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Percent Funded

Also referred as: "Reserve Adequacy"

A key performance indicator to measure the financial health of a building.

The ratio, at a particular point in time (typically the beginning of the fiscal year), of the actual (or the projected) reserve balance relative to the targeted fund balance, which is expressed as a percentage of the target. 

In a reserve study (depreciation report), the targeted balance (ie., the funding goal) is equivalent to either of the following targets: 

The percent funded is a measure of the financial health of the reserves and is used to determine the unfunded liability by quantifying the size of the reserve deficit and reserve backlog.

The percent funded is sometimes calculated in two ways:

  • The ratio of the current reserve balance relative to the target reserve balance. This method has serious limitations as it fails to recognize changes to future funding levels.
  • The ratio of the current annual allocation relative to the target annual allocation. This is the preferred method as it reflects the ongoing funding trajectory.

Some examples of percent funded being used as a financial tool by a group of owners:

  • "We currently have $100,000 in our reserve account. However, our reserve study indicated that we should ideally have $200,000 accrued to date if we are to avoid special assessments. We are therefore considered to be 50% funded at this time."
  • "We are setting aside $30,000 each year into our reserve account. Since our reserve study indicated that a $100,000 per year contribution (per year over the next 30 years) is necessary to avoid special assessments, we are deemed to be 30% percent funded at this time."

Since funds can typically be allocated from one asset to another with ease, this parameter has no real meaning on an individual reserve component basis. The purpose of this parameter is therefore to identify the relative strength or weakness of the entire reserve fund as of a particular point in time.


Purpose of Percent Funded

Percent funded is often used by mortgage underwriters and prospective buyers to make an informed decision about the funding liabilities of an owner group.

This benchmark is also used by the owner group to monitor the changing health of the reserve fund over consecutive years. It can therefore be used to set funding goals.

The value of this parameter is in providing a more stable measure of reserve fund strength, since cash in reserve may mean very different things to different governing bodies and/or owner groups.  


Range of Percent Funded
There are three broad funding levels on the funding spectrum, ranging from underfunded at the left side of the spectrum to overfunded at the right end of the spectrum:

Calculating Percent Funded
Although percent funded is intended as an industry measure to allow for objective comparison between buildings so that prospective buyers can make an informed decision, it can be calculated using different formulas resulting in different percentages.

Listed below are four major formulas:


Percent Funded by Property Type & Jurisdiction
According to the 2006 Community Association Treasure’s Handbook, which contains Northern California Common Interest Development (CID) survey data, the percentage funded amounts were
  • Condominium conversions, 44%
  • Condominiums,  46%
  • Planned unit developments (PUDs), 63%
In British Columbia the percent funded average, as of late 2011:
  • Condominiums, 15%

Evaluation
These debates always seem to get us into a knots due to the infinite loop between "funding" and "funded". The former is a process whereas the latter is a state, both of which are only measured (or measurable) in snapshots. We need to somehow get beyond the limitations of two types of funding-funded paradigms:
  • PERFORMANCE BASED - for example, our annual reserve contributions should be "adequate" (funding) and our account balance should be "adequate" (funded)
  • PRESCRIPTIVE BASED - for example, our annual reserve contributions are "25% of ___" (funding) and our account balance is "25% of ____" (funded)
Performance based paradigms communicate with linguistic variables (such as adequate, inadequate, over-funded, under-funded, good funding, poor funding, etc) whereas prescriptive paradigms use numerical variables (such as 10%, 20%, 75%, etc).

Lawyers generally operate in the domain of performance-based paradigms that use linguistic variables. Engineers, generally prefer to operate in the realm of numerical variables.

I don't believe we will ever find universal agreement on a "%" funding/funded to align with "adequate" funding/funded -- such a thing does not exist. "Adequate" is a qualitative term and belongs in the realm of general rules, thresholds, ranges, etc.that are tied to context and circumstances.

My quick two-cents. Let the debate continue.


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Fig. Different buildings funded to different levels.


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Fig. Incremental changes to the funding level at a single building over time.


Is "I. Care", our cartoon character, trying to raise funding levels faster than the owners can sustain?
Fig. Is "I. Care", our cartoon character, trying to raise funding levels faster than the owners can sustain?


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Fig. Comparison of average percent funded in different jurisdictions.

See also:


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