Many of you probably have seen the results of the percent funded mathematical flaw if you have worked with reserves studies for a particular community or several particular communities over several years. But let’s take a deeper dive into the flaw by looking at an example right now.
The Triage Hills HOA has $700,000 in reserves, while their fully funded balance is $1,000,000. They are, therefore, 70% funded. By percent funded protocol, 70% is a safe funding level. Triage Hills HOA then completes a scheduled roofing project, which is a very large part of their reserve funding. The project costs $600,000 to complete, exactly as it was projected to cost. Upon completion, both their fully funded balance and their actual reserve balance amounts are reduced by $600,000. The completion of this project should have no effect on the adequacy of their reserve fund. If anything, this should place them in better stead with regard to their reserve funding position. For after all, they have successfully completed their largest reserve project and relieved them of the possibility of cost overruns or other sorts of related failures. But it mysteriously doesn’t. Let’s look at the math:
First let’s create some mathematical representations for the components of this question. Let A = the fully funded balance. Let B = the actual reserve fund balance. So the percent funded equals B / A. As mentioned, before the project is completed, B / A (i.e. $700,000 / $1,000,000) = 70%. After the project is completed, the math, B / A changes to ($100,000 / $400,000) = 25%, because both balances are reduced by the $600,000 cost of the project. Ouch! Now Triage Hills is below the “Mendoza” line, the 30% funded level, under which an association’s reserve fund is considered to be in the high risk or danger zone! Wow! Something is really amiss here! From one year to the next Triage Hills has inexplicably gone from a safe reserve funding level to a very precarious one, by “percent funded” protocol. But, of course, in reality they are at least as safe now as they were in the previous year. Why is this so? Beficause the percent funded method of measuring a reserve fund’s adequacy, is bogus, inaccurate and spurious.
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