CMCA Budgeting and Reserve Studies 3 — Questions and Answers
Question 1: A community association wants to borrow from reserves to cover an operating deficit. What must the board typically do to remain in compliance with governing documents and state law?
- Obtain homeowner approval and establish a repayment plan (Correct answer)
- Simply transfer funds and document it in board minutes
- Increase the management fee to cover the shortfall
- Defer the transfer until the next fiscal year
Correct answer: Obtain homeowner approval and establish a repayment plan
Most state laws and governing documents require membership approval and a formal repayment schedule for inter-fund borrowing.
Question 2: What does 'remaining useful life' (RUL) indicate in a reserve study component analysis?
- The number of years the current reserve study is valid
- The years remaining before a component is expected to need replacement (Correct answer)
- The percentage of a component's lifespan already consumed
- The time remaining on the contractor's warranty
Correct answer: The years remaining before a component is expected to need replacement
Remaining useful life is how many more years a component is projected to function before requiring replacement.
Question 3: A special assessment is most appropriate when:
- Monthly dues are slightly higher than projected
- Reserves are insufficient to cover an unexpected major repair (Correct answer)
- The community wants to upgrade landscaping aesthetics
- Operating expenses come in 5% under budget
Correct answer: Reserves are insufficient to cover an unexpected major repair
Special assessments are used when reserve funds are inadequate to cover major unanticipated expenditures.
Question 4: When inflation is factored into a reserve study's cash flow projection, it primarily affects:
- The current balance of the reserve account
- The projected future replacement costs of components (Correct answer)
- The association's current monthly assessments
- The useful life estimates of components
Correct answer: The projected future replacement costs of components
Inflation adjusts the projected future replacement cost of components, increasing the amount that must be saved over time.
Question 5: Which document typically authorizes the board to collect reserves as part of regular assessments?
- The reserve study prepared by a professional
- The community's CC&Rs or bylaws (Correct answer)
- The annual financial audit report
- The property management agreement
Correct answer: The community's CC&Rs or bylaws
The CC&Rs or bylaws grant the board authority to levy assessments, including the reserve component.
Question 6: A fully funded reserve plan aims to maintain the reserve balance at what target?
- 50% of the total replacement cost of all components
- Equal to the sum of the depreciated value of all reserve components (Correct answer)
- Enough to cover one year of projected operating expenses
- A minimum balance of $10,000 at all times
Correct answer: Equal to the sum of the depreciated value of all reserve components
Full funding targets a reserve balance equal to the total accrued depreciation of all components at any given time.
Question 7: Which of the following expenses should NOT be included in a reserve budget?
- Parking lot resurfacing
- Swimming pool replastering
- Monthly janitorial services for the clubhouse (Correct answer)
- Elevator modernization
Correct answer: Monthly janitorial services for the clubhouse
Monthly janitorial services are a recurring operating expense, not a major capital replacement item funded through reserves.
CMCA Budgeting and Reserve Studies 3
A community association wants to borrow from reserves to cover an operating deficit.
What must the board typically do to remain in compliance with governing documents and state law?