Gaming the Reserve Fund Study

The requirements for the Reserve Fund Studies are laid out straight forward in the Act so there should be no difficulties in following them right?

Reality being what it is, some condos have learnt to work around these rigid safeguards with methods that are so simple as to beggar belief. The gaming has three premises:

1.	The recommended starting amount in the Reserve Funds is elastic and can be changed with every new engineering study.
2.	The estimated dates that repairs and replacements are required to be completed can vary depending on honest differences of opinion. The dates can be pushed out into the future to give the board a lot more time to raise the money.
3.	Instead of repairing or replacing large cost items such as the roof, balconies, water penetration problems, risers or underground parking garages, we'll do patch repairs as required.

How can the owners catch on?
There are four ways that an owner can tell that the Reserve Fund Study is pushing required repairs further out into the future or that the reserves are underfunded.

1.	The audited financial statements will show the amount that the study states should be in the reserves and the owner can compare that figure to the actual amount in the reserves. See if they are different. (Look in the auditor's Notes for these figures.)
2.	Whenever there is a new Reserve Fund Study, the owners will get a copy of Form 15, the tables that show the amounts that needs to be collected and the amounts that needs to be spent over a 30 year period. The owners should compare the figures between the old Form 15 and the new one. See if the compounded increase percentages are rising.
3.	The owners should ask to examine the current full Reserve Fund Study and the previous Study. Check for differences of when the recommended work should be done and the estimated costs.
4.	See if the engineers use the expression "ideal funding" to refer to pass contributions. (If so, they may be saying that in previous years the corporation underfunded the reserves.)
5.	See if there are large increases in the suggested annual contributions from one study to the next.

The games may work like this.

The original Reserve Fund Study
The engineers prepare a study and the board approves it. The condo has $100,000 in the reserve fund so that is the starting figure.

The engineers calculate what work has to be done when, how much it will cost and how much money the owners will have to contribute to the fund over the next 30 years.

There are times when more work has to be done than what the owners can reasonably expect to pay so the repairs and replacements get pushed out into the future a little longer than the engineers would like but it is put in a schedule that the board commits to.

The study could say something like this:

	Year 1	Year 2	Year 3	Totals
Starting balance	$200,000	$  50,000	$  25,000
Contributions	250,000	400,000	400,000	$1,050,000
Total	450,000	450,000	425,000
Spent fixing garage	400,000	425,000	175,000	$1,000,000
End of year balance	50,000	25,000	250,000

A million is needed to fix the garage and so the plan calls for just over $1 million to be raised by a combination of fees and a special assessment so the garage gets fixed and the reserves still contain a modest amount to help pay for other repairs. A good logical plan.

In reality
However, this is what can happen:

	year 1	year 2	year 3	Totals
Starting balance	$200,000	$ 75,000	$ 25,000
Contributions	100,000	100,000	100,000	$ 300,000
Moved to operating fund	–25,000	–50,000	–50,000
Total	275,000	125,000	75,000
Spend renovating lobby	200,000
Replacing hallway carpets		100,000
Spent fixing garage	0	0	0	0
Total money spent				$300,000
End of year balance	75,000	25,000	75,000

Is this example far fetched? Not at all.

The board will not raise the fees to pay for the operating costs or the reserves, they will not levy a special assessment and they dare not ask the owners to approve a loan. So they ignore the Reserve Fund Study and divert money that should go to the reserves to keeping the lights on.

Curb appeal
If any discretionary money is spent on the building, it goes to fixing up the front driveway, front landscaping, renovating the lobby and new carpets in the hallways. Why? To increase curb appeal by making the building look good.

The board can brag to the owners how they are keeping the fees low and improving the value of their units. Re-election is a shoo-in.

The next Reserve Fund Study
So what happens now when an updated reserve fund study is required?

Well  the past is wiped clean, the old Reserve Fund Study is kicked aside and the engineers go back to their computer and come up with another spreadsheet that has a lower starting balance.

	Year 1	Year 2	Year 3	Totals
Starting balance	$ 75,000	25,000	75,000
Contributions	$350,000	450,000	450,000	1,250,000
Total	425,000	475,000	525,000
Spent fixing garage	400,000	400,000	400,000	1,200,000
End of year balance	25,000	75,000	125,000

The engineers have to start with what actually exists in the bank, not what they thought would be available. The garage will cost more due to inflation and because there has been further deterioration due to it not being repaired three years earlier.

Again they have to hope that the board will raise the needed money by raising the fees and levy a special assessment.

Then all the other work that needs to be done; replacing the roof and the boilers, renovations to the balconies, replacing the hot water risers and the re-paving of the driveway, gets pushed further out into the future.

How do they get away with it?
It's actually very easy.

The owners don't understand what is going on. It is extremely rare for an owner to ask to read the Reserve Fund Study to find what work should be done, the estimated cost of that work and when it should be done. If anyone asks to examine the Reserve Fund Study, they are shown the new study. No one asks to see both studies so they can see how they differ.

All they see is the Form 15, the spreadsheet that shows how much money should be in the reserves at the start of each year, how much should be collected each year, how much interest should be earned and how much should be spent.

When a new Form 15 shows they need less money than the earlier study, the owners think that is good news because they will be paying less in fees.

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