"We're 65% funded."
This statement appears in reserve studies, board reports, and disclosure documents. But what does it actually mean? And more importantly, is 65% good or bad?
The Basic Formula
Percent funded is calculated as:
Percent Funded = Current Reserve Balance / Fully Funded Balance × 100
Where Fully Funded Balance is the amount you should have right now, based on the age and replacement cost of your components.
A Concrete Example
Your HOA has a roof: - Replacement cost: $100,000 - Useful life: 20 years - Current age: 10 years
Fully funded calculation: - After 10 years, you should have saved 10/20 = 50% of the replacement cost - Fully funded balance for this component: $50,000
If your actual reserve balance allocated to the roof is $40,000, your roof is: - $40,000 / $50,000 = 80% funded
The Aggregation Problem
Most reserve studies report a single percent-funded number for your entire reserve fund. This hides important details.
Consider: - Roof: 80% funded - Pool: 120% funded (you've over-saved) - Elevator: 40% funded (underfunded) - Parking lot: 90% funded
Aggregate: Let's say 75% funded overall.
The problem: That 75% masks a serious elevator underfunding issue. When the elevator needs replacement, you don't have enough—even though your "overall" funding looks reasonable.
Why Component-Level Tracking Matters
California Civil Code 5550 requires HOAs to disclose:
"The current estimated replacement cost, estimated remaining life, and estimated useful life of each major component"
Note: each major component. Not just the aggregate.
This means your tracking system should show funding status per component, not just overall.
The "Threshold" Question
Is 70% funded acceptable? What about 50%?
There's no universal answer, but consider:
| Percent Funded | Risk Level | Typical Interpretation |
|---|---|---|
| 100%+ | Low | Fully prepared for scheduled replacements |
| 70-99% | Moderate | May need special assessment for large items |
| 30-69% | High | Likely to need special assessments |
| Below 30% | Critical | Major financial risk |
Important: These thresholds assume even distribution. An HOA at 70% with one severely underfunded component is in worse shape than one at 60% with even funding.
Funding Methods
How you get to "fully funded" matters:
Full Funding (Component Method)
Save enough to replace each component when needed, funded proportionally over its life.
Baseline Funding
Keep reserves above zero, but rely on special assessments for large items.
Threshold Funding
Maintain a minimum dollar amount regardless of component needs.
Most reserve study professionals recommend full funding or near-full funding for California HOAs.
What Your Software Should Show
A proper reserve tracking system displays:
- Per-component funding status: Not just aggregate
- Funding trajectory: Are you gaining or losing ground?
- Replacement timeline: When will each component need funding?
- Drift warnings: Alerts when components fall below threshold
If your software only shows an aggregate percentage, you're flying blind on component-level risk.
The Board's Responsibility
Directors have a fiduciary duty to understand reserve funding. This means:
- Reviewing the reserve study annually
- Understanding component-level funding
- Adjusting contribution rates when needed
- Disclosing funding status to members
"We thought we were funded" is not a defense when a special assessment becomes necessary.
Related Concepts
- Why Reserve Drift Happens - Understanding why your actual balance doesn't match projections
- What Is Reserve Expense → Component Reconciliation? - Tracking spending at the component level
- What Is Fund Accounting? - The framework that separates reserve from operating funds
How CommunityPay Enforces This
- Component-level funding tracked separately
- Reserve expenditures validated against component balances
- Funding status calculated from actual posting data
- Drift warnings generated automatically