Each item in the study has a useful life and the cost of replacing it. This is the length of time the item is expected to function properly without problem. You take the current cost of each item and divide them by the number of years the item is useful. Take the amount per year and multiply that by the number of years the item has been in place.
For example: A pool cool deck may have a current cost of $5,000.00 and have a useful life of 5 years. $5,000 / 5 years = $1,000.00 per year. If the cool deck has been in place for 3 years then the amount that should be set aside to replace the cool deck is $3,000.00.
If an item does not get replaced the money should still be there and will begin to accumulate funds again as if it had been replaced.
Example: Using the pool cool deck from above the schedule would have two lines one showing that the cool deck should have accumulated $5,000.00, but since it wasn't done 2 years ago like scheduled. There will be a second line for pool cool deck and should have accumulated $2,000.00. Just because items aren't done when scheduled doesn't mean they stop accumulating funds. Mainly because putting off items will cost you money in the long run.
Once you calculate the fully funded amount you will take that amount and add 3% for every year since the year the study was done.
For Example: Using the example from above we'll say the reserve study was completed in 2007. Take $7,000 x 1.03 x 1.03 x 1.03 x 1.03 x 1.03= $8,114.92 is the fully funded amount.
You may want to make adjustments for prices you know have increased to cover those increases. For instance when Obama took office he authorized the oil industry to use the sludge they were selling to the asphalt company's to build streets and seal coats; to further refine it for a different kind of diesel fuel. And he ordered that the infrastructure be rebuilt and caused the majority of the oil sludge to go to government contractors first. This has resulted in a shortage of emulsion and caused a large price increase. Where the cost was .089 per sq foot in 2006, it became .25 a sq foot in 2009, and has gone up ever since. This isn't to say you cannot find someone willing to do it cheaper, but it will not be quality work or last as long. From 2006 to 2009, the price increased 65% which is worth making an adjustment to the fully funded figure.
Now take the amount of your reserves as of 12/31/2011 and divide that into the fully funded amount. If your reserves are more than the fully funded amount then your in good shape.
Where Indian Bend Village HOA aka Suntree needed $224,000 to be fully funded in 2008, they now need $403,000.00 to be fully funded. But, if you rely on the figure on the Cash Flow Specific Projections Schedule and haven't followed the study to the letter like our board didn't the figure shown is $93,213.00. Of course if you use this figure it looks like we are in great shape. Wrong because the scheduled expenditures for a few items were never completed; like the street overlay. Only the biggest expenses the community in the entire reserve study. If the board put away $36,000 for the last two years the community will only be 54% funded. This only 6% more than the community was in 2008!
It's easy to see how important it is to know how to calculate this figure. For something this important don't take the boards word make them show you the figures. This cannot be calculated on the fly or without writing it down or typing it out. When you ask for the spreadsheet, and they take it personally it's probably because it doesn't exist, is not correct, or they don't know how to calculate it. Which means things are probably worse than you think or you can get lucky and your better off. More likely than not is things are worse then you think. But, at least you can show everyone how to calculate fully funded correctly.
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