Reserve funding methods: baseline, threshold and full funding

Baseline funding

Contribute just enough that the reserve balance never drops below zero. It is the lowest contribution that avoids a shortfall on paper, and it leaves no margin. One early failure or one quote that comes in high means a special assessment.

Threshold funding

Contribute enough that the balance never drops below a minimum you choose, either a dollar amount or a percent funded level. It costs a little more than baseline and buys a cushion. Reserve Study Kit's recommended contribution uses this method.

Full funding

Aim for 100% percent funded, so that savings keep pace with wear. It asks the most of current owners and makes special assessments least likely. It is also the fairest across time, because each year's owners pay for the wear that happened while they lived there.

Component method and cash flow method

These describe how the contribution is calculated, not what it aims for.

• Component method. Each component gets its own account: its cost divided by its useful life each year. It is simple, and it usually asks for more than is needed because money in one account can't cover another.
• Cash flow method. All reserves sit in one pool, and contributions are tested against all the expenses in the projection. Most studies today use it.

What the law in your state says

Some states name the goal. Florida's structural integrity reserve study must include a baseline plan that keeps the balance above zero. Hawaii requires funding at least 50% of the estimated reserves, or 100% under a cash flow plan. Maryland lets the board choose among several named methods. Check your state's requirements.

Which to choose

Baseline is a floor, not a plan. For most associations the realistic choice is between threshold and full funding, and it comes down to how much risk of a special assessment the owners are willing to carry. Show the board the contribution under each, with the lowest balance each one produces.