Fully Funded versus Fully Funded Balance

Started by SteveB25 • 20 replies • 258 views

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SteveB25 (Arizona)
Posts: 77

Posted:

I've noticed numerous posts where the author seems confused about the distinction between an HOA being fully funded and the percentage of the fully funded balance (FFB). It's important to understand the meanings of these terms.

Firstly, there is no legal definition of "Fully Funded," but there is a clear understanding of the Fully Funded Balance and its percentage within an HOA.

What does it mean to be fully funded? Being fully funded means having the financial resources to cover any reserve item's maintenance or replacement expense at the time that the reserve item(s) requires service without needing an additional assessment from the association's members. If an HOA can do this, then they are fully funded. There is no correlation to the fully funded balance or percent thereof. There is no such thing a being partially funded. The HOA is either fully funded or it isn't. In a reserve study, the service provider should be demonstrating (forecasting) what the reserve fund balance should be to cover all current and future reserve expenses so that the HOA can consider themselves to be fully funded.

What is the Fully Funded Balance (FFB)? The Fully Funded Balance (FFB) represents the current value of the deteriorated portion, not the total replacement value, of all the reserve components. When someone mentions that their HOA is 50% funded, it's likely that do not fully grasp the difference between the terms. What they should say is that their HOA's reserve fund is 50% of the fully funded balance. Even if the reserve fund is 100% of the FFB, it is likely that there still are not enough funds to cover 100% of the replacement value of all the reserve components. The percentage of FFB serves as merely a key performance indicator and is related to the potential risk of a special assessment or reserve item maintenance deferral. HOAs with lower percentages of FFB tend to face a greater risk of a special assessment. It's generally recommended within the industry for an HOA to aim for about 70% of FFB. THIS IS NOT TO SAY THAT THE HOA IS 70% FUNDED.

I have seen many reserve study service providers make the same mistake ... either through lack of knowledge or even deliberately ... confuse the two terms.

SusanO3 (California)
Posts: 163

Posted:

Thank you, great explanation. It's a difficult concept to grasp, even if you are a fully engaged Board member. Even harder for the membership.

Just to check I have it right. My HOA is currently 37% funded, which means we are 37% covered for all the future expenses listed in our Reserve components list for the next 30 years? Right?

Sue

KerryL1 (California)
Posts: 14,550

Posted:

I have not heard the language that the "HOA is fully funded." This, he writes, is based on our "reserve fund's strength."My HOA's new study by a local expert RS in a national firm says, "Your Reserve Fund is currently at xx.x% Funded." This, he writes, is based on our "reserve fund's strength." He continues : "Adequacy is measured in a two-step process:
1) Calculate the value of deterioration at the association (called Fully Funded Balance, or FFB).
2) Compare that to the Reserve Fund Balance, and express as a percentage."

So how is this different than what you're writing, Steve?

Bt, I've referred a few times to the National Reserve Study Standards 2023. Or some such title.It was 20+pge sport by several experts in the field, (RS and PEs) in clouding our RSs' boss.. I can no longer find this document anywhere!

My search may be as sloppy as my typing. anyone know where it is?

DeanJ
Posts: 1,786

Posted:

Quote:

Posted By SteveB25 on 10/15/2024 11:14 AM
I've noticed numerous posts where the author seems confused about the distinction between an HOA being fully funded and the percentage of the fully funded balance (FFB). It's important to understand the meanings of these terms.

Firstly, there is no legal definition of "Fully Funded," but there is a clear understanding of the Fully Funded Balance and its percentage within an HOA.

What does it mean to be fully funded? Being fully funded means having the financial resources to cover any reserve item's maintenance or replacement expense at the time that the reserve item(s) requires service without needing an additional assessment from the association's members. If an HOA can do this, then they are fully funded. There is no correlation to the fully funded balance or percent thereof. There is no such thing a being partially funded. The HOA is either fully funded or it isn't. In a reserve study, the service provider should be demonstrating (forecasting) what the reserve fund balance should be to cover all current and future reserve expenses so that the HOA can consider themselves to be fully funded.

What is the Fully Funded Balance (FFB)? The Fully Funded Balance (FFB) represents the current value of the deteriorated portion, not the total replacement value, of all the reserve components. When someone mentions that their HOA is 50% funded, it's likely that do not fully grasp the difference between the terms. What they should say is that their HOA's reserve fund is 50% of the fully funded balance. Even if the reserve fund is 100% of the FFB, it is likely that there still are not enough funds to cover 100% of the replacement value of all the reserve components. The percentage of FFB serves as merely a key performance indicator and is related to the potential risk of a special assessment or reserve item maintenance deferral. HOAs with lower percentages of FFB tend to face a greater risk of a special assessment. It's generally recommended within the industry for an HOA to aim for about 70% of FFB. THIS IS NOT TO SAY THAT THE HOA IS 70% FUNDED.

I have seen many reserve study service providers make the same mistake ... either through lack of knowledge or even deliberately ... confuse the two terms.

Here is the bottom line. An annual budget and a reserve study are our best educated guess. Will the pool last another 20 years or will it unexpectedly experiance an expensive leak? What will the inflation rate be over the next 10 years? If you can tell me the future, I can tell you if we are adequately funded, which is the target we are aiming at.

As a board member, as long as we don’t fall below 80% funded at any point in time, small adjustments can be made to correct the reserves without a lot of pain. A $100,000 deficit can be made up with an $20 a month increase over a short time period in most HOAs. The problem occurs in communities where owners believe the board owes them a place to live at a cost they are willing to pay vs paying what it costs to live there.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Scott

Let us say it will require $50K to pay for an item in 10 years and the OD is setting $5K a year aside in the reserves so that in 10 years they will have the necessary $50K. What would you say this is?

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Quote:

Posted By JohnC46 on 10/20/2024 12:05 PM
Scott

Let us say it will require $50K to pay for an item in 10 years and the OD is setting $5K a year aside in the reserves so that in 10 years they will have the necessary $50K. What would you say this is?

John,

I call that fully funded for that portion of the Reserve Fund.

If every amenity in the HOA carried a 10-year life expectancy/replacement schedule, and the HOA's reserve fund carries, in cash, 50% of the inflation-adjusted amount at Year 5, the HOA is fully funded.

If certain amenities are fully funded, but not others, then the HOA is planning to have enough cash to pay for replacements as they come due on the schedule....that's not full funding yet still a strategy (the HOA just can't have anything breakdown earlier than planned in the reserve study).

If you're engaging on Reserve Fund discussions w/ most dues payers, their eyes will glaze over as we express our budgetary brilliance!

KerryL1 (California)
Posts: 14,550

Posted:

I think we get into trouble when we use th language"the HOA is fully funded." Aren't we talking about the reserves, not "the HOA?"

In JohnC's example, he is only talking about one reserve componet and, to use Steve's lingo, that component is 100% funded.

Totally agree with Kelly, owners and too often in my HOA, directors do not understand reserves.

DeanJ
Posts: 1,786

Posted:

IF one chooses to use the term fully funded. At least 6 conditions must be met.

1. There is a comprehensive and current reserve study in place.
2. The funding levels specified in the reserve study are met.
3. The HOA’s annual budget provides for the that year’s reserve fund contribution.
4. The HOA’s annual budget provides for 100% of that year’s operational cost.
5. If the HOA experiences and unplanned maintenance expenditure and funds are used from reserves, the board must have in place a policy to pass an emergency assessment to cover the expenditure or fully repay the funds to the reserve account by the end of the following fiscal year.
6. The owners in the HOA must fully support the Board’s budget resolutions.

KerryL1 (California)
Posts: 14,550

Posted:

Good grief, Dean, are you unable to cite your sources? And, does #5 apply to all states? It does to Calif.

What does #6 mean? That all owes pay thei dues based on the approved budget?

CathyA3 (Ohio)
Posts: 6,299

Posted:

Unfortunately, there are always going to be owners who don't agree with what the board is doing and who will voice their opinions in varying degrees of loudness. The only times I've seen unanimous agreement about anything were: 1) in very tiny condo associations where the entire building had to agree about something or it didn't happen; and 2) the decision involved a hot-button issue that the entire community agreed on (eg. an amendment to the CC&Rs that prohibited Tier 2 and Tier 3 sexual offenders from living in the community - which was actually a moot point because there is a day care center adjacent to the community).

Given that money is a contentious issue at the best of times, the chances of agreement on anything money related are basically zilch.

DeanJ
Posts: 1,786

Posted:

Quote:

Posted By KerryL1 on 10/23/2024 10:15 AM
Good grief, Dean, are you unable to cite your sources? And, does #5 apply to all states? It does to Calif.

What does #6 mean? That all owes pay thei dues based on the approved budget?

#6. If the budget increase is 5% in 2025, but you doubt the ownership will support a similar needed increase for 2026, you are not fully funded.

DeanJ
Posts: 1,786

Posted:

Quote:

Also Kerry, can’t a board have a policy without the state of CA requiring it?

KerryL1 (California)
Posts: 14,550

Posted:

Boards cannot oppose state statute the the statute says so, Dean. Isn't it the same in your OHIO?

Steve, since you initiated this topic, can you please respond to Dean's latest error about reserves???/

DeanJ
Posts: 1,786

Posted:

My number 5 said the board has a policy. An HOA does not need a state law to perform proper fiscal responsibility. .

KerryL1 (California)
Posts: 14,550

Posted:

What Board, Dean? Yours?

In CA and many states, owners do not "approve" the budget.

If the Op. Budget specifies that 10% of it goes to fund the reserves account, and your reserves study says that's what is needed to stay, let's say, at 70% funded, and Owners pay the correct new dues, the reserve fund is still/will be 70% funded for that year.

CathyA3 (Ohio)
Posts: 6,299

Posted:

The thing with "fully funded" is that it is a calculation based on a snapshot in time and incorporating estimates of things like remaining useful life and projected cost increases (inflation). By definition it will change even if the community is following the recommendations of the latest reserve study. So it can create a false sense of security.

At best it's a signal that may indicate a community is in trouble and that special assessments are coming. But you need to know all of the pieces that went into the calculation to really understand what it means.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Quote:

Posted By DeanJ on 10/23/2024 10:01 AM
IF one chooses to use the term fully funded. At least 6 conditions must be met.

1. There is a comprehensive and current reserve study in place.
2. The funding levels specified in the reserve study are met.
3. The HOA’s annual budget provides for the that year’s reserve fund contribution.
4. The HOA’s annual budget provides for 100% of that year’s operational cost.
5. If the HOA experiences and unplanned maintenance expenditure and funds are used from reserves, the board must have in place a policy to pass an emergency assessment to cover the expenditure or fully repay the funds to the reserve account by the end of the following fiscal year.
6. The owners in the HOA must fully support the Board’s budget resolutions.

Everything but #5 and #6 make this very feasible. Those last two provisions handcuff the HOA board, which if they're fully funded, are probably doing a stellar job in managing the HOA.

I'd apply #5 to HOAs who tend to overspend on their operations budget and thus don't fully meet their reserve goals by year's end.

There are too many HOA-affected owners who want amenities yet oppose funding their maintenance to make #6 work in a real world sense.

CathyA3 (Ohio)
Posts: 6,299

Posted:

I'm in Ohio and our owners do not approve the budget, nor do they vote on it in any way - it's solely at the board's discretion. If the homeowners disagree with how the board is operating, they have the option of electing board members who are more in line with how the owners think. And then the new board gets to figure out how to get $2 worth of spending out of every $1 of assessments, and good luck to them.

Keep in mind that owners electing boards that will do what the owners want is a partial cause of the Surfside condo collapse.

We'll soon be explaining our 2025 budget to our membership. Ordinarily we don't do this in a meeting, but the previous board made some stupid choices and made promises that did not materialize (and actually cost us money to rectify). After our attorney explains some hard facts, I get to explain why low assessments lead to increased spending and depleted reserves - and why the longer we wait to stop the slide, the more painful it will become (ie. special assessments or loans if we can get them). Recess is over, in other words, and winter is coming.

Personally, I refuse to live in an association with boards making dumb financial choices. At my age I have less time to recover from financial reversals, so I avoid them as best I can.

TerriS6 (California)
Posts: 3,284

Posted:

Kerry, here is link to Reserve Study Standards download (scroll down) https://www.caionline.org/advocacy/condo-safety/

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Our owners do not get to approve the budget nor any dues increase which is in the budget. That said 51%, of all owners could vote to reject the new budget thus reverting back to present budget but with a 5% dues increase.

KerryL1 (California)
Posts: 14,550

Posted:

Oh, thank you, that nk you Terri.I do not know what I was unable to find these.

These are NATIONAL standards approved in 2023. Any other standards that your HOA or its reserve analysts are using is out of date. It tells you everything you need to know.:

https://www.caionline.org/advocacy/condo-safety/ (scroll down to Reserve Standards). It is free and there's a nearby pub about reserves that also is helpful.

The thing is, I fear, that too many HOA leaders will not read it.

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