that didn't before or sheathing underneath the siding or other components that are impacted by water intrusion so it's important that you take that into consideration if you're going to be deferring projects because of low percent funded Figure BG don't have the money in the reserve account you should take into account that there's going to be possibly much higher costs associated with different project and that carries its own risk over time marketability and aesthetic appeal issues are extremely common in percent low percent funded communities and organizations buyers as well as people in the community are typically not very happy and pleased by seeing feeling paint tarps on roofs potholes in roads things like that we're a community organization has obviously defer to project oftentimes because they just don't have the funds to cover it at the time that will impact the marketability as well as values other considerations 4% funded percent funded will fluctuate from year to year that is normal that is based on the allocation rate of Reserve account as well as the project expenses ideally we create funding miles where the percent funded figure over a significant period time say 10:20 or 30 years increases to 100% funded level but within that period of time it will absolutely fluctuate up and down strictly based on the allocation rate to the reserve account and how much the project expenses actually aware and Witch Project expensively expenses actually occurred a percent funded is not the full picture you need to also look at cash flow $0.04 funded while it's very helpful you can be in a position where you're saying hi percent a good fun to drain 70 to 30 or 200% where you run out of money because you were not 100% funded at the end of a component useful life so you can run into a scenario where you Where is it fun to figure may say 70 or 80% but you have to make up that room remaining 20 or 30% within one year. And that's tenario if it's a large enough expense that could be a significant impact on the budgeting for that Community organization so it's important look at cash flow how much is actually going to be in the reserve account in each particular year as well as percent funded nothing is set in stone significant changes can and will happen to the reserve account and the percent fat finally Figures were absolutely change based on budgeting decisions this could be an increase or decrease to the allocation rate as stagnation to the allocation rate the reserve account for many years it could be project expenses that are much higher or lower than what we're projected it could be additional expenses related to those complemented projects that came up perhaps be due to different project or you have significantly higher cost lastly be cautious of mathematical gimmicks it's very easy to go into a component list and change a few numbers and have dramatically different percent funded Figures it's important to note that this has no real impact on the financial situation in the community or organization but mathematically it's easy to do on paper you can change the measurements or quantity of components you can change the useful life of components you can change the remaining useful life of components and you can change the cost of the components any of those if you make a significant change to a large X Project cost that's going to have a significant impact on the percent funded figures so it's really important that we are cautious of mathematical gimmicks I like to call it tinkering with the numbers because you can end up with a budget that looks great on paper and you're able to get away with 4 with many for many years before the actual project expense occurs and then in those years they find out well we've been under budgeting to the reserve account for many years of this point because we just don't have the money in the reserve account even though those prior years it look good on paper so it's really important we are very cautious of Guinness so that's about it for this presentation hopefully you found it helpful if you have any questions you can call or email I strongly suggest also looking at the fully-funded balanced presentation that goes into that figure since that's part of this formula percent funded it's important to know both aspects to get a full understanding of the methodology that were using thank you so much.

Additional Resources:   The Fully Funded Balance Explained