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The 2012 Syndrome and Reserve Funding

Most people have heard of the Mayan calendar that was created hundreds of years ago, even before the Americas were discovered by explorers. Of particular concern(once the calendars were deciphered) has been the prevailing interpretation of the Long Count calendar that some cataclysmic event would occur on December 21, 2012. Many believed this would be the end of the world.

December 21, 2012 is now behind us, and obviously the world did not end. Up until that date, however, many people were so convinced the world would end that they just refused to plan for any future beyond that date. Their attitude was, why plan for something in the future if you're not going to be here? There are others who believe that the year 2012 was simply misinterpreted, and that the end of the world is still relatively imminent.

This continued insistence that the world is going to end (soon) is nothing more than a convenient form of denial. It’s often referred to as the “2012 syndrome” since that date is so widely known, and since it was proven to be a false alarm. Those who suffer from the 2012 syndrome tend to use denial as an excuse for not taking action today. It doesn't really matter in what context this occurs. The person simply believes that there is no reason to plan because . . . (insert whatever reason you want here).

How does this concept apply to the community association world? We mostly see this in connection with reserve planning. Very few associations reach the 100% funded level, and many never even aspire to do so. We have performed reserve studies for many associations whose stated goal is to "reach 65% funded in 20 years." Some associations can get away with this by using the cash flow method of reserve funding to document that the association can get by with lower levels of reserve funding and still avoid special assessments. In one sense, there is nothing wrong with such a funding plan so long as members are fully advised to and supportive of this plan. However, it is not an "equitable" method of funding, as it means that the individuals "using up" the community components are not paying for the full use and enjoyment they are receiving - they're passing the buck to future owners.

On the other hand, too much reliance on the "percent funded" concept can also be a problem. The Association really needs to carefully conduct a cash flow analysis to make sure that enough funds will be available in "peak expenditure years." These are the years where multiple significant expenditures are scheduled to occur based on dates placed in service and estimated useful lives. As an example, if a condominium association has exterior painting, roofing, and paving projects all occurring at the same time, that would be considered a peak expenditure year. The only ways an association can accommodate the cash flow requirements for these kinds of years are to (1) build up the required cash flow in advance, (2) spread the projects out to fall on different years (although there is great danger in deferral of projects simply because they are inconvenient), and (3) borrow funds when needed and repay at a later date.

From experience I’ve learned that the "2012 crowd" is alive and well within the community association industry. These are the folks who don't want to fund reserves at all, or only at a very minimum amount. To be honest, I don't think most of these folks really believe that the world is about to end. I think they're just in denial that, for instance, the roof really needs to be replaced. After all, it has not been a problem for the last 20 years, so why should it be a problem now? Let somebody else worry about it. This kind of thinking affects association reserve funding plans by resulting in absolute minimum reserves being established and funded, and by necessary maintenance work being either deferred or funded by special assessments. This strategy might work on a relatively short-term basis, but is doomed to failure on a long-term basis.

Unfortunately, I believe the 2012 believers will always be with us. As for me, I have long been a skeptic of the 2012 theory. Think of it this way - you're creating a calendar consisting of future time periods. How far into the future do you take it? Until you run out of paper? Using a computer, you could theoretically run the calendar to any future period. However, the Mayans didn't have computers, nor did they have paper. They only had stone. I have always maintained that the Mayans simply ran out of stone, so they had no more room to continue - and after all, their calendar already looked hundreds of years into the future. Maybe they just didn't bother to get another stone.

Moral of the story? Don't be a denier. Carefully consider your association's future funding requirements and start setting aside an appropriate amount of money to fund those future expenditures.

Additional Info

  • Author: Gary Porter
Read 2807 times Last modified on Monday, 01 September 2014 14:30
Gary Porter

Gary Porter, CPA, RS, PRA, has been working in the community association industry for more than 30 years.  As a CPA, he has performed thousands of association audits, and prepared thousands of association income tax returns.  He has specialized in the preparation of tax exemption applications, and has successfully taken more than 80 associations tax exempt, at a cumulative tax savings of millions of dollars.  He is the primary author of PPC's "Guide to Homeowners Associations" and "Homeowners Association Tax Library," which serve as the principal guides used by CPAs within the community association industry.

As a reserve preparer, he has performed hundreds of reserve studies since 1982, and is author of the 1988 book "The Reserve Study Manual."

Mr. Porter is a past national president of CAI, and a member of the Association of Professional Reserve Analysts.

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