CAI-NJ February 2021

FINANCIAL TRACK... from page 44.

to replace. To combat this, it is highly recommended that asso- ciations engage an engineer to assist with these estimates. Engineers can conduct what is known as an engineering study for associations. These studies provide a detailed listing of the individual components of the site and include the estimated remaining life and replacement costs of each component. The study should also include a thirty-year cash flow projection. This schedule anticipates what expenses the association will incur during a given year and provides guidance on how much money the association will need to save on an annual basis in order to ensure that sufficient cash is available when the need to replace these common elements arises. Despite paying the money to have this study performed, many boards do not follow the recommendations provided by the engineer. Far too often the annual contribution to the replacement fund is calculated based on the availability of funds, rather than the actual financial needs of the site. For example, as discussed above, the annual budget process usually entails calculating all of your anticipated cash outlays for the year. One of those “outlays” in the budget should be sufficient contributions to the replacement fund. The biggest challenge when dealing with the budget line item for replacement fund contributions is

known as the cumulative operating fund balance, before mak- ing any budgeting decisions. If there is an accumulated surplus carried over from a prior year that is sufficient to absorb the current year loss and maintain the sites financial needs, then the loss should not have a significant impact on the subsequent year’s budget. On the other hand, when the association’s records indicate a cumulative operating fund deficit, boards must put a plan in place to replenish those funds over a rea- sonable period of time. This plan may include gradual fee increases over multiple years, special assessments, etc. In addition to overseeing the financial health of the operating fund, boards are also tasked with the responsibility of ensuring that sufficient funds are available for the eventual replacement of the site’s common elements. This is done through what is known as the replacement or capital reserve fund. As with the operating fund, there are many challenges facing boards with respect to the replacement fund. Without the proper knowl- edge, it almost seems like an impossible task to know how long the roofs, roadways, etc. will last, and what they will cost

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