Published in the ECHO Journal, March 2007
Editor’s Note: Part I of this article that looked at one-year cost comparisons from 60 associations appeared in the February issue of the Journal.
10-Year Data Comparisons
I recently analyzed a large amount of association financial data from my HOA clients going back to the early 1990s. For associations that I review financial statements for, I collect a fair amount of historical data on assessments, expense costs by category, cash balances, etc. I was curious as how much assessments have increased during this period, how expenses have changed and whether associations had more or less cash on hand ten years later. I also wanted to contrast the percentage increases with the Consumer Price Index (CPI) changes published by the Bureau of Labor Statistics. Various professionals in the community association industry have frequently asserted that HOA inflation data for homeowner associations far exceed CPI inflation data. However there have been few, if any, quantitative analyses to support such an assertion.
An analysis was conducted for 21 associations containing 1,899 dwelling units. The associations range in size from 28 to 360 units with the median (half larger and half smaller) association having 56 units. Twenty of these associations are in south Santa Barbara County while one is in the northern part of the county. All associations in the survey were my clients in 1995 and remain so today. Client associations that had less than $75,000 in gross revenues are not included in the sample because the same detailed information for them is not retained.
The hypothesis I wanted to examine was whether association assessments mirrored the published inflation rate. With increases in utilities and insurance costs, for example, as well as the aging of the associations’ property, I suspected that association costs outpaced standard CPI inflation rates and wanted to compile statistical data to support or refute that contention and analyze specific areas of expense and income.
Consumer Price Index
The Bureau of Labor Statistics publishes many different types of indices. For this analysis I selected the “Urban Wages Earners and Clerical Workers” index for “Los Angeles-Riverside-Orange County, California.” The index uses 1984 as the base year to equal 100. To calculate a rate of inflation, I take the current period factor and divide it by the prior period factor. For example, the factor for December 2005 was 196.5 while for December 2004, the factor was 188.5. The inflation rate for 2005 was 4.24% (196.5 divided by 188.5 = 1.0424). The factor for December 1995 was 149.4. Making the same computation for the ten-year period from 1995-2005, the rate of inflation was 31.53%. (196.5 divided by 149.4)
I have analyzed the data two ways. On a total basis, I have combined the income and expenses for all the associations into a grand total. Larger associations contribute more to the totals than smaller associations. I have computed averages for the total amounts. To establish median amounts per association, each association has an equal weighting as all other associations. In a sample of 21, the 11th ranked association is the median, since 10 will have higher amounts and 10 will have lower amounts.
Analysis Results
Total Assessments
In 1995, the average monthly assessment was $192.53. In 2005, the average monthly assessment was $283.03, an increase of $90.50 per month or 47%. These 21 associations collected over $2 million more (from 4.38 to 6.45 million dollars) in monthly assessments in 2005 than in 1995. The median assessment jumped 57%; half the associations had an assessment increase of more than 57% while half had an assessment increase of less than 57% during the 10-year period. Out of the 21 associations in the sample, only one had an assessment increase of the 10-year period of an amount less than the 31.53% increase in the Consumer Price Index. The other 20 had monthly assessment increases greater than the Consumer Price Index. The highest monthly assessment increase was 94.6% from 10 years ago, three times the rate of inflation. The changes are charted in Figure 1. (Note: In all of the figures, the median change is graphed as association 22, and the CPI change is shown as Association 23)
Operating Fund Assessments
Over the 10-year period, the median operating assessment increased by 62.2%, nearly twice the change in the CPI. The overall percentage that the operating assessment compares to the total assessment (operating + reserve) increased from 78.9% to 80.2% during the period.
Reserve Fund Assessments
Over the same 10-year period, the median reserve fund assessment increased by 61.4%. Five associations funded less to reserves in 2005 than they did in 1995. Conversely, eight associations had reserve assessments at least double what they funded ten years earlier. One association is funding its reserves at a rate over five times the amount that they funded in 1995. Figure 2 shows the percent change in the amount of the total assessment dedicated to reserve funding from 1995-2005.
Cash
In 1995, these 21 associations had combined cash and cash investments of $4.06 million. At the end of 2005, these balances had increased to $6.52 million. Changes in cash balances for each association ate summarized in Figure 3.The median cash balance per member had increased by $1,626 or 46.1% over the 10-year period. Four of the 21 associations had lower cash and investment balances in 2005 than they did in 1995. Three of those four associations recently completed major maintenance projects such as roofing while the fourth simply reduced its reserve funding.
Utility Expense
The median association paid 46.2% more for utilities in 2005 than it did in 1995. Results are summarized in Figure 4. Three associations paid less for utilities than they did ten years ago. One of those associations had been paying the sewer charge as part of the assessment. Now, that charge is being handled through the unit owner’s property tax bill. The other two associations pay for common water use only and have apparently reduced their usage in the face of rising utility rates. Three associations had utility expense increases of 90-100% from ten years ago. Two of these associations are in Carpinteria where water rates have skyrocketed in the past two years. Overall, utility costs increased $18 per month per member during the ten-year period.
Common Area Maintenance
This category includes gardening, common area repairs not chargeable to the reserve fund, pool maintenance, elevator maintenance, etc. These changes are plotted in Figure 5. The median association paid 46.4% more for common area maintenance than they did ten years ago. Common area costs for seven of the 21 associations’ increased by less than the change in the CPI index during the ten year period. Two had increases of over 100%. Overall, these associations paid $869,000 more for common area maintenance and services than they did ten years prior. These cost increases averaged a $38 per month per member.
Insurance Costs
In 1995, the 21 associations collectively paid $435,090 for all their insurance policies. Ten years later, the total premiums were $1,142,274, an increase of 162.5% or $31 per member per month. This increase was 5 times the cost of living increase for the ten year period. Further, this computation does not include the latest round of premium increases that occurred in 2006. Association number 7 in Figure 6 added earthquake coverage after 1995 while association number 14 eliminated the coverage. The median increase in premiums of 147.5% over 10 year was a little less than the average. Indeed, 18 of the 21 associations saw their premiums increase by more than double during the ten year period.
General and Administration Costs
These costs include management, bookkeeping, accounting, legal, other professional services, printing, postage, office supply, filing fees, licenses, income taxes, etc. Some of these expenses, such as legal, are subject to wide variation from one year to the next but a 10-year sampling should effectively smooth out these variations. Some associations added management services during this period. More associations are having a professional reserve study done than in 1995. Certainly, the laws have changed over the past 10 years and thus have increased compliance costs. As Figure 7 shows, five associations had higher administrative costs in 1995 than they did in 2005. The median association had a 48.4% increase in administrative costs but this amounted to only $6.78 per member per month increase over the 10-year period out of the $90.50 median increase in assessments noted earlier.
Conclusion
It costs money to own property in a homeowner association (or anywhere else, for that matter). This analysis confirms that association assessments have indeed increased at a rate greater than the CPI index. All major categories of costs (utilities, common area maintenance, insurance and administration) increased by an amount greater than the CPI. Some expenses, such as utilities are subject to rate-setting by government and the utility provider themselves who need to fund their own capital projects and increased costs. Maintenance costs are heavily influenced by the age of the components. Remember, everything in this sample is 10 years older than it was. Maintenance costs are further influenced by wage increases, vendor costs and overhead, materials costs, etc. Insurance costs are subject to the marketplace. The World Trade Center disaster, Hurricane Katrina and poor investment results all contributed to increased building costs, and the few available choices for associations seeking insurance have contributed to the major increases in premiums.
The final chart in Figure 8 summarizes the major assessment and expense categories and compares the median increases for the 10-year period to the CPI change.
When I attend association meetings or read minutes as part of my review of the financial statements, I often think that some members believe that associations are looking for the first time to cut costs. My own association board was looking at cutting costs as early as 1982. In most cases, cost cutting leads to a lower level of services, thus negatively impacting residents. It can also lead to imprudent delays in maintenance, which will only cause increased costs later on. It is difficult to increase assessments to meet these costs. Pressure and negative comments from your members work against meeting these financial requirements head on.
Keep in mind that since 1995, most South Santa Barbara County property values have tripled. Many association members now have substantial equity in their properties. New owners have a more substantial investment to maintain as well.
Unless the economy enters a deflationary period, it is often pure fantasy to think that association fees can remain the same or be reduced each year. Costs usually go up every year; association members in quality properties must learn to expect annual “Cost-Of-HOA-Living” increases.
Michael Gartzke, an ECHO member, is a Certified Public Accountant with a large homeowner association practice in the Santa Barbara area. He is also the coordinator of the South Bay Homeowners Group with a membership of about 120 associations.