Percent Funded only gauges the strength of the fund balance and not the adequacy of the current contribution, so it is entirely possible to have an extremely high Percent Funded level and have inadequate contributions. In this scenario, the reserve fund balance will eventually dwindle and most likely go negative without contribution increases. And the opposite is also possible. A very low Percent Funded level can be overcome by large contributions that don’t need to increase and could even decrease.

What is often overlooked in this discussion is the magnitude of cash flow relative to the reserve fund balance. Over 30 years, contributions typically far outweigh any one year’s balance, and especially the current balance. Percent Funded places great emphasis on the balance without considering the ever-so-powerful contribution of cash flow.

Percent Funded is a general gauge of risk, with lower percentages more risky than higher percentages, and Percent Funded levels have been commonly classified as either poor, fair, or strong, but what is lost in this classification is timing. Depending on the timing, being in the strong range (above 70%) may be riskier than being in the poor range (30%) at a different point in time. This is best illustrated with a single-component example.

Suppose a roofing component with a million-dollar current cost and a 30-year useful life. Now consider this roofing component at 2 different points in time, 1 year before and 1 year after roof replacement. 30% funded 1 year after replacement is no big deal because there are 29 years to make up the difference before the roof gets replaced again, but being 70% or even 90% funded 1 year before replacement is a huge deal because there is only 1 year to make up the difference.

This example illustrates that classifications are time-dependent; what looks good one year may not look so good the next.

Percent Funded is the ratio of the reserve fund balance to the Fully Funded Balance. Reserve funds have both beginning and ending balances, but the Fully Funded Balance does not, so which reserve fund balance is used in the calculation?

The national standard provides the following indecisiveness regarding this question: The ratio at a particular point in time (typically the beginning of the Fiscal Year), but local statutes, such as California’s, stipulate the ending balance.

There is currently no definitive answer, but does it matter? The choice of the beginning or ending balance affects the calculation result. Using the beginning balance tends to yield smoother percentages, while using the ending balance tends to result in greater year-to-year variations.

Reality is not always neat and clean, yet components are created to mimic it, and these realities are often overstated or understated in the Fully Funded Balance. An example of this occurs when the same work must be entered in two or more components, as is often the case when off-cycle work is returned to its regular cycle or when a scope of work changes between replacement cycles. Additional challenges exist for components with delayed starts, remaining lives greater than 30 years, or one-time-only events. The Fully Funded Balance calculation doesn’t necessarily account for all these realities and often distorts the idealized balance depending on the circumstances.

Let’s consider the example of a one-time-only event. What is the useful life of a one-time-only event? It may be tempting to say that it is infinite, but what impact does this have on the Fully Funded Balance? Setting the useful life to its maximum value makes the Fully Funded Balance immediately and continuously equal the full replacement cost, regardless of the remaining life, which is unrealistic if the remaining life is greater than a year. Another approach would be to set the useful life equal to the remaining life. This approach allows the Fully Funded Balance to gradually grow to the full replacement cost over the remaining life of the asset. Still, the question frequently arises: why does a one-time event have a short useful life when it has an infinite life (a perceived contradiction)?

Just as numbers such as zero can be presented in many ways (0, 1-1, 0*999, ACOS(1), …), so can components, but Percent Funded has a troubling aspect in that it can take different values depending on how components are presented and, in fact, yield surprisingly different values. Here again, this situation is best illustrated with an example.

In this example, suppose an association with a single reserve obligation to replace 30-year lifespan rain gutters on 30 buildings, with a current replacement cost of $1,000 per building. In this well-seasoned association, only 1 building per year has its rain gutters replaced, so, basically, $1,000 per year is required for rain gutter replacement.

Now consider 2 component approaches, 1 component with a 1-year life versus 30 components each with a 30-year life. In the first approach, 1 component provides replacement, and in the second approach, 30 components provide replacement. Both approaches provide the exact same rain gutter replacement for $1,000 per year.

The single-component approach has a Fully Funded Balance of, you guessed it, $1,000, but the 30-component approach has, and you probably didn’t guess this, $15,500. That is over 15 times the single-component approach. Looking at this from a purist perspective, most would probably admit that the 30-component presentation is a more true representation of the actual work (30 different rain gutters replaced on 30-year cycles as opposed to 1 rain gutter replaced every year), but why maintain the mathematically idealized balance of $15,500 when only $1,000 per year is expended?