Inflation-Proofing Your Community Association Budget

Inflation-Proofing Your Community Association Budget

Community association dues are not fixed, meaning the fees may increase or decrease depending on a variety of variables. An increase in dues doesn’t always happen every year during budget season, but when it happens, homeowners are frequently concerned. While there are many factors that can contribute to an increase in association dues, in some cases, inflation can be blamed.

It is crucial to first understand how associations establish monthly dues in order to comprehend how inflation can affect them. Every community association has a board of directors who are in charge of creating the budget. The projected costs for the following year are included in this budget. The board will allocate the whole amount of anticipated expenses from this budget among the local homeowners, including themselves.

The annual budget substantially depends on anticipated expenses. The budget increases in tandem with rising costs. Additionally, in an economic landscape like the one we are facing currently, expenses often increase as a result of inflation, which also raises the price of products and services.

The Effect of Inflation Reserves

The finances of an association are impacted by inflation in a variety of ways. Inflation has a direct impact on an association’s reserve money in addition to HOA dues.

The majority of homeowner and condominium associations collect reserve payments from its members. Usually, these contributions are taken into account when calculating the annual dues. To pay for future costly repairs and replacements, reserves are set up by the Board in their budget. For instance, gym equipment could outgrow its usefulness within ten years and need to be replaced or the elevator cab will need to be replacement every number of years.

The association will need to set aside funds for replacement costs, amortizing these expenses over the number of years they anticipate the expense will come due. If this isn’t done, there wouldn’t be money to cover the replacement or repair needed, triggering a community-wide assessment.

Because they cover all of a community’s assets, reserve funds are a little tricky. To undertake a reserve study, boards must hire experts (or update it every now and then). The results of this analysis will then tell them how much money needs to be placed away annually to maintain a healthy level in the fund.

However, inflation can also make reserve studies stale. Reserve studies can easily become outdated and inaccurate in an environment with a high inflation rate. Clearly, updating and adjusting the reserve study is a simple way to address this. But keep in mind that this will may necessitate increasing reserve contributions as well.

Additional Factors Increasing Association Dues

While inflation has a direct impact on a community association, it is not the sole one that needs to be budgeted for. Here are some other factors that can influence monthly association dues:

  • Rising Labor Wages Vendors and the association will need to pay their staff more as labor costs rise. Sometimes these increased wages are regulated by the State. The budget, and likely therefore monthly dues, will need increase as a result of this.
  • Higher Rates of Delinquency. A higher percentage of late payments by owners can make it more difficult for an association to stay on budget. Because of this, some boards overshoot dues calculations or levy special assessments to cover these delinquencies.
  • Additional Amenities or Services. A community association will probably need to raise its dues if it wants to provide residents with more or upgraded amenities or services.

Adjusting the Budget for Inflation Impact

When a change in external economic forces occurs, it is crucial to adapt. Budgets for associations should be updated to reflect these changes or they can run the danger of falling into a deficit. Keep in mind that a budget shortfall may require a board to levy special assessments or get financing/obtain a loan or line of credit.

Here are some suggestions on how associations can modify the budget in light of inflation or a recession:

  • Request updated estimates from vendors. Vendor fees rise along with the cost of goods and labor. As a result, associations should prepare for price increases from their providers. Boards must enquire about price increases before renewing contracts with current vendors. Asking for an estimate – even if you are in the middle of a current contract – will help boards anticipate unforeseen expenses. If the association is unable to handle the increase, it could be time to find another provider. Boards should not be reluctant to compare prices.
  • Cut Costs. Another consideration the board can deliberate is to try to reduce expenses rather than increase dues. Boards should examine their spending plan and decide which costs are necessary and which are not. Budget reductions or cuts should start with non-essential spending. Cutting corners can, of course, be detrimental as well. If an association cuts too many costs, it could – for example – affect the community’s curb appeal and affect property values. It’s a fine balancing act.
  • Review Governing Documents. Even if it’s inevitable that association dues will need to rise, check to make sure your governing documents don’t have a cap on increases per year.