With budget season fast approaching, community association boards across the country are sitting down to debate dues increases, project timelines, and funding needs. Capital planning is no easy feat, but when used intentionally, reserve studies can make budget season smoother and financial decisions more defensible.
What the Reserve Study Actually Tells You
The primary purpose of a reserve study is to convey your community’s capital planning needs to current and future boards by doing two things:
- Reserve studies inventory your community’s major components (roofs, parking lots, elevators, and so on) and determine their remaining useful life.
- This information is used to create a 30-year funding plan, showing when each component will require replacement, how much each project will cost, and how much you should be setting aside in reserves right now to be prepared.
These projections tell you not just what you’ll spend 30 years down the road, but what’s coming in the next one to five years, which is the window that matters most for annual budgeting.
Using Your Reserve Study During Budget Season
Before finalizing your budget, there are a few important steps every community association manager and board should walk through.
Review the Age of Your Current Study
Take stock of what has changed since it was completed and honestly assess whether an update is warranted. Reserve studies are built on educated estimates, and budget season is the right time to ask whether those estimates still hold.
- Have material or labor costs in your area risen faster than the inflation rate built into your study?
- Has a component failed ahead of schedule, or been extended through a maintenance program?
- Have you deferred maintenance that has now become critical, and therefore more costly than the original projection?
If the answer to any of these questions is yes, your study may not be on par with what you need to contribute to reserves. A conversation with your reserve specialist before you finalize your budget can prevent you from locking in a contribution that leaves reserves short.
Look at Your Five-Year Outlook
This will help you determine what capital projects are on the horizon and whether your funding levels are keeping pace. If a capital-intensive project is coming up in the next five years and it is not currently being funded, it’s crucial to course-correct before you’re forced to rely on alternate funding methods or defer maintenance.
Develop a Game Plan
Finally, develop a clear strategy for how your association will take on upcoming projects, with particular attention to ensuring that structural work is not deferred, as pushing those projects down the road can lead to significantly greater costs and liability down the line.
When the Study Points to a Problem
Sometimes budget season and the reserve study reveal an uncomfortable truth: the association is significantly underfunded, dues haven’t kept pace with inflation, and a major project is on the horizon.
In that situation, the reserve study is still your friend, because it quantifies the problem and gives you options. Your reserve specialist can help you model scenarios, such as phased contribution increases or alternative funding methods. Having those scenarios in hand, backed by the study’s data, lets the board make a deliberate choice rather than improvise under pressure.
How a Current Reserve Study Improves Budgeting Accuracy
Associations suffering from inadequate reserve funds and those struggling to prioritize capital projects will benefit most from a current reserve study. A current reserve study provides expert guidance on prioritizing capital projects and ensures that community leaders allocate reserve funds to the most important projects, which is critical in today’s economic climate.
When conducted by a professional firm, a reserve study will account for environmental conditions that affect component useful lives and utilize current local project costs to ensure the most realistic projection of near-term expenditures. Expenditure accuracy is critical to ensuring the supporting funding plan meets your long-term financial needs, and it becomes increasingly important during budgeting season.
As recent economic events have forced community leaders to focus on immediate business needs, there is an inherent risk of overlooking longer-term activities, such as capital project management and reserve planning. If neglected for an extended period, failure to address critical projects and insufficient reserves can be catastrophic to a community’s long-term financial health.
Reserve studies support the board’s fiduciary responsibility to maintain and enhance the community’s value. Following a reserve study’s recommendations helps minimize the risk of special assessments and bank loans needed to complete necessary capital projects for community components.
Simplify Budget Season: The Bottom Line
When it comes to budgeting for your community association, you never have to go it alone. With an up-to-date reserve study in hand, you’ll know exactly when to expect major capital projects and how best to save reserve funds to complete them in a timely manner without deferring necessary maintenance. Put simply, reserve studies simplify budget season and budgeting in general for both the near and long-term future of your community. If your community needs a little extra support this budgeting season, don’t delay commissioning a reserve study!