Reserve Studies

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Questions and Answers

What is the primary objective of full funding in a reserve study?

To assess the risk associated with reserve components

To set a reserve funding goal to attain and maintain reserves at or near 100 percent funded (correct)

To establish a reserve funding goal of keeping the reserve balance above a specified dollar amount

To maintain a minimum percentage of funded reserve balance

According to the component method, how much should be collected each year for a fountain that costs $1,000 to replace with a useful life of 10 years?

$100 per year (correct)

$200 per year

$500 per year

$50 per year

What is the main difference between threshold funding and full funding?

Threshold funding is more conservative, while full funding is more aggressive

Threshold funding is only used for small reserve components, while full funding is used for large components

Threshold funding sets a minimum percentage, while full funding aims for 100 percent funding (correct)

Threshold funding aims for 100 percent funding, while full funding sets a minimum percentage

What is the purpose of risk assessment in a reserve study?

To set a reserve funding goal based on the level of risk associated with the component Signup and view all the answers

What is the main characteristic of the cash flow method?

It allows the reserve cash balance to be at or near zero during the cash flow projection Signup and view all the answers

How much should be in the reserve account for a fountain that is eight years old, with a useful life of 10 years and a replacement cost of $1,000?

$800 Signup and view all the answers

What is a key consideration when choosing a funding goal?

The variance in component costing and differences in useful and remaining lives Signup and view all the answers

What is the term for the actual or projected funds at a particular point in time?

Reserve balance Signup and view all the answers

What is the formula for calculating Fully Funded Balance (FFB)?

Current Cost X Effective Age/Useful Life Signup and view all the answers

What is the primary goal of Baseline Funding?

To ensure the reserve cash balance never falls below zero Signup and view all the answers

Which funding goal is considered the most conservative?

Full Funding Signup and view all the answers

What is the primary difference between Threshold Funding and Full Funding?

Threshold Funding aims to maintain a reserve balance above a specified dollar amount, while Full Funding aims to maintain reserves at or near 100% funded Signup and view all the answers

What is the minimum duration of a Funding Plan?

20 years Signup and view all the answers

What is the purpose of a Funding Plan?

To provide income to a reserve fund to offset anticipated expenditures Signup and view all the answers

What is the risk associated with Baseline Funding?

High risk of cash problems, special assessments, and deferred maintenance Signup and view all the answers

What is the primary factor that determines the funding goal of an association?

The jurisdiction's statutory funding requirements Signup and view all the answers

What is the primary objective of Full Funding as a funding goal?

To attain and maintain reserves at or near 100% funded Signup and view all the answers

Which funding method involves testing different reserve funding plans against the anticipated schedule of reserve expenses?

Cash Flow Method Signup and view all the answers

What is the primary difference between the Cash Flow Method and the Component Method?

The Cash Flow Method involves testing different plans against reserve expenses, while the Component Method does not Signup and view all the answers

What is the purpose of a 30-Year Cash Flow Analysis in the context of reserve funding?

To graphically present different funding plans and their outcomes Signup and view all the answers

Which funding goal is considered the most conservative?

Full Funding Signup and view all the answers

What is the primary focus of the Component Method in reserve funding?

Developing a funding plan based on individual reserve components Signup and view all the answers

Which of the following is NOT a funding method?

Full Funding Signup and view all the answers

Why is it important to understand the difference between funding methods and funding goals?

To demonstrate subject knowledge in reserve funding Signup and view all the answers

Study Notes

Funding Plan Goals

Full Funding: Setting a reserve funding goal to attain and maintain reserves at or near 100% funded, the most conservative funding goal.
Threshold Funding: Establishing a reserve funding goal of keeping the reserve balance above a specified dollar or percent funded amount, with varying risk depending on the threshold selected.
Baseline Funding: Establishing a reserve funding goal of allowing the reserve cash balance to never be below zero during the cash flow projection, with the greatest risk.

Funding Plan Methods

Cash Flow Method: A method of developing a reserve funding plan where contributions to the reserve fund are designed to offset the variable annual expenditures from the reserve fund.
Component Method: A method of calculating the fully funded balance (FFB) for each component, using the formula: FFB = Current Cost X Effective Age/Useful Life.

Funding Plan Terminology

Funding Plan: An association's plan to provide income to a reserve fund to offset anticipated expenditures from that fund, with a minimum of 20 years.
Funding Principles: The reserve provider must provide a funding plan addressing principles such as adequacy and minimum requirements.
Fund Status: The status of the reserve fund reported in terms of cash or percent funded.
Reserve Balance: Actual or projected funds at a particular point in time.

Key Concepts

Risk assessment: The risk of cash problems, special assessments, and deferred maintenance associated with each funding goal, with Full Funding being the most conservative.
Inflation and interest: Not considered in the examples and definitions, but their impact on reserve components and interest earned on reserve funds can be added to the reserve study, varying the formulas.

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Description

Learn about different reserve funding plan goals, including full funding, threshold funding, and baseline funding, to manage and maintain reserves effectively.