The fixed income funding plan
A recent reserve study we performed for a 35-year old association highlighted the deficiencies of their prior reserve funding policies. What we saw was an all-too-familiar scenario.
This association was not able to afford all of the deferred maintenance projects that needed attention. While they knew that special assessments or borrowing funds from a commercial lender were options, the board felt that these options were politically impractical, given the fact that this was a senior community and most members were on fixed incomes. What the board decided to do was to simply fund all of the maintenance projects that they could each year until they ran out of money. This caused them to defer any uncompleted projects to the following year. Unfortunately, the uncompleted projects continued to pile up, until further damage was caused by the failure of certain components. This, in turn, caused future repair costs to escalate even further.
We have observed several associations over last 25 years attempting to fund their deferred maintenance projects in this manner. All suffered a very predictable ending. The fact is if you just spend the amount of money you’ve got available and not the amount of money it takes to actually complete a project, the projects never get completed as planned, and your deferred maintenance projects snowball into an insurmountable problem. This is not a plan, this is a reaction.
We strongly discourage such a reaction. We believe that a responsible board must make tough decisions rather than passing the buck to the successor board. That often means that a current board has to resolve problems created by a prior board. The fact is that you don’t get to play the cards that you want, you get to play the cards that you’re dealt. When the board is faced with a situation of not enough money coming in and too much money going out, there are only two possible solutions. One, increase revenues, or two decrease expenses.
An association may attempt to decrease expenses by making temporary repairs that extend the life of a component or by substituting lower-cost products in making repairs or replacements. Since most associations have already done this analysis and still are coming up short, the only remaining answer is to increase revenues. This generally means that the association must make a special assessment or borrow funds, or a combination of both.