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Reserve Fund Plans, or Studies, depict two main series of
numbers. One of them is the expenditures forecast, the
year-by-year estimates of the expected costs of major
repairs and replacements for the plan-period. The other is
the funding schedule. That’s the series of annual dollar
amounts you expect to raise for the reserve fund from the
fees paid in by unit owners.
Of course there are the all-important balances as well, but
the balances are derived from the two series mentioned
above. Establishing and maintaining adequate balances is
critical and many of our Whizdom articles will tackle issues
related to that challenge. But today we’re just going to talk
about the expenditures and funding numbers.
Let’s start with expenditures.
Your total estimated expenditures are derived from the sum of all the specific
expenditures. For example, you have, for a given year, an estimate that driveway
paving will cost
$25,000, that central air conditioning replacements will run you $15,000,
and that balcony restoration will amount to
$55,000. So your total that year will be $95,000. All the
other years have their own repairs and replacements and will
add up to annual totals, the same way.
It could happen though, (and it often does), that total annual
expenditures will be “high” for a few consecutive years, and “low” for
a few consecutive years. If the annual expenditures were graphed, you’d
have a line with significant peaks and valleys, as opposed to a flatter line.
It would mean that your
repairs are “bunched up” in some periods and at a low level
in other periods.
If this is the case, you may have cause to re-think the
expenditures plan. Here’s why.
In the span of years where your expenditures are going to be
high, you’ll have reserve fund balances that become low and
stay low until that period is over. Maybe you can get through
it okay, but … if you run into unexpected costs — a not
unusual experience — your fund may be in trouble.
The other side of
the coin is equally perilous. If you enter a
period where your estimated expenditures are low, you’ll run
excessive balances for a while. Not good either, as you’ll
see.
So either way, you have a potential problem.
One way to fix the balances that
get too low or too high is by
raising or lowering the owners’ contributions. Right? Yes,
but that introduces another set of problems.
For one thing, owner prefer steady
(or reasonably steady) monthly fees. They don’t like to pay a lot for
a while, and then pay a little for a while. So if you “use” the
level of fees to level out the fund’s balances, you’ll get a
flood of complaints.
Okay then. Why not just set the contributions (fees) at a
high level and leave them there?
Not a good solution. In periods where expenditures are low
the fund’s balances will become excessive, and the owners
will wonder why all that money is in the property’s hands and
not in their pockets, where it should be And they would have
a point!
The answer? It’s found in the annual expenditures totals. If
you have to work with a volatile expenditures series you’ll
run into the kinds of difficulties we’ve described. So the
answer is to do as much as you can to level out the yearly
expenditures estimates.
An approach that can do wonders to level out an up-anddown
expenditures plan is to look at the possibilities of “staging” your
repairs and expenditures. Consider the
chances of refurbishing 25% of the balconies every second
year, over eight years, for example. For big jobs that must
be done all at once — roofing would be typical — you’d
try to
move other work out of the same time-frame.
Another idea: A greater level of detail in your components
listings will enable you to schedule more “little jobs”,
and
avoid big expenditures. For example, if, instead of having
a
line Hot Water System you might break it down among
boiler
repair, coil replacements and so on.
Our suggestion is to do two things. Well ... do
one thing first,
and if necessary do the next thing. The first
thing.
Determine if you do, in fact, have an excessively
variable
series of annual expenditures. Usually just scanning
a graph
of them will give you the answer. But if you
want to be sure,
look at an “Index Chart”. This chart is part of a software
package for reserve funds. Type reserve fund
software into
Google to find it.
The second thing. If your scan (or your index)
says … yes,
your expenditures are too volatile, you can shift
your
expenditures around by doing what-ifs until you
come up
with a more steady annual series. We’ll discuss these
techniques in a future article.
But our Whizdom message for today is — keep your reserve
fund numbers smooooth. |
