We’re often asked “what percent should HOA reserves be funded?” The short answer is that there is no “one size fits all” benchmark for measuring the health of your community association’s reserve funds when it comes to applying the percent funded model.
To understand percent funded, one must first understand what a fully funded balance is. A fully funded balance is the balance that is in direct proportion to the fraction of life “used up” for a given component. For example, if an association has a $100,000 roof that is half way through its 20-year useful life, the fully funded balance in the 10th year would be $50,000 (10 years / 20 years x $100,000 = $50,000).
Percent funded is calculated by dividing the current reserve fund balance by the fully funded balance. In the above example, if the association has $30,000 in reserves in year 10, it is 60% funded ($30,000 / $50,000). In this case, one might say that being 60% funded is or is not sufficient. There is very little evidence that suggests a specific percentage rate applies to all or even a majority of associations. Percent funded provides a simple mathematical interpretation of the general strength of reserve funds but fails to provide context as to the adequacy of current reserve contributions. Some communities function very well with 20-to-30% of the fully funded balance on hand at any one point in time. Others would have to have 100% of the fully funded balance on hand to avoid a special assessment.
In lieu of targeting an arbitrary percentage of the fully funded balance, Associations should target a path (funding plan) that considers their specific needs. Most in the reserve study industry agree that stable, consistent reserve contributions that cover the cost of capital expenditures over time (aka threshold funding) is a more thoughtful approach to reserve planning compared to targeting a nominal percentage of the fully funded balance. This approach ensures adequate reserve funds from year-to-year and often results in lower annual assessments than targeting 100% of the fully funded balance.