What is a funding plan?

A funding plan is a financial forecast to determine the revenue stream required to provide sufficient funds for the estimated future major repair and replacement costs as determined by the site visit and component condition assessment.

A number of factors must be considered in determining the funding plan. The factors that are inherent in this determination are; (1) funds presently available for reserves, (2) the annual amount to be funded, (3) the acceptable increase in the annual amount to be funded, (4) inflation estimate, (5) interest earnings estimate, (6) contingency factors, and (7) the possibility of additional funding from either special assessments or loans.

The funds presently available for reserves should clearly exclude any operating monies and include only cash and investments and other net assesta available to pay for reserve fund expenditures. Most investment policies for associations exclude the possibility of investing in stocks or mutual funds. Certificates of deposits T-bills and government bonds would generally be considered as cash equivalents. Fixed assets and other assets such as notes receivable should generally be held in the operating fund rather than the reserve fund.

While it is possible to determine an ideal annual amount to be funded, that is generally not the best way to construct a funding plan. It is more likely that the first-year funding amount will be a political decision rather than a financial decision. This is because the Board of Directors has knowledge about what will be an acceptable increase to the Association membership based upon its current dues structure. It is not realistic to create a funding plan stating that each member would pay $200 per month just for reserves when their current dues structure has them paying only $110 currently. The board might inform us that the $110 could be increased to $130 but could not be increased to $200. Based upon that information we would construct a funding plan that begins at $130 per unit per month, increasing funding over the remaining 29 years of our 30 year forecast period to provide adequate funding.

The economic factors affecting the funding plan are the annual assessment increase, inflation, interest income, and contingency. We will discuss these items with Association management as part of the process of creating the funding plan.

Most associations that are reasonably well-funded can create a plan that excludes the use of special assessments or loans. We will often use loans as a means of "smoothing out" the funding plan where there is not sufficient cash available to cover projected expenditures, thereby avoiding a large, one-time special assessment.