By Ronn Williamson
Vice Chair for Reserve and Replacement Studies
As published in The View, June 2023:
Question of the Month: Is our Replacement Fund adequate to cover future needs?
If you prefer a one-word answer to this question, it is a definite YES – and you can stop reading here. But if you’d like to learn why I’m so confident, keep reading to see what I am learning in this new volunteer role.
In the February issue of The View, Mike Whelan, FAC Vice Chair for Investments, talked about where the Association’s cash is held and included a summary of our Replacement Fund and its purpose.
I joined the FAC shortly afterward with a personal goal to better understand our Replacement Fund monthly assessment and the Reserve Studies that guide the HOA Board in maintaining the fund.
What I have found is a simple concept: An HOA should maintain a separate account with sufficient funds to keep its community in good repair for 30 years into the future. The difficulty that arises is with making financial predictions about the next 30 years when few of us have a crystal ball. How long will each community asset last before a major repair or replacement is needed? What are realistic replacement costs today? What will they be in the future? How do we plan for inflation (a hot topic these days)? What investment return can we expect on the significant amount of funds held? What items should be included for replacement? Will our funds be sufficient to cover unexpected breakdowns or premature failures each year without the need for a special assessment? Fortunately, these questions are addressed each year with a “Reserve Study” done by a professional firm that works with many HOAs for just this purpose.
In November, the annual budget mailer includes the summary pages of the SCSH Reserve Study. Did you know the entire report is available to all residents at www.scshca.com/reserve-study, in the “Documents” section of our website in a folder labeled “Reserve Study”? I think it provides a fascinating detailed plan for our community as it ages. In the report for 2023, you will find every component listed for eventual replacement, including its full useful life, remaining useful life, estimated current replacement cost, and possible future replacement cost.
In all, there are 1,218 components listed in the “Component Identification Report” section that include such disparate things as asphalt resurfacing, restaurant equipment, HVAC units, and our golf course sand traps. For 2023, the report indicates we will spend about $2.7 million for replacement items with zero remaining useful life. While this study guides our replacement decisions, actual approval to spend money is made by the HOA Board on a case-by-case basis based on staff and committee input throughout the year.
In California, the Davis-Stirling Act (Civil Code 5550) requires HOAs to have a reserve study completed, with a “visual inspection” of all components at least every three years (our consultants call it a “Level II” site study). SCSH’s last Level II site study was done in 2020, and we are scheduling the next one for this June. Once the site inspection is completed, the consultant will work with staff, the FAC, and our Board to finalize the Reserve Study Report for use in the fall during the budgeting process for 2024. When that process is finalized in November, we can be assured that our replacement fund will continues to be in great shape!
Contact the author at finance@scshca.com.
Contact the author at finance@scshca.com.