Understanding Percent Funded in Reserve Studies

​When it comes to managing the long-term financial health of a community association—whether it's a homeowners association (HOA), condominium association, or co-op—reserve studies play a crucial role in ensuring that the property can maintain its value, meet future maintenance needs, and avoid sudden financial burdens on owners. One of the key metrics that is often discussed in reserve studies is the “percent funded.” But what exactly does this mean, and why is it so important? Let’s break it down.
What is a Reserve Study?
Before diving into percent funded, let’s quickly review what a reserve study is. A reserve study is an in-depth analysis that helps communities plan for significant repair and replacement projects that will be needed over time. This includes things like roof replacements, repaving roads, updating elevators, or any other major capital improvements. The goal of a reserve study is to estimate how much money should be set aside today to ensure that these future expenses are covered, reducing the likelihood of special assessments (unexpected fees charged to residents) or costly loans.
What Does Percent Funded Mean?
Percent funded refers to how well the reserve fund is equipped to cover anticipated future expenses, as indicated by the reserve study. It’s essentially a snapshot of the financial health of the community’s reserve account, showing how close the current reserve balance is to the projected amount needed to cover future repairs and replacements.
Here’s the formula for percent funded:
Percent Funded = (Current Reserve Balance / Recommended Reserve Balance) x 100

• Current Reserve Balance: The amount of money currently in the reserve fund.
• Recommended Reserve Balance: The amount of money that, according to the reserve study, should be in the fund to cover the expected costs of future repairs and replacements.

For example, if a community’s reserve study recommends a reserve balance of $500,000 to cover future needs, but the community currently has $400,000 in its reserve fund, the percent funded would be:
($400,000 / $500,000) x 100 = 80% funded.
Why is Percent Funded Important?

1. Indicates Financial Health: Percent funded gives an at-a-glance view of how well the association is preparing for future repairs. A higher percentage (typically 70% or above) suggests that the association is reasonably prepared for upcoming expenses. A lower percentage could signal potential challenges, possibly requiring special assessments or borrowing money to make up the shortfall.
2. Helps Avoid Special Assessments: If a reserve fund is underfunded, the association may need to rely on special assessments—one-time fees charged to homeowners to cover immediate costs. Special assessments can come as an unpleasant surprise for homeowners, creating financial strain. Adequate funding of reserve accounts reduces the likelihood of having to impose these extra fees.
3. Supports Property Value: Buyers often examine the financial health of an HOA or condo association before making a purchase. A well-funded reserve account suggests the association is responsible and proactive, ensuring there are no looming costs that could affect the property’s value. Conversely, an underfunded reserve could raise concerns about potential financial instability.
4. Long-Term Sustainability: A community with adequate reserve funding is better positioned to maintain its infrastructure and handle repairs and replacements on schedule. This ensures that necessary projects are completed without jeopardizing the community’s financial health. Percent funded serves as an essential indicator of how well the community is planning for its long-term future.

Adequate Funding vs. Full Funding
While reserve studies may recommend full funding—where the reserve account is fully aligned with projected future expenses—it’s not always necessary to aim for 100% funding. In many cases, striving for adequate funding is a more realistic and practical goal.
Adequate funding typically refers to maintaining a reserve balance that ensures the community can reasonably meet future expenses without overburdening homeowners. This might mean achieving a reserve fund that covers 70% to 80% of anticipated costs, which is often sufficient to avoid drastic measures like special assessments. It also allows communities to adjust over time as their needs evolve.
What is an Ideal Percent Funded?
The "ideal" percent funded can vary from one community to another based on factors like the property’s age, condition, and the specific types of assets being maintained. However, a reserve funding target in the range of 70% to 80% is often considered adequate for most communities. Here’s how different funding levels typically stack up:

• 70-80% Funded: This is typically considered adequate funding. It shows that the community is actively preparing for future expenses without being overly conservative. While it may not cover every possible scenario, this level of funding usually provides enough cushion to manage anticipated repairs and replacements.
• 80% or Above Funded: This level of funding is still strong, providing extra security without necessarily being overfunded. A reserve fund in this range suggests that the community has planned well for future costs but isn’t tying up excessive resources that could be used elsewhere.
• Below 70% Funded: Communities below 70% funded should consider taking steps to improve their reserve balance. While it's still possible to manage with this level of funding, the association may face difficulties if major repairs are needed sooner than expected. In this case, it might be worth considering increased contributions or a review of the reserve study.

How Can Percent Funded Be Improved?
If your community is below the ideal (or adequate) percent funded, there are several strategies to help boost it:

1. Increase Reserve Contributions Gradually: One of the most straightforward ways to improve percent funded is by increasing the annual reserve contributions from homeowners. A slight annual increase, rather than a large jump, can make a meaningful difference over time, improving the reserve balance without causing financial strain.
2. Adjust the Reserve Study as Needed: It’s important to review the reserve study periodically, typically every 3-5 years, to ensure it reflects realistic estimates of future repair and replacement needs. An updated reserve study can help the community better align its funding targets with actual needs.
3. Prudent Management of Funds: Carefully managing reserve funds through smart investment strategies can also help the reserve balance grow. It’s essential to work with financial professionals to ensure that the reserve fund is growing at a reasonable rate.
4. Reassess Large-Scale Projects: Sometimes, large maintenance or replacement projects can be deferred or staggered, allowing the community to build its reserves gradually over time. With input from the reserve study and engineering experts, the community can prioritize repairs to balance the need for action with the available funding.
5. Special Assessments When Necessary: In rare cases, a special assessment may be required to catch up on a significantly underfunded reserve. This should be considered strategically and only if necessary to avoid more severe financial difficulties down the road.

Conclusion
Percent funded is an essential metric for understanding the financial health of a community’s reserve fund, but it’s important to recognize that adequate funding—typically in the range of 70% to 80%—is often sufficient to meet future needs. By maintaining an adequately funded reserve, communities can avoid financial crises, reduce the likelihood of special assessments, and continue to manage their infrastructure efficiently.
Instead of striving for full funding, which may not always be necessary or practical, focus on ensuring that your reserve fund is adequately prepared to cover future repairs and replacements. This balanced approach will allow for a sustainable, financially stable community, providing peace of mind for homeowners today and in the years to come.