CAI-NJ Dec. 2018 (w)

RESERVE STUDY... from page 54.

Figure 3

fund to offset anticipated expendi- tures from that fund. In developing the Funding Plan we first start with an evaluation of each component in which the replacement cost and useful life is analyzed. A graphical presenta- tion of the steps in doing this is shown in Figure 2 (on page 54). The Funding Plans are based on four different Funding Goals which are listed below in order of the great- est risk to the least risk. Baseline Funding: Establishing a reserve funding goal of allowing the reserve cash balance to never be below zero during the cash flow projection. This is the funding goal with the greatest risk due to the vari- abilities encountered in the timing of component replacements and repair and replacement costs. Threshold Funding: Establishing a reserve funding goal of keeping the reserve balance above a speci- fied dollar or percent funded amount. Depending on the threshold select- ed, this funding goal may be weaker or stronger than “Fully Funded” with respective higher risk or less risk of cash problems. Full Funding: Setting a reserve funding goal to attain and maintain reserves at or near 100 percent funded. This is the most conservative funding goal. A graphical presentation of the Funding Plans is shown e in Figure 3. The Fund Status is the status of the

Figure 4

Level of Threshold

reserve fund reported in terms of cash or percent funded. The most common way to do this is to compare the existing Reserve Fund to what would have been accumu- lated if Full Funding was employed. An example of this would be a component with a replacement cost of $100,000 with a 10 year use- ful life. This would result under Full Funding of $10,000 per year being

funded ($100,000/10-year life = $10,000 per year). Should the asso- ciation only be funding $5,000 per year they would be 50% funded ($5,000/$10,000 = 50 %) While this is a method for estab- lishing a Fund Status it should be recognized that in many instances Full Funding (100% funding) is more than adequate to provide for an associa- tion’s needs.

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