A Reserve Fund basically puts money aside today to pay for replacement of assets in the future. Look at our four largest assets, the Berger Center and the three Recreation Centers. Each of those assets consist of many smaller assets and each has a useful life and will someday be replaced.
Let’s look at a pool. A pool is a hole in the ground that you fill with water, should last forever. Except, you need to keep the water in so you line the hole with concrete, finish the concrete with plaster, tile and coping and, in a busy pool, you refresh the plaster, tile and coping about every 10 years. The water is heated and the heaters run 7 days a week, all year long and maintain water temperatures between 81 and 86 degrees so the heaters need to be replaced about every 5 years. The filter system may last 10 years, the pumps 5 or 6 years. Pool cover, furniture, pool sweep, lighting, fencing, etc. all have different life expectancies before they will need to be replaced. The hole in the ground filled with water will still be there but it won’t be very useful or attractive unless all the related components are maintained and replaced when needed.
In the Reserve Fund we identify all of the individual assets with a threshold replacement cost of at least $2,000. We try to accurately estimate the useful life of each asset and estimate the cost to replace that asset at end of life. We break the replacement cost down to a yearly amount. You can see an example here (link to http://oakmontvillage.com/wp-content/uploads/2015/05/2016-Reserve-Disclosure-Summary.pdf). In an ideal world we would save the total of those calculated yearly amounts each year and spend, from that fund, the amounts we need to do this year’s asset replacements.
Of course, the estimated useful life is only an estimate. The condition of each asset is monitored and they’re replaced when they need to be replaced. If assets last as long as our projected useful lives that’s good, if they last longer that’s better and if they fail early we should have sufficient funds in the reserve fund to replace them. If we’re doing this diligently for all the assets we track things should even out in the end.
After all the assets have been identified and documented a Reserve Study Specialist prepares a 30 year projection of reserve fund deposits and expenditures. We assume a steady growth rate for the monthly deposits to the Reserve Fund and a steady net interest rate on a calculated balance. We expect that the projections for the first 3 to 5 years of the study may be close to the actual expenditures and the projections beyond that are just for long term planning purposes. Each year we compare actual expenditures to projected expenditures and actual replacement costs to projected replacement costs. This data is used to refine the projections in future Reserve Studies.
Here is our current detailed 30 year Reserve Study.