What is Percent Funded?

Do we have enough or too much money in our reserve fund account? This is a very common question board members and homeowners ask. In this article we will explain what percent funded level is and how to understand how it applies to reserve strength.

First, if you don’t already have a Reserve Study, you should have one. Click here for a sample Reserve Study with percent funded results.

Percent Funded Level Definition

Percent funded as defined by National Reserve Study Standards is “The ratio, at a particular point of time (typically the beginning of the Fiscal Year), of the actual (or projected) Reserve Balance to the Fully Funded Balance, expressed as a percentage.” More simply, Percent Funded compares what you have (Reserve Account Balance) to what you should have (Fully Funded Balance) and expresses this in the form of a percentage.

A simple example will help better illustrate this concept:

• XYZ Homeowners association has $5,000 in a Reserve Fund Account.
• XYZ has (2) reserve items: a 1-year old roof and a 5-year-old pool.
• Assume a useful life of 20 years for the roof and a current replacement cost estimate of $50,000.
• For the pool, assume a useful life of 10 years for resurfacing at a current cost estimate of $20,000.

The roof has “used up” 1 year of the 20-year useful life or 1/20th of $50,000 = $2,500. The pool has “used up” 5 years of the 10-year useful life or 5/10ths of $20,000 = $10,000. The total depreciation/deterioration since the last time the roof was replaced and the last time the pool was resurfaced (Fully Funded Balance) can be calculated as $2,500 + $10,000 = $12,500. The Fully Funded balance of XYZ association is $12,500.

To calculate the percent funded level, simply take the Reserve Fund Account Balance of $5,000, and divide this by the Fully Funded Balance calculated of $12,500 and you get 40% Funded.
The Percent funded range is as follows: 70% and above = “Strong” and 30% and below = “Weak”. An association with a “Strong” reserve fund has low risk of special assessments and deferred maintenance.

The opposite is true for associations with a reserve fund of 30% and below. Where does your association fall in comparison to other HOAs? Approximately seventy percent of clients report percent funded levels below 70%.

In Summary

Associations with a percent funded level of 70% and above have low risk of special assessments and are well-positioned to handle major future financial outlays. Associations with a percent funded level of 70% and below have greater risk of special assessments and deferred maintenance.