CMCA Budgeting and Reserve Studies 5 — Questions and Answers
Question 1: 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?
- Incremental budgeting
- Zero-based budgeting (Correct answer)
- Cash basis budgeting
- Reserve-first budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting requires each expense to be justified from scratch each budget cycle rather than rolling over prior figures.
Question 2: When a reserve study identifies a component with 'zero remaining useful life,' the community manager should:
- Remove the component from the reserve schedule immediately
- Advise the board that replacement or professional evaluation is urgently needed (Correct answer)
- Continue collecting reserve contributions for that component for two more years
- Transfer the component to the operating budget
Correct 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.
Question 3: Which of the following best describes the purpose of a budget variance report?
- Projecting next year's reserve contributions
- Comparing actual income and expenses to budgeted amounts for a given period (Correct answer)
- Listing all reserve components and their replacement costs
- Summarizing the results of the annual audit
Correct 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.
Question 4: A homeowner asks why the reserve study uses a 4% inflation rate for replacement costs. The best explanation is:
- State law mandates a 4% inflation assumption for all reserve studies
- Inflation increases the future cost of materials and labor, requiring higher savings today (Correct answer)
- The 4% rate is fixed by the reserve study professional's software
- Inflation only affects operating budgets, not reserve studies
Correct 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.
Question 5: Which reserve funding strategy is most likely to result in large special assessments if not regularly updated?
- Full funding
- Threshold funding
- Baseline (minimum) funding (Correct answer)
- Percent-funded targeting 100%
Correct answer: Baseline (minimum) funding
Baseline funding keeps reserves just above zero, leaving the association highly vulnerable to special assessments when major replacements occur.
Question 6: 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?
- $10,000 per year
- $30,000 per year (Correct answer)
- $40,000 per year
- $90,000 per year
Correct answer: $30,000 per year
The shortfall is $90,000 ($120,000 − $30,000), divided over 3 years equals $30,000 per year.
Question 7: Which of the following is a key advantage of using a professional reserve study preparer rather than having the board estimate reserve needs internally?
- Professional studies are always lower cost than board estimates
- Professionals provide an objective, qualified analysis that meets legal and lending standards (Correct answer)
- State law in all 50 states prohibits boards from preparing their own estimates
- Professional studies eliminate the need for annual budget updates
Correct 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.
CMCA Budgeting and Reserve Studies 5
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?