Reserves vs special assessments

Two tools for two different jobs

An association's operating fund pays for the recurring costs of running the community, landscaping, insurance, management fees. The reserve fund is set aside separately for the infrequent, expensive stuff: roofs, pavement, elevators, the things that fail all at once and cost a lot when they do. A reserve is that fund building up gradually, project by project, over the years before a component's replacement date arrives.

A special assessment is a different mechanism entirely: a one-time charge to owners, raised outside the normal budget, to cover a cost right now. It exists because the reserve, by definition, was supposed to make special assessments unnecessary. When one shows up, it is usually a sign the reserve did not have enough saved for the project in front of the board.

When the reserve fund comes up short

A reserve study can tell a board a roof is due this year and the fund is $30,000 short of the estimated cost. At that point the board is generally choosing among three imperfect options: levy a special assessment, arrange a reserve loan, or defer the work. Deferring is rarely free. Putting off resealing asphalt can turn into a full repaving job, and a skipped paint cycle can turn into siding replacement, because the deterioration underneath keeps running while the decision sits.

"Reserve Fund Balance (actual)/Fully Funded Balance (computed)"

Source: What Exactly is Percent Funded?, Association Reserves, Inc.

That ratio is called percent funded, and one practitioner firm's convention treats associations above roughly 70 percent as a range where special assessments are rare, and below roughly 30 percent as carrying high risk of one. Those bands are industry convention, not law, but the direction holds: the closer the fund sits to fully funded, the less likely a project forces a special assessment.

Closing the gap before you need one

The standard response to a moderately underfunded reserve is not to wait for a shortfall and then assess. It is a catch-up funding plan, a schedule of gradually increased contributions that closes the gap over several years instead of all at once. It also tends to cost less than boards expect: moving from a bare-minimum funding objective to a fully funded one typically raises contributions by only 10 to 15 percent, not a dramatic jump.

"the association shall levy regular and special assessments sufficient to perform its obligations"

Source: Is Reserve Funding Mandatory?, Berding Weil

That is California's assessment-sufficiency language, one law firm's reading of it, not a required percent-funded figure. Whether your state sets any funding floor, and what vote or notice a board needs before levying a special assessment, depends on your state's statute and your own governing documents. Check both before assuming either a special assessment or a catch-up plan is your only path.