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CA NEWS
Let’s Communicate!
Jim Romine, Executive Director
Repairs, replacements, recommendations:
the art and science of reserve studies
The Sun City Texas Reserve Policy collect funds at a stable rate to offset the How much reserves are enough?
requires a professional reserve predicted future major expenses.
study to be conducted by a qualified The sufficiency of reserve funds is typically
reserve company every four years with What assets are covered by reserve measured by identifying the percent
updated studies performed by staff and funds? funded, which is the current reserve
resident volunteers in the intervening fund balance divided by the association’s
years. Since our last professional reserve Expenses charged to the reserve are calculated fully funded balance. Fully
study was completed in 2014, we will be the larger, infrequent expenses that funded balance essentially means that
conducting the in-house study this year require significant advance planning 100 percent of the replacement cost
by working with staff and the Reserve compared to operating expenses, which of all major assets is available in the
Subcommittee to perform this necessary occur on a daily, weekly or monthly basis. reserve fund. Measuring reserves by
task. To be clear, the study is continually To determine which items should be percent funded tells how well prepared
updated as expenditures are drawn from funded through reserves, management an association is for upcoming reserve
the fund and contributions are made to determines whether 1) an asset is the expenses. While the 100 percent point is
the fund. association’s responsibility, 2) the asset ideal, reserve funds above the 70 percent
has a limited but predictable useful life, level are considered strong because cash
A reserve study is the art and science 3) the cost to replace the asset is above a flow problems are rare. Reserve funds in
of anticipating and preparing for the minimum threshold (in our case $2,000). the 30 to 70 percent range are usually
repair and/or replacement of major considered adequate, while those funded
assets. Partially art, because projections How are useful life and remaining below 30 percent are considered weak. The
are made about the future, and partially useful life established? balance of the reserve fund for Sun City
science, because projections are based Texas at the end of 2015 was in excess of
on research and analysis within defined An asset’s useful life is typically $6.5 million. With budgeted contributions
methodologies. A reserve study for an established through past experience with and anticipated expenditures for the year,
operation as large and complex as Sun similar assets, adjusted by assumptions we anticipate ending 2016 at 70 percent of
City Texas is performed by specialists for quality, rate of wear and weather the fully funded balance for the HOA and
in the field and consists of two parts: exposure. Remaining useful life is 73 percent for golf.
the physical analysis and the financial established by evaluating an asset’s
analysis. current condition, which may decrease How much should we contribute?
or increase based on usage. For those
The physical analysis includes assets requiring a particular expertise There are several issues to consider when
information about the current condition or when age characteristics are not visible developing a reserve funding plan. The
of the association’s major assets and the (elevators, irrigations systems, pumps, primary issue is determining the objective
cost to repair or replace those assets. etc.), service vendors are consulted to of the plan. Generally speaking, our
The financial analysis evaluates the obtain recommendations on useful life. objective is to provide sufficient cash to
association’s reserve fund balance and perform reserve projects on time. Based on
its ability to cover anticipated repairs or How are cost estimates established? the study, the Board looks to develop a plan
replacements. Theoretically speaking, a that provides stable contributions to the
reserve study helps the association keep The best way to accurately estimate reserve fund. This will ensure each owner
their physical and financial assets in repair or replacement costs for major pays a fair share of the deterioration of the
balance. Practically speaking, a reserve assets is to check on actual costs for CA’s assets, proportionate to the amount
study is a budget-planning document similar items. In the absence of actual of time they are owners. While this is a
providing a list of major assets, the status costs, local vendors are contacted to brief summary of a fairly complex subject, I
of the reserve fund and the recommended provide insights into current pricing hope it has provided a basic understanding
funding plan. The plan’s objective is to trends. For components that require a of a key issue facing the association as we
particular expertise (roof, HVAC, etc.), approach transition.
ONLINE: SCTEXAS.ORG vendors are again interviewed or industry
guidebooks consulted. Inflation is also JULY 2016 SUNRAYS | 7
taken into consideration.
