The State of Florida accepts two primary types of reserve funding: the pooled method and the component method. The pooled method draws reserve funds from one reserve pool. With the pooled method, there is one reserve account balance and anywhere from a few to many reserve items.
With the component method, each reserve item has its own account balance. For example, if your association has 88 reserve items, then there will be 88 reserve balances–one for each item. Conversely, in the same scenario with the pooled method, there will be 88 reserve items and one reserve balance.
I am often asked which method of funding I recommend. The answer is the pooled method. The pooled method leads itself to much simpler record keeping than the component method. With the pooled method if one reserve item’s cost is underestimated, then it just draws from the pool of reserve funds, and it is not typically a problem. The component method, however, funds each item from its own account balance. So if one item’s cost is underestimated, it can make the reserve budget spike for a few years, or even cause a special assessment.
Using a slightly different way of looking at things, here is another example. Let’s go back to the association with 88 reserve items. If the reserve item cost estimates are high for 5 items and low for 5 items, it will essentially balance out (assuming one of the items is not substantially more expensive than the others). On the other hand, using the component method and having 5 items estimated highly and 5 items estimated lowly will create a real problem. The five items that do not have enough reserve funds will either require passing a majority member vote to borrow money from a different reserve account, or create a special assessment, where each owner is required to pay there pro-rated share of the difference to repair or replace the reserve item.
Employing the component method requires much more red tape including membership votes and calculating account balances for each reserve item. The component method also is not realistic for large associations because it requires every item to project its precise replacement cost, which is something that is almost impossible to do. The pooled method is a much more streamlined version of calculating reserves. As you can see, using the pooled method over the component method will save you time and annoyances.