QLD: Sinking fund shortfall vs forecast: How to identify causes and fix underfunding in strata schemes

Question: Our body corporate had a sinking fund forecast done in 2017. According to that, we should have just under $900k in that fund at present. We currently have about half of that. What is the best course of action here? Should a new forecast be done?

Answer: If there is a definite shortfall, then something does not add up – maths doesn’t lie!

If the sinking fund balance does not match the sinking fund forecast projection:

1. Check that the projection date is correct – the ‘year end’ can sometimes be confusing.
2. Check that the budgets match the projected yearly amounts to be raised – otherwise you will fall short.
3. Check that the contributions being raised, match what the budget requires – if they don’t you will fall short.
4. Check if there are outstanding sinking fund contributions – do they account for the shortfall?

If not, see if significant expenditure has been brought forward, or is for work not in the sinking fund forecast – sometimes work has to be done more quickly than expected, or was not originally accounted for.

After the above, if there is still a shortfall, then something does not add up – maths doesn’t lie!

Once you have the cause/s pinned down, you can then take appropriate remedial action. That may include:

For budgeting mistakes – increase the amount of the contributions (perhaps over time) to make up the shortfall.

For outstanding contributions – take action to recover them, use the discounting and penalty (interest) provisions in the next budget and tweak the contributions upwards.

For work not in the sinking fund forecast – if the work was not in the forecast but it was in the budget, then increase the contributions to cover the shortfall (again consider doing this over time). If the work was not in the budget then there should have been a special contribution (special levy); so there should be no shortfall!

For work brought forward – consider getting an updated sinking fund forecast. Why? Because the forecast takes into account interest earned on the corpus of the fund, to ensure that there is enough money in the fund when it is scheduled to be spent. If you undertake major spending early, then the interest income might not help you meet the next major expenditure.

This post appears in Strata News #475.

Michael Kleinschmidt
Stratum Legal
E: info@stratumlegal.com.au
P: 07 5406 1282