The Fully Funded Balance Explained

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Reserve Study Presentation: The Fully Funded Balance Joel L. Tax, RS PRA Reserve Specialist https://www.reservedataanalyst.com

 

2. Presentation Topics

 

3. What is the Fully Funded Balance (FFB)?

 

4. Fully Funded Balance: The Formula Example: Paint Project Costs: $100,000 Age of Paint: 1 years Paint Useful Life: 10 years

 

5. Allocating 100% of the Fully Funded Balance  In 10 Years a Paint Project: $100,000.* *Interest and inflation omitted for simplicity Fully Funded Balance = on track. ReserveAccountBalance

 

6. Allocating 50% of the Fully Funded Balance  In 10 Years a Paint Project: $100,000.* *Interest and inflation omitted for simplicity They are @ 50% Funded = Shortfall ReserveAccountBalance

 

7. Fully Funded Balance: Many Components Fully Funded Balance Total Component Costs

 

8. Risk of Being Underfunded K S I R Higher Risk Of: •Cash Flow Issues •Deferred Maintenance •Marketability & Aesthetic Appeal Issues

 

9. Considerations for the Fully Funded Balance

 

10. Do you have any questions? ??? Joel L. Tax, RS PRA Reserve Specialist

Script

Hi my name is Joel tax I'm with Reserve Data Analyst and this presentation is going to go into the fully funded balance calculation in the reserve study. The topics today and what is the fully funded balance risk of being underfunded less than the fully funded balance and other considerations for the fully funded balance calculation so what is the fully funded balance essentially is calculation of Nigel amount in the reserve account which offsets the accrued deterioration of the component calculated annually at a specific point in time and it will change from one year to the next it's important to note here what the fully funded balance is not it's not the full project cost of the component it does not equate to a number that equals the cost to complete the project it's essentially just means you're on track for paying for that project as a specific point in time and the formula for this is a pretty simple formula it's the component cost that's the current component cost time the component current age / the opponent useful life an example here of this formula is we have $100,000 paint project which is 1 years old and as a paint useful life of 10 years so at the end of 10 years were going to have to recoat the paint so in this scenario the formula is $100,000 that's the the paint project cost x one because it's 1 years old divided by 10 because the useful life of the paint is 10 years and that's equals to $10,000 so the fully funded balance at the end of your 1 for this paint project is $10,000 now let's look an example here of a community or organization that's allocating 100% of the fully funded balance into the reserve account so in this case we have again this hundred-thousand-dollar paint project that's useful life of 10 years and when ignore interest in inflation here for simplicity's sake you can see at the end of your 1 they've allocated $10,000 into the reserve account they are 100% funded and that is also the fully funded balance this $10,000 that means they're on track for paying for this paint project at the end of 10 years which equals $100,000 now the reason we're saying they're on track is because they have equally dispersed the cost over the 10 years so every 10 every year they're depositing $10,000 in the reserve account they're not fluctuating at the end of your two they have $20,000 in the reserve account the end of your 3 30,000 so on and so forth interior the end of your 10 they have $100,000 in the reserve account which equals the amount of the paint project expected cost again we're ignoring inflation here just for simplicity's sake of the map in this community they have deposited into the reserve account and amount equal to the fully funded balance in your wonderful offended down to 10000 in your to its 20000 year 3 is 30000 and so on and so forth until the final end of your 10 the fully funded balance equals the cost of the project that's the only time that the fully funded balance will equal the full project cost is that the end of the useful life of the component now let's look at a different scenario in this case this community is allocating half of the fully funded balance in the reserve account in each year so in this case they are depositing $5,000 into the reserve account instead of an ideal amount of 10000 which is also the fully funded ounce important remembered the fully funded balance is an idealized calculation it's the amount that if we were dispersed the cost equally over time it would offset the deterioration of the component and at the end of useful life of the component to fully fund the balance equals the cost of the project so in this case there depositing half of the fully funded balance In your 1 in your to another 5,000 to have a total of 10000 in your 3 they have a total of 15000 and so on and so forth until your 10 when there's a significant shortfall at the end of your 10 because they have under budgeted the reserve account they have deposited less than the fully funded alance into the reserve account for the prior 9 years the project cost is still going to happen it's up here at $100,000 so they're going to have to come up with a way to raise funds and place them into the reserve account to pay the paint vendor the fully funded balance at the end of your 10 his $100,000 they only have 40 or 45 thousand depending on how you want to cut this off here essentially the community members in your 10 or having to make up for that deficit or that shortfall in the reserve account and that's something we want to prevent we want to disperse those cost over time so the deterioration of the component equals the fully-funded balance and the amount being deposited in the reserve account is as close as possible to the fall of funded balance that means everybody is paying their fair share into the reserve account now in a real life scenario we're not just dealing with 1 paintcomponent we're dealing with many components with different ages with different replacement ears with different useful lives different remaining useful eyes and different cost unit cost and total cost you do you can see here this hundred $65,000 figure that's the total component replacement cost if you replace all the components now that would be the cost in this particular community that is very different than the fully funded balance which as you can see is significantly less than the full cost to replace all the components this is the amount that represent that they're on track for paying off the project cost over time it is not an amount that equals total project replacement at this particular point in time in this community that's important to note there's a huge difference there they are not the same number Nation V intermingled with one another risk of being underfunded include cash flow issues underfunded essentially just means you've deposited less than the fully funded balance into the reserve account there as time goes on and component projects need to be completed there just isn't the money in the reserve account another risk is deferred maintenance and differing projects that is the direct result of depositing less than the fully funded balance into the reserve account now we use a cash flow method of calculations so that has kind of a built-in margin of error when we have many components but the fewer the components the community has the closer we need to be to 2 fully funded balance any particular year or else there is definitely be a deficit Market Billy anesthetic issues when the fully funded balance is not reached and there isn't money in the reserve account to pay for these projects oftentimes their deferred when they deferred things start to look aesthetically unappealing you may have peeling paint you may have a tarp on the roof you may have a siding that's rotting you may have potholes in the asphalt whatever the case is those all have an impact on current membership and any potential buyer that comes into the community other considerations for the fully funded balance include fully funded balance is calculated annually it takes into account current cost and inflates that over time we do realize 3% inflation is pretty typical it's also important to note that fully funded balance will fluctuate over time based on the component projects that have been completed or that have been deferred they will again fluctuate from year to year the fully funded balance is not full picture we also want to make sure we look at the cash flow projections in the reserve study we want to see the app Reserve account balance not just the fully funded balance its support and remember that the reserve stays at full document with many aspects to it we want to read all of it to get a full picture of the scenario in your particular Community or organization having less than the fully funded Downs May not lead to a add exit or having $0 in the reserve account again will you lies a cash flow method which is essentially we make a pool of money for all the components and we remove money from the reserve account to pay for those projects as they come due essentially it's a snapshot in time of the cost and will have a different presentation about the cash flow method that I suggest watching and you should be very cautious of mathematical gimmicks it's very easy to change the fully-funded balance simply by changing a cost of component useful life of component remaining useful life of component those items can have dramatic impact on the fully funded balance we want to make sure that they're accurate and real life scenarios not just something that's being done to make something look good on paper it's very easy to create a budget on paper that looks great and get away with it for many many years sometimes even decades before the real project cost happens and then it's becomes obvious that the reserve account has been underfunded usually because there is an inadequate component list or they're essentially is gimmicks being made to the the math by changing the numbers to make things could look on paper so that's about it for this presentation I hopefully it was helpful here please call or email with any questions and we look forward to working with you in the near future thank you

Additional Resources:  Percent Funded in a Reseve Study