The Cost of Living, Inflation, and the HOA Budget

Homeowner associations budget their expenses on an annual basis. The California Civil Code requires that anticipated expenses are to be budgeted on an annual accrual basis. Most HOAs add up all the expenses for the previous year, compare this to revenue collected, consider an inflation factor (if any) and notify the owners of the expected cost for the next year.

Fifteen years ago, home foreclosures impacted assessments requiring HOAs to add a “bad debt” factor to the annual budget. This year, we see another external factor impacting budgets – inflation – the sudden and unexpected increase to the cost of living. Inflation has hit all levels of our economy and we can expect it will impact actual HOA expenses, and perhaps our ability to collect assessments.

HOA’s have an obligation to budget sufficiently to cover expenses. If that figure is underestimated, the HOA can call for more, by way of a special assessment. However, no one wants to hear that. The law further says that the association may not assess more than its actual cost. That is to say, the association cannot build a pot of excess funds in anticipation of future unknowns.

The intent of the legislature in creating the budgeting requirements is to help HOAs create a known cost factor for the owners that allows them to prepare for known expenses, preferably without any surprise expenses during the year. Many associations have budgeted minimal increases as the economy remained stable, but the time of stability

By Steven Shuey, PCAM

is clearly not the case today.

HOA’s need to try their best to forecast costs, recognizing that it is likely that all of their costs will be going up. Impacting budgets will be minimum wage increases, which increases labor costs. Combined with fuel cost increases, transportation increases, the increase in purchasing most goods, and labor shortage have all caused service providers to raise their costs. Both direct and indirect cost increases must be passed on to the individual owners in the form of monthly assessment increases.

"HOAs that have been working to maintain a policy of “no increases” will be hit the hardest. Keeping assessments low may be putting your HOA at risk."

HOAs that have been working to maintain a policy of “no increases” will be hit the hardest. Keeping assessments low may be putting your HOA at risk.

Deferring maintenance, while attractive in the shorterm, is not an option. Facilities must be maintained. With many Valley HOAs approaching 40 to 60 years in age, we are seeing infrastructure failures not anticipated in years past. Those failures are usually costly and may not be covered by insurance. Check your policies carefully so that you can plan for major problems.

Boards are expected to know what is going on in their community. “We didn’t know” is not a valid excuse. The Business Judgment Rule tells us that associations are expected to seek the advice of experts and follow that advice. If you suspect major repairs may be required, get licensed experts involved and create a plan to address these issues. Keep your residents informed so they are not surprised and don’t let neighborhood pressure dissuade you from achieving your fiduciary duties.

Managers can be a trusted professional advisor to boards. They can help keep watch over the association’s budget and help communicate to residents about the need to increase assessments to cover inflation and major repairs.

Keep in mind that small increases every year are easier to accept than large increases every few years. California sets 20% as the maximum increase in any one year without a vote of the membership. Delaying increases today will only mean larger increases in the future. Budget and assess residents accurately.

Steven Shuey is a member of the Education Committee, serves on the CAI-CV Board of Directors, and is a Professional Community Association Manager (PCAM). He serves on the national faculty of CAI and is a past board member of the CAI Managers Council. He is a community association consultant recently retired from Personalized Property Management in the Coachella Valley. In January 2017 he was awarded the lifetime achievement award from CAI-CV. He may be contacted at IslandMgr@aol.com. You can follow him on Twitter (www.twitter.com/@IslandMgr).