Section 94(8) of the Condo Act says …
Within 120 days of receiving a reserve fund study, the board shall review it and propose a plan for the future funding of the reserve fund that the board determines will ensure that, within a prescribed period of time and in accordance with the prescribed requirements, the fund will be adequate for the purpose for which it was established.
There is some ambiguity as to what is meant by “adequate”.
One of two funding approaches is generally utilized to ensure that the reserve fund is “adequate”.
First Fiscal Year Funding
The Act and Regulations state that the reserve fund should be fully funded by the year after the year the reserve fund study is completed with subsequent increases at the rate of inflation.
This approach requires immediate funding of any deficiencies and reduces the likelihood of special assessments or future funding problems.
Advocates of this approach believe that it is not reasonable to require current owners to immediately implement full funding when most expenses are unlikely to be incurred until future years. They feel that the fund is “adequate” so long as it can cover anticipated expenses. Under this approach the reserve fund only needs to contain funds anticipated for the current fiscal year.
Since reserve fund studies are undertaken every three years, advocates of this approach generally agree that full funding should be complete by the time of the next reserve fund study. Others feel that longer periods of time are acceptable to achieve full funding so long as each current fiscal year’s anticipated expenditures are fully funded.
This approach avoids a one year spike in reserve fund contributions. It also presents opportunities for manipulation, underfunding and future funding deficiencies. This multi-year funding approach penalizes future condo owners for prior reserve fund deficiencies.
The Stage 2 Solutions Report, which recommends changes to the Condo Act, attempts to clarify how reserve funds are to be funded. The report recommends a three year phase-in period after which time reserve fund increases should be limited to the rate of inflation. The report further recommends that an unexpected 50% decrease in reserve fund balance two months after the reserve fund study is complete trigger a potential review.