Letter to the ECHO Journal: Inaccuracies in Reserve Study Article

Published in the ECHO Journal, January 2007

Numerous Inaccuracies in “Back to Basics” article in September 2006 ECHO Journal:

ECHO should be applauded for the theme of this article (Reserve Studies are good…update yours annually and ensure it is accurate). But below the theme’s surface, the number of inaccuracies in the September 2006 Reserve Study “Back to Basics” article was surprising. These are not “point of view” issues. Civil Code is misrepresented and key concepts are misstated.

For instance, per National Reserve Study standards (in circulation since 1998) and California Civil Code (Section 1365.1.2.C), Percent Funded is defined as a measure of Reserve Fund size at a particular point in time, not a time or circumstance dependant measure of contribution size or rate as claimed by the author. In addition, the Cash Flow “method” is fundamentally a multi-year analysis of an association’s Reserve income and expenses (hence the name, as cash “flows” from year to year), not as the author states an evaluation of just the initial year, ignoring the needs of future years. Nowhere does Civil Code state a requirement that “100% of the money needed for next year’s expenditures” be available. It should also be noted that it is Civil Code Section 1365.a.4 (not Section 1365.5) that requires the Reserve Study to be distributed with the budget 30-90 days prior to the Fiscal Year End (not “at least 45 days”).

These inaccuracies, and more like them, are troubling. Can you imagine the confusion if a CPA or attorney were to ignore their industry standard definitions and utilize their own personal definition for “audit” or “foreclosure” in a published article and totally misrepresent Civil Code on the matter? ECHO members rely on the Journal for guidance on numerous topics. While in general the ECHO Journal has met that objective, in the case of this article I believe ECHO failed its membership.

Robert M. Nordlund, P.E., R.S.

Association Reserves, Inc.


The Article Author Replies:

This is in response to the letter from Robert Nordlund [printed above]. I appreciate the opportunity to respond to the letter.

Robert Nordlund is an experienced reserve funding specialist, and we have talked at several trade shows and seminars regarding the issues he raises. I have found that there are significant differences among reserve consultants regarding the specific wording and definitions used in this field. My article was a very basic article, and I did not wanted it be a detailed discussion on terms and semantics.

First, I must agree with Robert that the deadline for distribution of the Pro Forma budget including the Reserve Study information is not less than 30 days nor more than 90 days prior to the start of the new fiscal year. I used language from an older article and should not have let this error pass by undetected. [Editor’s Note: Equally this error should have been corrected by the editor.]

However, on the other points, I must disagree. First, my points regarding the definition of Cash Flow Method vs Per Cent Funded are valid points. Yes, the Per Cent Funded method is an attempt to measure the degree to which an association is keeping pace with the necessary funding. That is why it is expressed in a per cent, for example. Secondly, of course the minimum requirement for the Cash Flow Method is that the association must have sufficient cash to meet the next year’s reserve expenditures. That is the reason reserve funding was established originally.

[I would like to suggest that] ECHO…start a forum among reserve study consultants regarding these differences of opinion on definitions and interpretations. This would be helpful in developing a broader based input into this discussion, which I am sure would benefit both the readers and those of us who work in this field.

Thomas Douma, MBA, RS