Budgeting and Reserve Studies Flashcards

A community association's reserve study is comprised of two main parts. What are they?

Answer: A physical analysis and a financial analysis.

A comprehensive reserve study consists of two key parts: the Physical Analysis, which evaluates the condition and replacement cost of major common area components, and the Financial Analysis, which assesses the status of the reserve fund and recommends a funding plan.

A newly built community association has just transitioned from developer control. The initial budget provided by the developer did not include a reserve study. What is the BEST immediate course of action for the new board of directors?

Answer: Commission a full, professional reserve study to be completed.

The board has a fiduciary duty to manage the association's assets. A reserve study is a critical tool for long-term financial planning. For a new association, it's crucial to have a professional study done to accurately identify the components the association is responsible for, their useful lives, and the required funding, as initial developer budgets may not be accurate.

Which of the following is typically funded from an association's operating budget rather than the reserve fund?

Answer: Annual landscape maintenance contract.

The operating budget covers predictable, recurring, day-to-day expenses. An annual landscape maintenance contract is a routine expense. Reserve funds are specifically set aside for the major repair or replacement of capital components that have a limited, but long-term, useful life, such as roofs, roads, and major equipment.

An association is utilizing the 'component' method for its reserve funding. The board needs to pay for an unexpected, major repair to the swimming pool filtration system, which was not a listed component. However, the 'roof replacement' component fund has a surplus. How should the board proceed?

Answer: The funds cannot be used for any purpose other than roof replacement without a vote of the members.

The component method allocates funds to specific line items (components). Money in a specific component's fund is restricted for that item's use. Using those funds for another purpose, like an unlisted pool repair, typically requires a formal vote and approval from the association's membership, not just a board decision.

The primary purpose of a community association's annual budget is to:

Answer: Provide a financial plan for the association's anticipated revenues and expenses for the coming year.

An association's annual budget is a financial roadmap for a specific period, typically one year. It estimates the income needed (from assessments, etc.) to cover all anticipated operating expenses and reserve contributions.

Which of the following describes the 'Baseline Funding' goal in a reserve study funding plan?

Answer: A minimal funding plan where the reserve cash balance is projected to remain above zero.

Baseline Funding is a strategy where the goal is to keep the reserve fund balance from dropping below zero. While it meets the minimum requirement of having funds available, it is considered a higher-risk strategy compared to Full Funding, as there is less of a buffer for unexpected expenses or cost increases.