CMCA - Certified Manager of Community Associations Budgeting and Reserve Studies Questions and Answers — Questions and Answers
Question 1: A community association's reserve study is comprised of two main parts. What are they?
- A physical analysis and a financial analysis. (Correct answer)
- An operating budget and a capital budget.
- An income statement and a balance sheet.
- A component inventory and a funding plan.
Correct answer: A physical analysis and a financial analysis.
A comprehensive reserve study consists of two key parts: the Physical Analysis, which evaluates the condition and replacement cost of major common area components, and the Financial Analysis, which assesses the status of the reserve fund and recommends a funding plan.
Question 2: A newly built community association has just transitioned from developer control. The initial budget provided by the developer did not include a reserve study. What is the BEST immediate course of action for the new board of directors?
- Continue with the developer's budget for the first year to establish a baseline.
- Immediately levy a special assessment to start a reserve fund.
- Commission a full, professional reserve study to be completed. (Correct answer)
- Poll the homeowners to see if they want to fund reserves.
Correct answer: Commission a full, professional reserve study to be completed.
The board has a fiduciary duty to manage the association's assets. A reserve study is a critical tool for long-term financial planning. For a new association, it's crucial to have a professional study done to accurately identify the components the association is responsible for, their useful lives, and the required funding, as initial developer budgets may not be accurate.
Question 3: Which of the following is typically funded from an association's operating budget rather than the reserve fund?
- Asphalt repaving of the community roads.
- Replacement of the clubhouse roof.
- Annual landscape maintenance contract. (Correct answer)
- Major overhaul of the swimming pool pump system.
Correct answer: Annual landscape maintenance contract.
The operating budget covers predictable, recurring, day-to-day expenses. An annual landscape maintenance contract is a routine expense. Reserve funds are specifically set aside for the major repair or replacement of capital components that have a limited, but long-term, useful life, such as roofs, roads, and major equipment.
Question 4: An association is utilizing the 'component' method for its reserve funding. The board needs to pay for an unexpected, major repair to the swimming pool filtration system, which was not a listed component. However, the 'roof replacement' component fund has a surplus. How should the board proceed?
- Use the surplus roof funds for the pool repair, as it is an emergency.
- The funds cannot be used for any purpose other than roof replacement without a vote of the members. (Correct answer)
- Take a loan from the operating fund and pay it back later.
- Immediately commission an updated reserve study to add the pool filter.
Correct answer: The funds cannot be used for any purpose other than roof replacement without a vote of the members.
The component method allocates funds to specific line items (components). Money in a specific component's fund is restricted for that item's use. Using those funds for another purpose, like an unlisted pool repair, typically requires a formal vote and approval from the association's membership, not just a board decision.
Question 5: The primary purpose of a community association's annual budget is to:
- Guarantee a surplus of funds at the end of the fiscal year.
- Provide a financial plan for the association's anticipated revenues and expenses for the coming year. (Correct answer)
- Justify the salaries of the community manager and staff.
- Set the schedule for all major capital replacement projects for the next decade.
Correct answer: Provide a financial plan for the association's anticipated revenues and expenses for the coming year.
An association's annual budget is a financial roadmap for a specific period, typically one year. It estimates the income needed (from assessments, etc.) to cover all anticipated operating expenses and reserve contributions.
Question 6: Which of the following describes the 'Baseline Funding' goal in a reserve study funding plan?
- Keeping the reserve balance at or near 100% of the association's calculated deterioration.
- A plan where the reserve cash balance is kept at a specified dollar or percentage funded level.
- A minimal funding plan where the reserve cash balance is projected to remain above zero. (Correct answer)
- Funding reserves only after all operating expenses for the year have been paid in full.
Correct answer: A minimal funding plan where the reserve cash balance is projected to remain above zero.
Baseline Funding is a strategy where the goal is to keep the reserve fund balance from dropping below zero. While it meets the minimum requirement of having funds available, it is considered a higher-risk strategy compared to Full Funding, as there is less of a buffer for unexpected expenses or cost increases.
CMCA - Certified Manager of Community Associations Budgeting and Reserve Studies Questions and Answers
A community association's reserve study is comprised of two main parts.
What are they?