Selecting a funding plan
Once your association has established its funding goals, the
association can select an appropriate funding plan. You should
consult a professional for help in choosing between the three
basic strategies:
•
The full funding strategy is to attain and maintain the
reserves at or near 100%.
•
Baseline funding involves keeping the reserve cash
balance above zero. This means that while each individual
component may not be fully funded, the reserve balance
does not drop below zero during the projected period.
•
Threshold funding is based on the baseline funding
concept, but the minimum reserve cash balance is set at a
predetermined rand amount.
Developing an investment policy
Developing a policy for investing reserve funds allows boards to
make consistent choices, and brings structure and continuity to
Serengeti Estate
investment decisions.
Some terminology Funding plan: An association’s plan to provide income to
Accrued fund balance (AFB): The total accrued depreciation fund.
– an indicator against which the actual or projected reserve Life and valuation estimates: The task of estimating
balance can be compared to identify the direct proportion useful life, remaining useful life, and repair or replacement
of the used-up life of the current repair or replacement cost. costs for the reserve components.
Cash flow method: A method of developing a reserve Per cent funded: The ratio, at a particular point of time
funding plan where contributions to the reserve fund are (typically the beginning of the fiscal year), of the actual (or
designed to offset the variable annual expenditures from projected) reserve balance to the accrued fund balance,
the reserve fund. expressed as a percentage.
Component
inventory:
a reserve fund to offset anticipated expenditures from that
The
task
of
selecting
and
Physical analysis: The portion of the reserve study where
quantifying reserve components. the component inventory, condition assessment, and life
Component method: A method of developing a reserve and valuation estimate tasks are performed.
funding plan where the total contribution is based on the Remaining useful life (RUL): The estimated time, in years,
sum of contributions for individual components. that a reserve component can be expected to continue to
Condition assessment: The task of evaluating the current serve its intended function.
condition of components based on observed or reported Replacement cost: The cost of replacing, repairing or
characteristics. restoring a reserve component to its original functional
Current replacement cost: see Replacement cost. condition.
Deficit: An actual or projected reserve balance less than the Reserve balance: Actual or projected funds as of a particular
fully funded balance. point in time that the association has identified for use to
Effective age: The difference between useful life and defray the future repair or replacement of those major
remaining useful life. Not always equivalent to chronological components that the association is obligated to maintain.
age, since some components age irregularly. Used primarily Reserve component: The individual line items in the
in computations. reserve study developed or updated in the physical analysis.
Financial analysis: The portion of a reserve study dealing Reserve provider: An individual that prepares reserve
with financial reserves. studies.
Component full funding: When the actual or projected Special levy: A levy applied to the members of an association
cumulative reserve balance for all components is equal to in addition to regular levies.
the fully funded balance. Surplus: An actual or projected reserve balance greater
Fund status: The status of the reserve fund as compared to than the fully funded balance.
an established benchmark such as per cent funding. Useful life (UL): Total useful life or depreciable life is the
Funding goals: Independent of methodology utilised, estimated number of years that a reserve component can
the categories of funding plan goals are baseline funding, be expected to serve its intended function if it is properly
component full funding and threshold funding. constructed in its present application and/or installation.
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