High Assoc Dues and 120% funded reserves

Nick,

You can't compare Associations. There are differences in amenities, services provided, delinquency rates, etc.. Therefore, comparing assessments between associations is akin to comparing apples to oranges.

Assessments, as I suspect that you know, is based on known expenses (contracts and amount to be placed in Reserves) and estimates (based on past history) of normal expenses. Additionally, some (perhaps many) Associations will also have a contingency buffer in the budget to address short falls between bills being due and assessments paid. This is your budget and only those who have all the information can assist you with that. I've attached our last proposed assessment presented to the Board to help illustrate this process.

Reserve funding is based on one of two methods, component and cash flow.

The component method (also known as straight line) sets aside a specific amount of money for the replacement and (typically) expected repairs of each component the Association is responsible for. Your reserve accounting will likely have each component (or group of components) as a line items and x amount being set aside each month to that line item. This method does tend to build up a large amount of funds in the reserves.

The cash flow method treats the Reserves as one big pot of money. To over simplify it, it takes the position that you need x amount of money at a specific time. It also keeps a specific amount (set by the Board) that the reserve balance will not fall below. Expenses for reserve components will come out of this large pot of money. This method tends to have less funds in the reserves at any one time and may require less amount of money to be placed in the reserves (when compared to the component method) because this you place, say, 25,000 into the reserves that will be used for anything identified as the Reserves vs. the component method that says you will place 10,000 for sidewalks, 15,000 for roads and 1,000 for playgrounds (total of $26,000).

The goal of the cash basis method is only to make sure you have enough money for replacement of a single when it's needed (and the other component when it's needed) vs. the component method that says you are setting aside a specific amount each month for each item you are funding.

Here are some links on the two methods:

CASH FLOW vs COMPONENT UNDERSTANDING DIFFERENT METHODOLOGIES

Component method vs cash flow analysis

Choosing Between Straight Line and Cash Flow Funding

National Reserve Study Standards

Personally, I prefer the component method.

For general info on Reserve Studies see the following thread on this forum:

Subject: Reserve Studies/Funds 101

Hope this helps,

Tim

Nick,

I put together excel spreadsheets to handle the reserves at the Association I used to live in. In five years, they did three reserve studies with three different reserve analysts and the numbers are all over the place. It was relatively simple to take the three reports and then re-inventory the assets to make sure we actually had them. Then I re-measured the components and looked up replacement prices through a Craftman's Guide.

Once that was all done, I took the monies and re-allocated them to the specific components based on a number of factors. Another sheet calculated when items were coming up for repair or replacement. Another sheet tracked our reserves, whether they were in laddered CD's or money market. We made sure that our money market account always had 2 years or reserve funds available at any given time.

My background is finances and having reviewed a number of reserve studies, there had to be a better way, instead of just going through the motions. BTW, there is no legal limit of percentage funded, just one attorney's opinion.

In reference to your monthly dues and thinking you are out of touch with neighboring communities. No two associations are alike. Things to consider. Number of units compared to others. The smaller the association, generally, the higher the dues, less folks to spread the pain. Quality of amenities versus the others. Detached homes versus townhomes or condo. Are reserves adequate now or are you playing catch-up.

As others will tell you, you have to compare apples to apples.

Nick,

I am not much of a bean counter but it always looked like the problem with reserves is that you are aiming at a moving target. For example, you estimate that your roof will need to be replaced in 20 years and it will cost $100,000 so you set aside that much money. In twenty years, however, the roof is shot but inflation now means you need twice as much as you saved.

Being 20% over-funded is not unreasonable. Everything always costs more than you thought it would so I see nothing wrong with having a cushion.

How current is your last reserve study?

Inflation and interest on your own funds can also be important factors. The spreadsheet I'm working on analyzes our reserves using the cash flow method, and when it gets to predicting spending and fund balances in the 5-10 year range the results are dramatically different between 0.5% interest on your funds with 3% inflation, for example, and 1.5% interest on your funds with 1.75% inflation. Very very different results.

My own preference is to take the conservative estimates and then re-evaluate every 2 or 3 years. If you overestimate your contributions you can always ease up a bit down the line. If you underestimate then you have to play catch-up which can be difficult and stressful.

A reserve study is a planning document and not a construction schedule. It's more like a forecast from the National Hurricane Center. Projections are usually pretty good for the first couple of days (years) but a great deal of uncertainty comes into play the further out you go.

Welcome to HOATalk, Nick.

We had three reserves companies in three years and there were some significant differences but a lot of similarities. (but we have 150 components!)

Do you have a sense of how many components you have in your HOA? what size is your HOA?

I do agree that you need to hire a new firm but not that that specialists come into your HOA blind. Do give her/him your previous studies--re-invention of the wheel not advisable! Your analyst will be able to estimate the remaining useful life of each components and the estimated cost to replace it. Your analysts also will have you reserves say, x% a year for inflation.

S/he'll have other analysts to touch base with if a component is unusual--these folks often seek advice form each other
A reserves specialist will not advise you on your overall dues, i.e., they won't advise about line items in your operation budget.

70-130% funded is considered strong, but only about 30% of CA HOAs are funded at that level. Your analyst--and all of them--recommend 100% funding as, it seems, part of their professional ethics. You could reduce your contributions a bit to reserves for '16 after your new study, which you should have done right away.

Do know, however, that a new analyst may find one or more components that the old vendor neglected. OR, the new analyst may find something listed in your study that'll outlast the estimated life of your HOA, and shouldn't be reserved for.

Poke around davis-stirling.com for more about almost any reserves question you might have! Just scroll down their Main Index to reserves.