MARCH 2014 SUNRAYS | 7
ONLINE:
SCTXCA.ORG
Let’s Communicate!
Jim Romine, Executive Director
T
he Sun City Texas Reserve Policy calls for a professional
reserve study to be conducted by a qualified reserve com-
pany every four years with updated studies performed
by staff in the intervening years. Since our last professional
reserve study was conducted in 2010, we will be hiring a profes-
sional reserve specialist this year to work with staff and the
Reserve Sub-Committee to complete this necessary task. To
be clear, the study is continually updated as expenditures are
made from the fund and contributions are made to the fund.
WHAT IS A RESERVE STUDY?
A reserve study is the art and science of anticipating and pre-
paring for the repair and/or replacement of major assets. It is
partially art because projections are made about the future;
and partially science because projections are based on research
and analysis within defined methodologies.
A reserve study for an operation as large and as complex as
Sun City Texas is performed by specialists in the field and
consists of two parts: the physical analysis and the financial
analysis. The physical analysis includes information about
the current condition of the Association’s major assets and the
cost to repair or replace those assets. The financial analysis
evaluates the Association’s reserve fund balance and its ability
to cover anticipated repairs or replacements.
Theoretically speaking, a reserve study helps the Association
keep the physical and financial assets in balance. Practically
speaking, a reserve study is a budget-planning document that
provides a list of major assets, the status of the reserve fund,
and the recommended funding plan. The plan’s objective is
to collect funds at a stable rate to offset the predicted future
major expenses.
WHAT ASSETS ARE COVERED BY RESERVE FUNDS?
Expenses charged to the reserve fund are larger, infrequent
expenses that require significant advance planning, compared
to operating expenses that occur on a daily, weekly, or monthly
basis. To determine which items should be funded through
reserves, management determines whether 1) an asset is the
Association’s responsibility; 2) the asset has a limited but
predictable “Useful Life;” and 3) the cost to replace the asset
is above a minimum threshold (in our case $2,000).
HOW ARE THE USEFUL LIFE AND REMAINING USE-
FUL LIFE ESTABLISHED?
An asset’s useful life typically is established through past
experience with similar assets, adjusted by assumptions for
quality, rate of wear, and weather exposure. Remaining useful
life is established by evaluating an asset’s current condition,
which may decrease or increase based on usage. For assets
requiring a particular expertise or when age characteristics
are not visible (elevators, irrigation systems, pumps, etc.),
service vendors are consulted to obtain recommendations on
useful life.
HOW ARE COST ESTIMATES ESTABLISHED?
The best way to accurately estimate repair or replacement costs
for major assets is to check actual costs for similar items. In
the absence of “actual” costs, local vendors are contacted to
provide insight into current pricing trends. For components
that require a particular expertise (roof, HVAC, etc.), vendors
are again contacted and interviewed, or industry guidebooks
consulted. Also, inflation is taken into consideration.
HOW MUCH RESERVES ARE ENOUGH?
The typical measure of whether a reserve fund is adequate
is by identifying the “Percent Funded,” which is the current
reserve fund balance divided by the Association’s calculated
fully-funded balance. Essentially, a fully-funded balance means
that 100 percent of the replacement cost of all major assets is
available in the reserve fund. Measuring reserves by percent
funded indicates how well-prepared an Association is for up-
coming reserve expenses. While the 100 percent point is ideal,
reserve funds above the 70 percent level are considered “strong”
because cash flow problems are rare. Reserve funds in the 30
percent to 70 percent range are usually considered adequate,
while those funded below 30 percent are considered weak.
The balance of the reserve fund for Sun City Texas at the end
of 2013 was in excess of $5.7 million. With budgeted contribu-
tions and anticipated expenditures for the year, we anticipate
ending 2014 at 70 percent of the fully-funded balance for the
HOA and 78 percent for golf.
HOW MUCH SHOULD WE CONTRIBUTE?
There are several issues to consider when developing a reserve
funding plan. The primary issue is determining the objective of
the plan. Generally speaking, our objective is to provide sufficient
cash to perform reserve projects on time. Based on the study,
the Board develops a plan that provides stable contributions to
the reserve fund. This plan will ensure that each homeowner
will pay a fair share toward the repair of the CA’s assets, pro-
portionate to the amount of time they are homeowners.
While this article is a brief summary of a fairly complex subject,
I hope that it provides a basic understanding of a key issue
facing the Association as we approach transition.
Take care,
Jim
CA NEWS
Reserve Studies and Funds
