Funding Methods and Objectives
There are several reserve study funding methods and goals. These methods may be used to develop a funding strategy that corresponds with the risk tolerance of the community.
In National reserve study Standards terminology, there are two basic funding Methods: “Cash Flow” or “Component Funding”. The Component Funding models utilize a methodology in which funds are allocated to specific components, often not modeling the real world function of the reserve fund (where all Reserve Funds are available to be spent on all legitimate Reserve projects).
In the same National reserve study Standard terminology, there are four funding objectives: Full funding, threshold funding, baseline funding, and statutory funding.
Due to its greater computational flexibility and its ability to allow the user to focus on and achieve any of the four funding Objectives, the “Cash Flow” Method has seen significant growth in popularity. “Full funding” describes the objective to have reserves on hand equivalent to the value of the deterioration of the each reserve component. For example, for a $10,000 (current cost) pool resurface project with a useful life of ten years, after two years, when the pool’s surface has deteriorated 2/10 of $10,000, to be fully funded the association should have $2,000 set aside for this component (and on and on again for each component). “Full funding” describes an objective where ongoing deterioration is offset by the proportional accumulation of cash.
“Baseline funding” describes the objective to have sufficient reserves on hand to never completely run out of money. This is sometimes described as a “cash-positive” plan. With less cash in reserves on-deposit, associations with a baseline funding objective have higher instances of special assessments and/or deferred maintenance.
“Threshold funding” describes an objective chosen by the board other than the 100% (full funding) level or just staying cash-positive (baseline funding). This may be a specific percent funded target or a cash balance target. Threshold funding is often a value chosen in between full funding and baseline funding.
“Statutory funding” describes the pursuit of an objective as described or required by local laws or codes. All funding objectives are designed to meet exactly the same expenses outlined in the reserve component list. Thus the expenditures are identical, only the size of the reserve fund through the years is different. This means the size of reserve contributions between different reserve funding objectives is relatively small (typically only 10-15%).