What is Percent Funded?
Percent funded is one of the methods to measure the strength of a Reserve Fund. The Community Associations Institute (CAI) defines “Percent Funded” as the ratio, at a particular point in time (typically the beginning of the Fiscal Year), of the actual (or projected) Reserve Balance to the Fully Funded Balance, expressed as a percentage.
To understand this lets first define Fully Funded Balance (FFB). The Fully Funded Balance is the total accrued depreciation of the component(s). This balance is the cost of how much life has been used. The Fully Funded Balance is then used as an indicator against which the actual (or projected) Reserve Fund Balance can be compared against, know as Percent Funded.
To best explain this concept lets look at an example. Let’s say that the cost to replace interior carpet is $10,000 and the plan is to replace it in 10 years. Each year the cost of depreciation is 1/10th of the replacement cost. Therefore, each year $1,000 of cost is accrued. In year 2 the Fully Funded Balance would be $2,000. In year 5, the total accrued depreciation is $5,000, and so on.
To determine the Percent Funded we compare the FFB with the Reserve Fund Balance. To continue the above example, let’s say you have $2,000 in your Reserve Fund in year 2. The total accrued depreciation or FFB is $2,000. Therefore, you are 100% funded. You have 100% of the accrued depreciation or 100% of the Fully Funded Balance. If you have set aside only $1,000 are you 50% funded. You have saved 50% of the existing depreciation.
Let use another example. Let say that the cost to replace the roof is $100,000 with a useful life of 20 years. Each year 1/20th of the cost of replacement is accrued. In year 5 the FFB is $25,000. If in year 5 you have $25,000 then you are 100% funded. If you only have $15,000 then you are 60% funded.
As already mentioned Percent Funded is used as a way to measure the strength of the Reserve Fund. The strength can be described as weak, fair, strong and ideal.