Baseline funding
The reserve funding objective with the smallest possible contribution, and the smallest possible cushion.
Baseline funding is a reserve funding objective that keeps the reserve cash balance at or above zero, nothing more. It's the funding objective with the least cushion: contributions only need to cover projects as they become due, so a bigger than expected expense can push the fund negative fast.
Baseline funding, defined
Reserve study practice recognizes three named funding objectives a board can choose between: baseline funding, threshold funding, and full funding. Baseline is the floor.
"Baseline Funding means establishing a Funding Objective of keeping the Reserve cash balance above zero."
Source: What is Full Funding and Baseline Funding?, Association Reserves, Inc.
Nothing in that definition says how healthy the fund is relative to actual wear and tear on the association's common elements. It only says the balance shouldn't go negative. A component can be badly deteriorated and the fund can still be "on track" under baseline, as long as cash on hand covers what's due right now.
The tradeoff: low contributions, low margin
Keeping contributions at the level baseline funding requires is the cheapest option available to a board, and that's exactly the problem. The same source that defines baseline funding also describes what it costs in risk.
"...little or no 'margin for error'..."
Source: What is Full Funding and Baseline Funding?, Association Reserves, Inc.
A component that fails early, a bid that comes in over the study's estimate, or two projects landing the same year can all push a baseline-funded reserve below zero. When that happens, a board is generally choosing between a special assessment, a reserve loan, or deferred maintenance, and deferring tends to make the eventual repair more expensive, not less.
How it compares to threshold and full funding
Threshold funding sits between baseline and full funding: instead of a floor at zero, the board sets its own dollar or percent funded target and funds to hold that line. Full funding aims higher still, at matching the fund's calculated deterioration.
"Full Funding is a conservative alternative, where the objective in any year is to have a Reserve balance equal to the value of deterioration at the association."
Source: What is Full Funding and Baseline Funding?, Association Reserves, Inc.
The gap in risk between baseline and full funding is large. The gap in cost is smaller than most boards assume: full funding contributions "are typically only 10-15% higher than Baseline contributions," according to the same source. A board weighing whether to move off baseline is often trading a modest increase in dues for a much larger cushion against a surprise assessment.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
A board wants to spend as little as possible on reserves while still avoiding a negative balance. Which funding objective are they choosing?
Association A funds to keep its balance above zero. Association B funds to match its calculated deterioration exactly. Which one has less cushion against a surprise expense?
A board currently funds at baseline and wants less special-assessment risk without jumping straight to full funding. What's the standard middle option?
Sources
- What is Full Funding and Baseline Funding?, Association Reserves, Inc.
- What Happens When Your HOA Reserve is Underfunded?, The HOA Handbook
Related elsewhere in the Academy
Reserves
Want to see what moving off baseline actually costs your association? Read percent funded next to learn how boards measure the gap.
Whether a board may choose baseline funding, and whether that choice needs a membership vote, depends on your governing documents and your state. Florida bars unit-owner-controlled associations from underfunding the specific structural and life-safety items covered by its structural integrity reserve study law; other states generally leave the funding objective to the board's discretion.