Fully Funded Balance (FFB) is a mathematically derived balance that provides one answer to the question as to how much should be in the reserve fund at a given point in time. FFB is considered an idealized balance, and when the reserve fund balance equals the FFB, the reserve fund is considered Fully Funded.
Fully Funded Balance represents the “used up” portion of a component which is sometimes referred to as the component’s “accrued liability”. To use an example to illustrate this, suppose that a $3,000 component has a three year useful life. The example component’s FFB at age one is $1,000, at age two is $2,000 and at age three is $3,000. So the FFB for each component is its Cost times its Age divided by its Useful Life where Age is defined as Useful Life minus Remaining Life. Fully Funded Balances are summed up for each and every component to generate the FFB for the year.
Fully Funded Balance Formula
Fully Funded Balance = Component Cost X Component Age / Component Useful Life
This calculation is applied to each individual component, and those individual results are summed to provide a single year’s total Fully Funded Balance. This calculation is then repeated for each future year with each individual component’s age and inflated cost adjusted relevant to each future year. 30 year reserve studies generate 30 annual Fully Funded Balances. The following FFB examples assume a constant 2.5% inflation rate.
Fully Funded Balance Calculation Examples
Single Component FFB Example
Inflation Rate = 2.5%
Component Replacement Cost = $3,000
Component Useful Life = 3 years
Component Remaining Life in = 2
|Inflated Replacement Cost||$3,000||$3,075||$3,152||$3,231||$3,311||$3,394||$3,479|
|Fully Funded Balance||$1,000||$2,050||$3,152||$1,077||$2,208||$3,394||$1,160|
Bold = replacement year
The FFB increases upwards until the replacement year and then drops in the year following replacement, and in replacement years the FFB exactly equals the inflated replacement cost.
Multiple Component FFB Example
In the above table, only one component is depicted with its age and remaining life added for clarity. In the below table, four components are depicted and summed up to present the total Fully Funded Balance for each year. Notice how the total FFB gyrates up and down from year to year as individual components are replaced and begin new life cycles, and despite inflation, the lowest FFB occurs in the last year in this realistic example.
Bold = replacement year, CRC = Current Replacement Cost, UL = Useful Life, RL = Remaining Life