Another significant limitation of a community’s reserve study is the assumptions the reserve study is based on.
How accurate is the predicted inflation rate? We use historical data to determine future inflation. Obviously this is not a perfect method. It’s unlikely that a reserve study from 20 years ago accounted for the effect that China’s growth would have on building material prices. What’s the next 30 years going to look like? How much will oil cost?
When a homeowner’s board member reviews his community’s reserve study, s/he will notice that a reserve study also includes interest on the community’s reserve balance. This interest rate over the course of years has a significant impact on the community’s savings. Is this interest rate reasonable? What is the interest rate of your savings? Perhaps the community should be more conservative and change the reserve study’s assumption.
A reserve study is the most accurate the day it is created and each day afterward it becomes a little less accurate. While a reserve study may project out 30 years, its useful life is maybe 3-5 years.
