Planning the yearly HOA budget is a daunting but necessary task, and many HOA board members need to pay more attention to three critical considerations: inflation, interest, and insurance. Although gradual, these three factors can strain HOA financials, and your community can always prepare for it.
What is the Effect of Inflation on the HOA’s Annual Budget?
Inflation affects all aspects of the economy, increasing the cost of goods and services, including those needed to maintain and manage the community. It also directly impacts the HOA’s budget in numerous ways.
Due to inflation, higher service costs for materials and labor drive up the prices for contracts needed to maintain the community. These include services like repairs, roadwork, landscaping, roofing, general maintenance, and security.
Given this, inflation also drives up the amount needed for reserve funds. These funds are allocated for the expected, long-term community maintenance or cover emergency community repairs, including the payment for materials and labor required.
With prices increasing, the HOA must also consider collecting and allocating more for this fund. If your HOA decides to increase regular HOA dues, it needs to propose that the homeowners would vote to be approved. As such, it is crucial to create a proposal that would be enough to cover the impact of inflation while staying at a reasonable range for the community members.
The Impact of Rising Interest Rates
Interest rates may both directly and indirectly affect the HOA’s budget.
Higher rates directly impact the annual HOA budget when it comes to borrowing. When the HOA takes out a loan instead of imposing special assessments for large-scale projects, higher interest rates may result in more expensive interest payments. Higher interest also affects already existing debt, as it drives up refinancing costs.
Apart from borrowing expenses, interest also impacts a HOA’s investment income. Some homeowner’s associations manage and invest in reserve funds. When interest rates go up, the HOA may see lower returns that the board needs to account for.
HOA-related expenses are not the only ones affected by the increase in interest rates. Homeowners needing to pay for mortgages and other loans will experience more financial strain if rates increase. This makes it more difficult for some members to pay dues on time, resulting in a potential increase in delinquency in the community. The association should consider allocating a budget for collection efforts and short-term cashflow issues.
Insurance Costs and the HOA
Today, insurance costs are increasing, primarily due to natural disasters becoming more frequent and liability claims increasing. Insurance companies assess the risks and predict the damage payouts to cover policies. With more risks coupled with inflation, premiums inevitably go up in price.
Insurance is crucial to a planned community as it protects against damage costs. Most commonly, it covers damages caused by natural disasters, such as hurricanes and flooding. However, it may also cover liabilities in the form of D&O insurance. So, when planning for the HOA budget every year, the board must review insurance policies to ensure the community has enough coverage without overspending.
HOA Yearly Budget Planning
A proper annual HOA budget is essential to keeping the association’s finances in check and ensuring smooth operations.
Who Plans the Budget?
The board is responsible for creating the annual plan for the HOA budget. However, this process must still comply with the association’s governing documents and regulations stipulated in state law.
For example, in North Carolina, N.C. Gen. Stat. § 47F-3-103(c) outlines the requirements and limitations of a yearly HOA budget that the board can allocate. It states that the board must create and manage the budget. The law also indicates that the annual budget must include an allocation for common expenses and reserves for significant capital expenditures. It also underpins transparency, requiring the board to communicate budget matters with homeowners.
Creating a HOA Budget Plan
Remember these tips when it’s time for the HOA annual budget planning meeting.
1. Create a Budget Committee
The board may assign specific individuals from the board members, typically including the treasurer, to focus on planning the budget. It would also be good practice to consult experts, such as accountants and managers, to help correctly allocate the funding.
2. Outline What the Budget is For
Whether creating a short-term budget or outlining the HOA 5-year plan, the board must know what expenses to allocate funds for. You can categorize these as administrative fees, operating fees, and fixed costs.
Administrative fees cover accounting, bank, legal, and management fees while operating fees cover general maintenance costs, such as repairs and landscaping. Fixed costs should include federal and property taxes, filing, and insurance costs. In addition to these, the board must also indicate a separate allocation for reserve funds.
3. Consider Historical Data
Past budget reports and financial statements can help pinpoint potential cost trends. You can use this data to estimate and project the necessary allocations for the year.
4. Anticipate Future Expenses
Other than common expenses that are the foundation of the budget, responsible board members must also account for future costs, including price changes and contract renewals.
5. Always Consider Economic Factors
Some of the most common considerations many HOA boards miss out on are changes in several economic factors, including inflation, interest rates, and insurance. Since their impact is gradually felt, many associations must factor it in when allocating the budget.
However, given their effects on both the HOA and the homeowners individually, they need to anticipate changes driven by these factors to ensure the HOA is prepared.
Frequently Asked Questions
Should Homeowners Know the Yearly HOA Budget?
Yes, they should, and the HOA needs to provide them access to the proposed budget. This should be discussed in the HOA annual meeting.
What is an HOA 5-year Plan?
Unlike an annual budget, a 5-year plan considers the HOA’s long-term strategies and expenses. This plan may factor in costs for capital improvement projects and investments.
Additionally, while the HOA should consider inflation in the yearly budget, strategies and plans to mitigate its gradual effects are usually best outlined in a multi-year plan.
How Often Should the HOA Budget be reviewed?
The HOA budget should be reviewed yearly, at the very least, unless emergencies and unexpected expenses arise. However, long-term plans, including 3-year- and 5-year, can also be outlined separately.
Taking Them Into Consideration
Inflation, interest rates, and insurance costs may seem challenging and tedious to factor into the HOA budget, but properly doing so can lessen their impact on both the association’s budget and the homeowners’ financial burden. While there are many technicalities to consider, factoring in these three helps create an HOA budget that quickly addresses their effects on the association and its members.
If you need help planning and reviewing your HOA’s yearly budget, Clark Simson Miller offers exceptional remote management solutions. Call us today at 865.315.7505 or contact us online to get a free proposal!
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