Good morning residents,
After my message on Monday I have been asked some questions, and I thought it would be good to share the answers with everyone. I was asked since the 2019 inflation rate for the United States is only 1.7%, why are the monthly assessments going up by approximately 3%-4% in the past 2-3 years?
I want to start by saying I am a proponent that monthly assessments will always go up every year if there is inflation. If we are to maintain facilities and services at an equal level year over year, assessments will have to go up at least inflation to compensate. The only way to keep assessments at the same level would mean a reduction in services or maintenance and I am not a proponent of such a philosophy. As a result, I have often stated that assessments must go up every year if we want to maintain the same level of services.
There are many reasons to increase assessments over inflation such as cost increases imposed by the government, i.e. minimum wage increases, or perhaps residents want to increase costs for additional services for a particular reason. An example is the landscaping cost was increased by $3.50 per month per home because many wanted an increase in the landscape service so the facility would have a better appearance. Such increases in labor to achieve a different result from the past will mean an increase in costs. I have been told by many the landscaping has dramatically improved. Was it worth it is a judgement each person must decide for themselves.
There was a time when assessments were reduced by $20 per unit per month for three years and our Operating Fund net working capital of about $1.7M was reduced to a deficit amount of $453,000. At that pace another 6 months to a year and we would have been staring at a special assessment to pay Operating Fund expenses. I know hindsight is always 20/20 but planning to reduce assessments in an environment of inflation rarely ends up on a positive note.
As a basis for discussion, keep in mind this year’s balanced budget was $270 per month, not $265 per month. The reduction of assessments to $265 was because of a budget surplus in 2018 which allowed us to reduce assessments by $5 per month. So, from a budget point of view, costs for this year are based on $270 per month. It is correct current inflation is 1.75%. Estimated year end will be 1.8%, but for our discussion I will use the current rate of 1.75%. This means that for facilities and services to be maintained at their current level costs must go up by 1.75%, or $4.73 per month. This is based on 1.75% of $270 per month.
We now need to add in the costs of increased labor as a result of state mandated increases in minimum wage. Minimum wage will increase from $10.50 to $15 by the year 2022. This increase in labor cost each year we must pay, and it will mean a labor cost increase of about 8% per year. Considering a company like Troon employees more than half of the staff at minimum wage you can see this increase can be considerable. As a result, the Board requested and implemented labor cost increases for next year to be 1.5% for non-minimum wage staff and then state mandated increases of about 8% for minimum wage staff. There were two buckets for calculating labor, one for non-minimum wage staff and one for minimum wage staff. Considering inflation is at 1.75% we did well to hold labor cost at 1.5% for those that were not minimum wage. Combined labor cost will then come in about 4-5%.
We need to keep in mind that our HOA does not allow for contracts over one year. This can work against us when trying to hold costs for a period of time longer than one year. Although we can bid each contract every year, all increases in costs will be passed on to us each year. As a result of low unemployment and increased minimum wage, contract costs have increased because companies are having more difficulty holding down labor costs in order to hire people while being required to increase minimum wage. Security contract for example went up by $1.50 per unit per month. The landscape contract went up by $3.50 per unit per month for two reasons, residents wanted increased service, which requires more labor, and increased costs of inflation and minimum wage. These two contracts alone increased costs to the HOA by $5 per unit per month.
Let’s talk about Reserves which is referred to as the Replacement Fund. We accumulate a portion of each month’s assessments for future replacement and major repairs of common area real property improvements and common area personal property and equipment. The Finance Advisory Committee (FAC) initially was recommending the 2020 Replacement Fund assessment per unit would be $45 per month. FAC had concern that using $45 per unit per month starting rate in 2020 would result in a forecasted percent funded of less than 70% for eight years in the thirty-year cash flow forecast included in the 2020 Reserve Study. The 70% threshold is considered financially healthy and unlikely to have any special assessments. On recommendation of FAC an additional $2 per unit per month for a total of $47 per unit per month will be put into the Replacement Fund in 2020. The increase in the starting rate in 2020 would result in a forecasted percent funded of less than 70% for only two years in the thirty-year cash flow forecast included in the 2020 Reserve Study. Long term I agree this is wise and provides residents added confidence that we should not have to have a special assessment which is one factor in maintaining home values.
After you total all these different points, an increase in costs was projected at $15 per month per home. Given the balanced budget this year was $270 per month this meant we were trying to negotiate costs to stay below $285 per month. Through the budget process of looking at costs we might not need, or costs that could be reduced, the balanced budget came in at $281 per month per home. Since there is a projected surplus for 2019 of $331,000, the Board decided to use this surplus to reduce the balanced budget assessments by $8 per month, giving the net assessments for next year at $273 per month. This will be a net increase to residents of $8 per month beginning in January. Keep in mind the balanced budget will be $281 per month and we have two more years of minimum wage increases so we have two more years of increased costs beyond our control.
Once you calculate the past two years of budgets, you can then project that for the next two years assessments will increase at a rate of at least 4% per year. Hopefully if we can maintain some efficiency, we can maintain that 4% level without going higher, but given state mandated costs increases, holding assessments to inflation increases will not be possible in my opinion. The only way to hold assessments to less than a 4% increase would mean a reduction of maintenance and/or services, not my first choice.
At $273 per month, Sun City Shadow Hills is still one of the best values in the valley for facilities and services, and the reason I have always stated we are living in Paradise. Please enjoy your Thanksgiving Holiday, and I for one am very thankful for living here with so many volunteers and staff willing to help make this the best place on earth.
If you have any questions, please don’t hesitate to ask.