Inflation is a persistent issue that wreaks havoc on the financial health of community associations. From project delays to regular assessment increases and impact on reserve funds, the effects of inflation can be far-reaching and challenging to manage. Community association boards must be proactive in mitigating the impact of inflation to ensure that they can continue to provide necessary services to their members while also planning for future capital projects. In this blog, we will discuss the different ways in which inflation affects community associations and provide actionable tips on how to manage them.
Inflation can weaken spending power and increase labor and material costs, which can create various challenges for community associations. One of the most pressing challenges is the delay in project completion. Due to these delays, board members may need to extend the project timeline longer than in previous years. To ease the inconvenience caused to homeowners, board members should be transparent and communicate about projected costs and timeframes for the completion of projects. Additionally, non-critical projects may be postponed to a later date.
Regular Assessment Increase
In a stable economy, moderate inflation is expected and often manageable. However, during inflationary spikes, the cost of managing a community association can skyrocket, leading to significant budgetary strains. To avoid unexpected special assessments and ensure smooth operations, board members must get in the habit of regularly reviewing and adjusting assessment levels to reflect the current cost of operations. Careful planning and budgeting are essential to minimize the impact of inflation, as assessments are based on projected expenses and must be collected from all members to meet financial obligations. To mitigate cash-flow issues during tougher economic times, it’s critical to anticipate realistic levels of uncollectible assessments and budget accordingly.
Inflation significantly impacts the cost of insurance, which is essential for any community association. Escalating insurance premiums can present a variety of financial implications if not addressed promptly. To ensure that premiums remain affordable, board members must regularly review the association’s policies with the help of an insurance agent. Moreover, it’s crucial to keep in mind that reducing the association’s insurance coverage should only be considered after assessing the required coverage as per the association’s governing documents and budgeting appropriately.
Impact on Reserve Funds
Due to the financial turmoil, an association’s reserve fund or funding plan may become outdated and require immediate updates, particularly if there are capital-intensive projects due soon or already in progress. In such situations, budget and repair/replacement plans should be revised promptly. Updating capital plans generally entails revising an association’s existing reserve study. Although reserve study reports consider inflation when creating the initial reserve budget plan, unforeseen spikes in inflation, such as the current one, cannot be predicted. Regular updates can assist in aligning near-term capital expenses and funding requirements with the impact of current inflation rates. Similar to prices in other sectors, it is likely that dues and assessments within associations may need to be raised to maintain reserves on the right track. While this may not be an ideal option, it is becoming increasingly necessary. However, any increase in dues and assessments should be reasonable and equitable. It is recommended that associations review and update their reserve funds annually.
As the economy remains in flux, it’s important to understand the extent of inflation’s effects. By recognizing the various ways in which communities are affected, you can take actionable steps to adapt and manage them. Regularly reviewing assessment levels, keeping insurance policies up-to-date, and updating reserve funds are critical components of mitigating the impact of inflation. Furthermore, it is crucial to maintain open and transparent communication with homeowners to guarantee that all individuals comprehend the financial difficulties their community may encounter and the necessary steps to reduce their effects. By working together and taking a proactive approach, community associations can weather the effects of inflation and continue to provide essential services to their members.
At California Builder Services, we provide DRE public report processing, HOA budgeting, and reserve study services. If you’re seeking professional assistance to ensure your community is financially secure against inflation, we’re here to help. Don’t hesitate to contact us today for reliable and knowledgeable HOA budgeting services and reserve studies.