Budgeting and Reserve Studies Flashcards

A board is creating next year's operating budget. Which approach involves starting from zero and justifying every expense rather than adjusting prior year numbers?

Answer: Zero-based budgeting

Zero-based budgeting requires each expense to be justified from scratch each budget cycle rather than rolling over prior figures.

When a reserve study identifies a component with 'zero remaining useful life,' the community manager should:

Answer: Advise the board that replacement or professional evaluation is urgently needed

A component at end of useful life needs immediate board attention for replacement or a professional condition evaluation.

Which of the following best describes the purpose of a budget variance report?

Answer: Comparing actual income and expenses to budgeted amounts for a given period

A budget variance report highlights differences between budgeted and actual financial performance to guide management decisions.

A homeowner asks why the reserve study uses a 4% inflation rate for replacement costs. The best explanation is:

Answer: Inflation increases the future cost of materials and labor, requiring higher savings today

Inflation causes future replacement costs to exceed today's prices, so reserve studies account for this to avoid underfunding.

Which reserve funding strategy is most likely to result in large special assessments if not regularly updated?

Answer: Baseline (minimum) funding

Baseline funding keeps reserves just above zero, leaving the association highly vulnerable to special assessments when major replacements occur.

A community needs $120,000 for pavement replacement in 3 years and currently has $30,000 in the pavement reserve. Ignoring interest, what annual contribution is needed?

Answer: $30,000 per year

The shortfall is $90,000 ($120,000 − $30,000), divided over 3 years equals $30,000 per year.

Which of the following is a key advantage of using a professional reserve study preparer rather than having the board estimate reserve needs internally?

Answer: Professionals provide an objective, qualified analysis that meets legal and lending standards

Professional reserve studies provide credibility, objectivity, and compliance with lender requirements such as Fannie Mae guidelines.