CMCA Budgeting and Reserve Studies 4 — Questions and Answers
Question 1: What is the key distinction between a 'repair' and a 'replacement' for reserve funding purposes?
- Repairs cost more than $1,000; replacements cost less
- Repairs restore function without extending useful life; replacements renew the component for a full new lifespan (Correct answer)
- Repairs are funded by reserves; replacements by the operating budget
- Repairs require board approval; replacements require a vote of owners
Correct answer: Repairs restore function without extending useful life; replacements renew the component for a full new lifespan
Repairs maintain existing function without resetting useful life, while replacements start a new full useful life cycle.
Question 2: A reserve study preparer recommends increasing annual contributions by 15% due to rising construction costs. The board decides to ignore the recommendation. What is the primary risk?
- The reserve study will become invalid and unenforceable
- The association may face a funding shortfall requiring a special assessment (Correct answer)
- The state will require the association to hire a new manager
- Owners may sue the management company for negligence
Correct answer: The association may face a funding shortfall requiring a special assessment
Ignoring professional recommendations leads to underfunding, which typically results in special assessments or deferred maintenance.
Question 3: Which financial statement provides a snapshot of the association's reserve account balance at a specific point in time?
- Income statement
- Budget variance report
- Balance sheet (Correct answer)
- Cash flow statement
Correct answer: Balance sheet
The balance sheet shows assets, liabilities, and equity including the reserve fund balance at a specific date.
Question 4: A manager is reviewing bids for reserve-funded roof replacement. The lowest bid is 30% below the next lowest. The best course of action is to:
- Accept it immediately to save reserve funds
- Investigate the low bid for scope omissions or contractor qualifications before recommending acceptance (Correct answer)
- Reject all bids and rebid the project
- Award to the second-lowest bidder automatically
Correct answer: Investigate the low bid for scope omissions or contractor qualifications before recommending acceptance
An unusually low bid often signals missing scope, inexperience, or financial instability, requiring due diligence before acceptance.
Question 5: Under the accrual basis of accounting, reserve contributions are recognized:
- When cash is deposited into the reserve bank account
- When the board passes a resolution to fund reserves
- In the period they are earned/assessed, regardless of cash receipt (Correct answer)
- Only after the fiscal year-end audit is completed
Correct answer: In the period they are earned/assessed, regardless of cash receipt
Accrual accounting records revenue when earned (when assessed), not when cash is actually received.
Question 6: What is the recommended frequency for a full Level I reserve study (with site visit) under CAI best practices?
- Every year
- Every three years (Correct answer)
- Every five years
- Every ten years
Correct answer: Every three years
CAI recommends a full on-site Level I reserve study at least every three years, with annual updates in between.
Question 7: A community association collects $50,000 in reserves annually but spends $80,000 on reserve-funded replacements. Over time, this will most likely result in:
- Improved percent funded ratio
- A growing reserve surplus
- A declining reserve balance and potential underfunding (Correct answer)
- No impact if the operating budget is balanced
Correct answer: A declining reserve balance and potential underfunding
Spending more than collected will deplete the reserve balance over time, leading to underfunding.
CMCA Budgeting and Reserve Studies 4
What is the key distinction between a 'repair' and a 'replacement' for reserve funding purposes?