100% Funded: What Does it Really Mean?

The percent funded metric is arguably the most misunderstood concept in the lexicon of HOA financial planning. 

The Community Associations Institute (CAI) National Reserve Study Standards (NRSS) defines the term percent funded as follows:

The ratio, at a particular point in time related to the fiscal year-end, of the actual (or projected) reserve balance to the fully funded balance, expressed as a percentage. While percent funded is an indicator of an association’s reserve fund size, it should be viewed in the context of how it is changing due to the association’s reserve funding plan in light of the association’s risk tolerance.

From a more practical perspective, percent funded expresses the ratio between the accumulated reserves and the value of the common elements lost to depreciation.

The percent funded calculation compares the accumulated reserves at the close of the budget year to the accumulated depreciation of the common elements for which the reserves are being accumulated.

The formula uses the straight-line depreciation method, which assumes all common elements are assigned a useful life that is measured in years, with the asset value losing the same amount each year throughout the service life of the asset.

Hence an asset with a service life of 10 years is assumed to lose 1/10th of its economic value each year.

Salvage value is not included in the percent funded formula development by the CAI.

Most important to your understanding the percent funded principle is that the term 100% funded does NOT mean that the accumulated reserves represented 100% of the money that is required to renew or replace all of the common elements for which the reserves are being accumulated.  

Instead, the terms 100% funded and fully funded mean that the accumulated reserves are equal to the accumulated depreciation of the common elements at the point in time when the calculation is performed.  

The percent funded formula is not a perfect measure of the strength of the Association’s reserve funding status but is a useful and important metric that all buyers and HOA members should understand. © – CIDAnalytics 2022.