We have a very basic 2011 financial problem;
Our expenses have grown over time so that they are now greater than our income.
This is not rocket surgery. I am sure we have all faced this dilemma at one time or another in our personal life. Businesses, cities, counties, states and nations wrestle with this problem on a continuing basis. That we, as an Association, are now spending $20,000 more per year than our income is not good, but it is not the end of the world. It is also not a sign that the board is wasting money or is not employing good financial management. We all know costs go up over time. Our building is now 34 years old, and it simply costs more to maintain it than it did in the past. We needed $20,000 more in 2009 and 2010 to balance our budget ( which was taken from the special assessment money ) and we know we need at least $20,000 more in 2011 to balance this year’s budget. In 2012 we will most likely need a little more than $20,000 to balance our budget and in 2013 I’m positive we will need more than $20,000 to balance the budget.
You are now probably wondering if the above explanation is just a lot of hand waving and BS. Are our Association expenses increasing at an alarming and out-of-control rate? How might we tell if we dealing with normal Association cost growth or rampant cost increases fueled by incompetent management?
I would propose that one way is to compare our cost growth to the rate of inflation over the same period of time. The two charts below compare the national rate of inflation to our Association expenses over a recent 9 year period and a longer 23 year period. The Association expenses are shown broken down into four basic categories.
Note that for both the short-term and long-term the Association expenses are right in line with the inflation rate.
This is actually quite surprising, particularly over the last nine years, given that we are having to do more maintenance on the building at the same time that the cost for these services are increasing. Said another way, I believe the board is doing an excellent job of controlling our costs.
Our expenses have grown over time so that they are now greater than our income.
This is not rocket surgery. I am sure we have all faced this dilemma at one time or another in our personal life. Businesses, cities, counties, states and nations wrestle with this problem on a continuing basis. That we, as an Association, are now spending $20,000 more per year than our income is not good, but it is not the end of the world. It is also not a sign that the board is wasting money or is not employing good financial management. We all know costs go up over time. Our building is now 34 years old, and it simply costs more to maintain it than it did in the past. We needed $20,000 more in 2009 and 2010 to balance our budget ( which was taken from the special assessment money ) and we know we need at least $20,000 more in 2011 to balance this year’s budget. In 2012 we will most likely need a little more than $20,000 to balance our budget and in 2013 I’m positive we will need more than $20,000 to balance the budget.
You are now probably wondering if the above explanation is just a lot of hand waving and BS. Are our Association expenses increasing at an alarming and out-of-control rate? How might we tell if we dealing with normal Association cost growth or rampant cost increases fueled by incompetent management?
I would propose that one way is to compare our cost growth to the rate of inflation over the same period of time. The two charts below compare the national rate of inflation to our Association expenses over a recent 9 year period and a longer 23 year period. The Association expenses are shown broken down into four basic categories.
Note that for both the short-term and long-term the Association expenses are right in line with the inflation rate.
This is actually quite surprising, particularly over the last nine years, given that we are having to do more maintenance on the building at the same time that the cost for these services are increasing. Said another way, I believe the board is doing an excellent job of controlling our costs.
The question facing us as homeowners now, is how do we want to deal with our current cost increase? There are only three ways to do this:
(1) cut $20,000 in Association expenses this year and in all subsequent years,
(2) have a special assessment of $20,000 in 2011 and all subsequent years.
(3) raise our Association dues by 8 % to bring in $20,000.
The first issue to consider is; Can we realistically expect to reduce our 2011 budget and the subsequent year budgets by $20,000 or more and at the same time, adequately maintain our building?
This is an easy one. I can tell you right now from my years of working with our Association budget both as a treasurer and the president, that this is not a cost-effective or practical alternative. It’s kind of like when politicians want to get elected they tell you they are going to go to Washington DC or to Sacramento and cut out all the waste which they just know is there even though they’ve never looked at any of the individual line items associated with the budget. And then after a while you never hear about any savings while the budget and costs continue to go up.
There may be a few thousand dollars can be saved in our budget this year, and hopefully our Financial Committee will be able to identify some cost-saving items. However, there is not anywhere near $20,000 that can be saved without adversely impacting the maintenance of our building.
The second issue is; Should we balance our operations budget in the future by having a special assessment every year?
Special assessments are used when unforeseen or unplanned circumstances create an immediate need for cash which cannot be covered by the operating budget or the reserve account. The need for a special assessment is usually caused by an emergency that reasonably could not be planned for, such as the collapse of a sewer pipe in 03 or extensive unit water damage in 2010. It should not be a substitute for an unwillingness to face up to cost-of-living increases.
Banks and mortgage lenders look upon the use of multiple special assessments as an indication of financial instability and poor financial management. Multiple special assessment will adversely affect a buyer’s ability to obtain a mortgage in order to buy in this building. The figure below shows that we have had only 12 special assessments over the 34 year life of our Association. Using special assessments to balance the budget this year, and in the future, is a terrible idea and will only lower the value of our homes and make them more difficult to sell.
(1) cut $20,000 in Association expenses this year and in all subsequent years,
(2) have a special assessment of $20,000 in 2011 and all subsequent years.
(3) raise our Association dues by 8 % to bring in $20,000.
The first issue to consider is; Can we realistically expect to reduce our 2011 budget and the subsequent year budgets by $20,000 or more and at the same time, adequately maintain our building?
This is an easy one. I can tell you right now from my years of working with our Association budget both as a treasurer and the president, that this is not a cost-effective or practical alternative. It’s kind of like when politicians want to get elected they tell you they are going to go to Washington DC or to Sacramento and cut out all the waste which they just know is there even though they’ve never looked at any of the individual line items associated with the budget. And then after a while you never hear about any savings while the budget and costs continue to go up.
There may be a few thousand dollars can be saved in our budget this year, and hopefully our Financial Committee will be able to identify some cost-saving items. However, there is not anywhere near $20,000 that can be saved without adversely impacting the maintenance of our building.
The second issue is; Should we balance our operations budget in the future by having a special assessment every year?
Special assessments are used when unforeseen or unplanned circumstances create an immediate need for cash which cannot be covered by the operating budget or the reserve account. The need for a special assessment is usually caused by an emergency that reasonably could not be planned for, such as the collapse of a sewer pipe in 03 or extensive unit water damage in 2010. It should not be a substitute for an unwillingness to face up to cost-of-living increases.
Banks and mortgage lenders look upon the use of multiple special assessments as an indication of financial instability and poor financial management. Multiple special assessment will adversely affect a buyer’s ability to obtain a mortgage in order to buy in this building. The figure below shows that we have had only 12 special assessments over the 34 year life of our Association. Using special assessments to balance the budget this year, and in the future, is a terrible idea and will only lower the value of our homes and make them more difficult to sell.
The last issue to consider is; Should we increase our monthly assessments to bring in enough money to cover our expenses?
This is way too easy, of course we should. If you can’t cut expenses, you have to increase the income in order to balance the budget. Just because Washington DC and Sacramento seem unable to grasp this basic accounting principle doesn’t mean that we should adopt this same head-in-the-sand approach.
The concern about increasing our monthly dues is that it will make our building the most expensive one on the Esplanade. Turns out this is not the case. The graph below compares our monthly dues with the dues of other HOAs on the Esplanade. The first chart shows the comparison based on our current monthly dues and the second chart shows how it would look if we increased our monthly dues to balance our budget.
So here’s what all the fuss is about if we increase our monthly assessments by 8%;
Our lower tier would move from the lowest on the Esplanade to the third lowest.
Our middle tier would move from having 9 HOAs higher to having 8 higher.
Our top tier would move from having 2 higher to only having 1 higher.
I think this is much ado about nothing.
This is way too easy, of course we should. If you can’t cut expenses, you have to increase the income in order to balance the budget. Just because Washington DC and Sacramento seem unable to grasp this basic accounting principle doesn’t mean that we should adopt this same head-in-the-sand approach.
The concern about increasing our monthly dues is that it will make our building the most expensive one on the Esplanade. Turns out this is not the case. The graph below compares our monthly dues with the dues of other HOAs on the Esplanade. The first chart shows the comparison based on our current monthly dues and the second chart shows how it would look if we increased our monthly dues to balance our budget.
So here’s what all the fuss is about if we increase our monthly assessments by 8%;
Our lower tier would move from the lowest on the Esplanade to the third lowest.
Our middle tier would move from having 9 HOAs higher to having 8 higher.
Our top tier would move from having 2 higher to only having 1 higher.
I think this is much ado about nothing.
The board needs to vote to increase our monthly assessment by 8% to balance the budget.
Anything else does a disservice to our homeowners.
Anything else does a disservice to our homeowners.