Threshold funding

What threshold funding sets

Every reserve fund needs a target, a number the board is trying to hit. Threshold funding is one of three named funding objectives a reserve study can build a plan around: baseline, threshold, and full. Baseline funding just tries to keep the reserve balance above zero, which leaves little room for a bad estimate or a project that runs over budget. Full funding aims to keep the balance equal to the fully funded balance, the computed value of everything that has worn down so far. Threshold funding sits between the two: the board picks a specific dollar figure or a percent funded number and works to keep the reserve at or above that line, year over year.

"Threshold Funding... means keeping the Reserve Fund at or above a pre-determined dollar or Percent Funded amount (typically a 'middle ground' objective)"

Source: What is Full Funding and Baseline Funding?, Association Reserves, Inc.

Where boards usually land

Most threshold targets fall somewhere in the range one reserve-study firm calls fair, roughly 30 to 70 percent funded, the gap between a fund it calls a high risk of special assessments and one where special assessments are rare. No statute in the available research sets a required percent funded figure for general reserves, though some states require the study itself and a set review cycle. Check your state's requirement, covered in Statutory reserve requirements. Picking a percentage because it sounds safe is guessing; the target should come from what your own study says it would cost to fully fund your components, not from a number found online.

Choosing and defending your number

There is no single right threshold. What matters is that the board's fiduciary duty of care is easier to defend when the target came from an informed decision, not a guess: reviewing the reserve study's recommendation, discussing the trade-offs at an open meeting, and writing down why this number instead of another.

"disinterested, reasonably informed under the circumstances, and able to reasonably believe that the decision was in the best interests of the association"

Source: Fiduciary Duties 101, Limiting the Liability of the Board, communityassociations.law

If your reserve balance is already below the threshold you set, the standard response is a catch-up funding plan that raises contributions gradually, not a single emergency assessment. See Baseline funding and Full funding for the objectives on either side of threshold funding.