PERCENT FUNDED STATUS VERSUS TIMING
Percent Funded status is commonly gauged as either Poor (below 30%), Fair (between 30% and 70%) or Strong (above 70%). However there is a quirk in this gauge making these statuses questionable. A Poor status can be superior to a Strong status at different points in time. As an example, let’s consider a million dollar roof with a 30 year useful life and assume a Strong Percent Funded status a year before roof replacement and a Poor Percent Funded status a year after roof replacement.
The Fully Funded Balances (FFBs) a year before and a year after replacing the $1,000,000 roof are $966,667 and $33,333 respectively. With a Strong 70% status a year before replacement and a Poor 30% status a year after replacement, the reserve fund balances a year before and after replacement are $676,667 and $10,000 respectively. These reserve fund balances equate to before and after replacement deficits of $290,000 and $23,333 respectively. What is immediately shocking here is that there is only 1 year to make up the huge $290,000 deficit while there are 29 years to make up the much smaller $23,333 deficit. In this example, the Poor status is clearly superior to the Strong status.
| Percent Funded | Status | CRC | UL | RL | FFB | Reserve Fund Balance | Deficit | Years to Make Up Deficit |
|---|---|---|---|---|---|---|---|---|
| 70% | Strong | $1,000,000 | 30 | 1 | $966,667 | $676,667 | $290,000 | 1 |
| 30% | Poor | $1,000,000 | 30 | 29 | $33,333 | $10,000 | $23,333 | 29 |
CRC = Current Replacement Cost, UL = Useful Life, RL = Remaining Life, FFB = Fully Funded Balance
Even if the Percent Funded level is 90% the year before replacement, the deficit is a substantial $96,667 which is equivalent to approximately 3 years of normal contributions towards this roof replacement.
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