UNDERSTANDING HOA RESERVE STUDIES AND THE “PERCENT FUNDED” NUMBER IN CALIFORNIA
OVERVIEW
Every HOA in California is legally required to prepare a reserve study every three years. This isn’t a budgeting suggestion or a best practice. It’s a legal obligation under the Davis-Stirling Act, and it exists for one reason: to make sure that your HOA doesn’t run out of money when the roof needs replacing, the elevators break down, or the plumbing fails.
Many homeowners have never seen their HOA’s reserve study. Many have no idea it exists. But it’s one of the most important documents in the entire HOA system because it determines how and when major repairs will be funded and whether special assessments might be needed to cover the cost.
The Davis-Stirling Act also requires HOAs to send all members a written summary of the reserve funding plan every year. This document—called the Assessment and Reserve Funding Disclosure Summary—must be included in the Annual Budget Report and contains key figures like the current reserve balance, projected repair costs, and a critical indicator known as the “percent funded” figure.
In theory, these rules are meant to protect homeowners from financial shocks caused by deferred maintenance or mismanagement. In practice, however, far too many HOA boards misrepresent their financial condition, falsify reserve assumptions, or improperly borrow from their reserves to cover unrelated expenses.
This article explains what a reserve study is, how the “percent funded” figure is calculated, and why it matters. It also shows how bad HOA boards manipulate reserve numbers to avoid accountability—and what legal tools homeowners can use to uncover fraud, challenge misuse, and prevent future financial harm.
For a deeper dive into this topic, you can also watch my two-part HOA HELL podcast series on reserve studies. You can watch Part 1 by clicking here, and you can watch Part 2 by clicking here.
WHAT CALIFORNIA LAW REQUIRES IN HOA RESERVE STUDIES
A reserve study is a formal report prepared by a licensed professional that assesses the long-term repair and replacement needs of the HOA’s major components. It includes:
- An inventory of all major components the HOA is responsible for maintaining.
- The estimated useful life of each component.
- The estimated remaining useful life of each component.
- The estimated cost to repair or replace each component.
- A funding plan showing how the HOA will accumulate enough reserves to meet these future obligations.
Reserve studies require inspection of the property, a review of past maintenance and repair records, an analysis of the expected useful life of various components, and an estimate of future repair and replacement costs. Reserve studies also take more intangible items into account, such as the costs of inflation or other factors that might impact the costs of performing the work in the future—e.g., the costs of materials, like lumber.
This study isn’t about routine maintenance. It’s about capital repairs, like re-roofing buildings, resurfacing roads, replacing balconies, or replacing pool equipment. If the board isn’t planning ahead, the costs hit homeowners all at once in the form of steep special assessments.
WHY RESERVE STUDIES MATTER FOR CALIFORNIA HOMEOWNERS
Reserve studies directly affect your wallet.
If the board underestimates costs or fails to follow the funding plan, homeowners will be blindsided by large assessments when inevitable repairs/replacements arise. Far too many HOAs in California have dramatically underfunded reserve accounts, often holding less than 50% of what’s actually needed (this is the “percent funded” number that is disclosed every year).
The reserve study also controls what gets disclosed in the Annual Budget Report. That includes:
- The current reserve balance.
- The percent funded based on current contributions.
- Whether any repairs will be deferred.
- Whether the board expects to take out a loan or levy a special assessment.
If the board doesn’t have an up-to-date reserve study, those disclosures will be inaccurate or missing entirely.
Some boards try to avoid updating their reserve studies because the numbers make them look bad. That’s not just negligent. It’s a breach of fiduciary duty.
WHAT THE RESEREVE STUDY’S “PERCENT FUNDED” FIGURE REALLY MEANS
One of the most important numbers in your HOA’s financial disclosures is the “percent funded” figure. It appears in both the Assessment and Reserve Funding Disclosure Summary (which is included in the Annual Budget Report) and in the full reserve study itself. And while it may look like just another percentage on the page, it’s actually one of the clearest indicators of your HOA’s financial health—provided that it’s being calculated and disclosed honestly.
The “percent funded” number provides a snapshot in time of how well the HOA is positioned to meet its future obligations regarding the repairs/replacements of its major components. In plain English: it tells you whether your HOA is on track to have enough money set aside when it’s time to repair or replace the big-ticket items, like the roof, the roads, the plumbing, staircases, elevators, or the balconies.
Here’s a simplified example:
Suppose your HOA has only one major component—a roof—and that roof has a projected useful life of 10 years and a replacement cost of $1 million. As part of the reserve study, the preparer will calculate how much the HOA should have accumulated at each point along that 10-year timeline to remain on track. So if you’re in year 7, and the roof is 70% through its useful life, the reserve study will estimate that the HOA should have roughly 70% of the replacement cost set aside at that point—about $700,000. If the HOA has that amount in its reserves, it’s 100% funded. If it has only $500,000, it’s 71% funded. And if it has just $300,000, it’s only 43% funded.
This figure matters because it reflects whether the board is properly planning ahead, or kicking the can down the road. While the Davis-Stirling Act doesn’t require HOAs to meet any minimum percent funded threshold, the law does require HOAs to levy regular and special assessments that are sufficient to meet its obligations. That means that the percent funded figure gives homeowners one of the clearest and most direct ways to evaluate the relative financial health of their HOA.
WHY THE RESERVE STUDY’S “PERCENT FUNDED” FIGURE MATTERS
The “percent funded” figure isn’t just a technical calculation. It’s one of the fastest ways to assess whether your board is performing one of its most fundamental duties. A healthy reserve “percent funded” figure reflects long-term planning and fiscal responsibility. A weak one suggests poor oversight, deferred maintenance, and quite often a looming special assessment.
This number is required by law. Under the Davis-Stirling Act, every HOA’s Assessment and Reserve Funding Disclosure Summary (contained in the annual budget disclosures) must disclose the HOA’s current reserve balance, the anticipated cost of repairs, and the “percent funded” figure. It also appears, almost always with more context and detail, in the full reserve study itself. That’s important, because while most homeowners never bother reading the full reserve studies (they are dry and complicated), they are more likely to review the annual summary.
If your HOA’s “percent funded” figure is in the 70s or higher, that’s excellent. A 65% figure is pretty good. A 60% figure is fair. But when the percent funded drops into the 50s, 40s, or lower, that’s a red flag, especially if there’s no sign that the board plans to raise assessments, cut spending, or revise the reserve strategy. A low “percent funded” figure almost always means that the board is kicking the can down the road and hoping someone else deals with it later. Or even worse, that the board is intentionally manipulating things to artificially (and fraudulently) prop up that figure. Either way, it’s a bad thing for you and your HOA.
But there’s another reason this number matters, and it’s often overlooked: reserve obligations are not speculative. They aren’t hypothetical, and they aren’t contingent on what might happen in a lawsuit or natural disaster. These are repairs and replacements that are going to happen. The roofs will wear out. The asphalt will crack. The balconies will need repairs and replacing. In fact, the component timelines and cost estimates in reserve studies prepared by qualified professionals are remarkably predictable. Professional reserve specialists calculate useful life and remaining life figures based on decades of performance data and physical inspections.
So when a board underfunds reserves, it’s not just underestimating the future. It’s actively ignoring it. And the “percent funded” figure gives homeowners a way to see that risk coming. That, of course, presupposes that the figure has been reported honestly and has not been wrongfully manipulated to give a false impression as to the real financial condition of the HOA.
If the board is omitting major components, lowballing cost estimates, or fraudulently extending the life of deteriorating assets—all of which artificially prop up the “percent funded” figure—then that figure won’t reflect reality.
HOW CALIFORNIA HOA BOARDS FALSIFY THE “PERCENT FUNDED” FIGURE
The “percent funded” figure only means something if it’s grounded in honest numbers. When prepared correctly, by a competent and independent reserve analyst, the figure reflects a reality-based snapshot of the HOA’s long-term financial position. But when that process is hijacked—either by board members looking to hide the truth, or by weak professionals willing to compromise under pressure—the figure becomes a smokescreen. And homeowners are left holding the bag (almost always in the form of massive special assessments).
To understand how manipulation of the “percent funded” figure typically happens, it’s critical to distinguish between appropriate adjustments made by legitimate professionals and those made by (or insisted upon) by fraudulent HOA boards.
Proper Adjustments Made by Qualified Professionals
Not all adjustments to the reserve study figures are improper. On the contrary, competent reserve specialists routinely update component timelines, useful life estimates, and replacement cost projections as part of their ongoing work. These adjustments are based on updated physical inspections, market conditions, inflation, and material performance data.
But it’s important to understand that regional factors like salt air, UV exposure, temperature swings, and humidity are already baked into the original estimates. A particular roof located in Palm Springs will not be expected to last the same number of years (i.e., likely won’t have the same useful life) as an identical roof located in San Francisco. Those location-based realities are accounted for from the beginning. What prompts a re-evaluation is a deviation from the norm.
For example, if the original study assumed that the area receives an average of six inches of rain per year, and the past year saw less than one inch, those unseasonably dry conditions might lead to reduced wood rot in certain major wood components. In that case, a reserve specialist might lengthen the component’s useful life based on observed reduction in the expected deterioration. That’s not manipulation. It’s responsible, evidence-based planning.
Qualified professionals will document these kinds of adjustments in their reports. They’ll explain the cause, justify the change, and base it on what they saw in the field rather than on what the board wants to see or hear. That’s what distinguishes professional reserve planning from political gamesmanship and fraud.
Improper Board Influence and Fraudulent Manipulation of the “Percent Funded” Figure
While competent professionals rely on physical inspections and data to make adjustments, bad HOA boards, and sometimes the reserve preparers they pressure, take a different approach. Their goal isn’t to plan responsibly. It’s to make the HOA’s finances appear better than they really are in the present, even if it means putting the community at risk at some vague future date.
It often starts with subtle pressure. A bad HOA board might suggest extending the useful life of a major component by “just a few years” even when there’s no evidence to support the change. Or they might push for lower replacement cost estimates, claiming they can probably get a better deal when the time comes. Some boards go further by intentionally removing major components from the reserve schedule entirely (or “delisting” them), or reclassifying them as general maintenance items (referred to as “defunding”) to avoid triggering long-term funding obligations.
If the reserve preparer is weak or financially dependent on keeping the board’s business, they may go along with it. In those cases, the reserve study becomes less about objective planning and more about presenting a fiction to the HOA members. Sometimes, boards don’t even bother with subtlety. They’ll override the preparer’s conclusions outright, editing the reserve study after it’s delivered, refusing access to key areas of the property during inspection, or demanding that certain assumptions be included despite clear evidence to the contrary.
These actions are not just irresponsible. They’re fraudulent. A board has no business making unilateral changes to a reserve study. Ever. That is especially true when those changes directly contradict the professional’s findings or eliminate core components that will inevitably need repair or replacement in the future. When a board alters a study to inflate the “percent funded” figure, it isn’t saving the HOA money. It’s setting the HOA and its members up for a future financial crisis.
In one HOA, for example, the board directed the reserve preparer to extend the useful life of three sets of elevated wooden staircases, claiming they looked “fine” and didn’t need replacement anytime soon. The preparer, under pressure to keep the board happy, agreed to list their remaining life as 15 years. But during that same year, multiple residents had reported visible dry rot, splintering, and instability in the stairs—all clear signs of deterioration. The board made no effort to inspect or repair the structures. By the time it became impossible for even the board to ignore the deteriorating conditions, there was no money set aside to repair or replace the staircases, and every homeowner ended up having to pay a special assessment of $37,000. The HOA, of course, claimed that the expense had been “unforeseen,” but that was completely untrue. The truth was that the special assessment arose directly as a result of years of systemic failure by the board to maintain the stairs, as well as years of blatant fraud in manipulating multiple reserve studies to conceal the true condition of that particular component.
WHAT CALIFORNIA HOAS ARE, AND ARE NOT, ALLOWED TO DO WITH RESERVE FUNDS
Under California law, reserve funds are not just another bank account the board can dip into at will. The Davis-Stirling Act places strict limitations on how and when reserve funds can be used. These limitations exist to ensure that money set aside for major repairs and replacements is actually there when it’s needed.
Unfortunately, many boards either ignore these restrictions or don’t understand them. Some treat the reserve account as a slush fund for unrelated expenses. Others “borrow” from reserves without following the required procedures (which include repayment). These are not technical violations. They’re serious breaches of fiduciary duty that expose the entire HOA to serious financial risks.
Permitted Use of Reserve Funds
Civil Code section 5510 clearly and concisely establishes how reserve funds may be spent:
- The repair or replacement of the major components that the HOA is obligated to maintain, as identified in the most recent reserve study.
- Litigation involving the repair or replacement of those same components.
That’s it. Routine operating expenses, landscaping contracts, management company bonuses, or unexpected legal fees not related to capital components cannot be paid from the reserve account.
Reserve funds are not meant to make the board’s life easier in the short term. They exist to protect the long-term stability of the community—e.g., they exist to ensure that when a $400,000 roof replacement comes due, there’s money in the bank to cover it.
Borrowing From Reserves: What HOA Boards Can and Can’t Do
Civil Code section 5515 does allow boards to temporarily borrow from reserves when the need arises, but only under strict conditions. If the board chooses to borrow reserve funds for other purposes, it must:
- Place the item on the agenda of an open board meeting and notify the members of its intent to borrow.
- Explain the reason for the transfer, propose options for repayment, and disclose whether a special assessment may be needed to restore (i.e., repay) the funds.
- Once the transfer is approved, record in the meeting minutes the justification for the borrowing and the repayment plan.
- Repay the money to the reserve account within one year unless the board documents in writing why a longer period is in the best interest of the association.
These rules aren’t optional. They’re mandatory. And they’re designed to ensure transparency, accountability, and responsible reserve management.
HOW TO SPOT AND RESPOND TO FRAUDULENT OR ILLEGAL USE OF RESERVE FUNDS
Boards that misuse reserve funds rarely leave an obvious smoking gun. But they do leave patterns—paper trails, omissions, and inconsistencies that don’t add up. And if you know what to look for, you can spot the signs before the damage grows too large.
Below are some of the clearest red flags that your board may be misusing, misreporting, or illegally borrowing from the HOA’s reserves:
- Major components are missing (periodically or otherwise) from the reserve study. If the development has wooden staircases, balconies, retaining walls, or flat roofs that obviously need upkeep, but none of those components appear in the reserve schedule, then that’s a good indication that something is wrong.
- Remaining life figures that don’t match visible reality. If a deck is visibly cracked, rotting, or unsafe, but the reserve study says it has 15 years left, that’s not just a mistake. It’s a red flag that someone is manipulating the data. And by looking at prior reserve studies (or summaries) to compare, you can often determine when the wrongdoing started.
- Replacement cost estimates that are wildly off. If the reserve study lists a $400,000 roof replacement at $190,000, or if other numbers seem suspiciously low based on local market conditions, that’s a sign the board or preparer is lowballing to inflate the “percent funded” figure.
- Identical components listed with different lifespans. If two buildings in the same development have the same type of balconies, built at the same time with the same materials, but the study lists them as having 12 years and 20 years remaining, that’s a serious inconsistency. Unless there’s a clear explanation, you should consider that a serious red flag.
- No reserve study updates or revisions after visible deterioration. If obvious damage or aging has occurred, like cracked concrete, rusted railings, or water intrusion, but the reserve study hasn’t been updated or adjusted, that’s a sign the board is ignoring new evidence or shielding the truth.
- Sudden drops in reserve balance without a known repair project. This may signal that funds were transferred without disclosure or used for improper purposes.
- No board discussion of a repayment plan after a reserve transfer. If the HOA admits to “borrowing” from reserves, but there’s no documentation of how and when the money will be repaid, that’s a statutory violation under Civil Code section 5515.
- Vague or missing meeting minutes. If financial transfers or project decisions don’t appear in the board’s meeting records, or appear as ambiguous references, that’s a classic tactic to avoid scrutiny.
- The board claims a major expense was “unforeseen.” If homeowners are suddenly hit with a huge special assessment for something predictable, such as a roof, deck, or stair collapse, that’s often a cover story for reserve mismanagement or fraud.
If you suspect something isn’t right, here’s what you can do:
- Request financial records. Under Civil Code section 5200, HOA members have a legal right to inspect a remarkably large list of HOA-related documents (see Chapter *) that will show you where reserve money has gone.
- Demand board meeting minutes from the past 12–18 months. If the board borrowed from reserves, there must be a recorded vote, a documented reason for the transfer, and a repayment plan. If those minutes don’t exist, or if the board claims the decision wasn’t discussed publicly, then they’ve violated Civil Code section 5515.
- Ask the tough questions on the record. At the next open meeting, challenge the board directly: When was the money transferred? Where is the repayment plan? Why wasn’t the membership notified? Boards that are hiding something will often deflect or delay. But if you raise the issue clearly, and on the record, you’ve already changed the power dynamic. Demand that your questions (and the board’s answers or non-responses) be put into the minutes.
- Demand that the issue be added to the next board meeting agenda. Don’t just raise the issue during general comments. Ask, in writing, that the board place the item on the next meeting agenda as a scheduled business item. That forces the board to acknowledge it publicly—and if they refuse, it helps build your case for enforcement or legal action.
- Rally other homeowners. Boards are far more likely to back down, or correct course, when they realize you’re not the only one paying attention. Share what you’ve found with neighbors. Organize a group demand letter. Use numbers to build pressure.
Misuse of reserve funds isn’t just a technical violation. It’s a serious breach of trust that can cost homeowners tens of thousands of dollars. The law gives you the right to uncover it, challenge it, and stop it. But that only works if you’re willing to speak up and take action.
CONCLUDING THOUGHT
The Davis-Stirling Act sets clear rules for how California HOAs must plan for long-term repairs, disclose reserve data to members, and protect the integrity of their reserve accounts. But those rules only work when boards follow them and when homeowners know what to look for.
Every “percent funded” figure in an HOA’s disclosure tells a story. But unless that figure is grounded in honest reporting, realistic cost estimates, and regular professional evaluations, it can be dangerously misleading. Whether it’s missing components, inflated lifespans, or unauthorized borrowing, reserve fund manipulation is not just bad management. It’s a legal failure and fiduciary breach that puts homeowners at risk of massive special assessments.
If you’re a homeowner in an HOA-governed community, reviewing the reserve study and its annual disclosures isn’t optional. It’s one of the clearest windows you have into your HOA’s financial stewardship, and it’s one of the strongest tools available to hold your board accountable when they fail.