A Discussion About Assessments
Every year when our new assessment amount comes out, I get questions about why the assessment is going up. So, I hope to explain here some of the factors that determine our monthly assessments. Our assessments are set up to allow us to meet all our costs and maintain sufficient reserves for future replacement, improvements and major repairs.
I want to start by saying that I believe that as long as there is inflation, monthly assessments must always go up. If we are to maintain facilities and services at an equal level year over year, assessments will need to go up at least by the inflation rate in order to compensate. The only way we could keep assessments at the same level would be to have a reduction in services or maintenance, and I do not support 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 also many reasons to increase assessments by more than the national inflation rate such as cost increases imposed by the state government (for example our state-mandated minimum wage increases). It is also possible that residents might want to boost costs for additional services. For example, the Board increased our landscaping cost by $3.50 per month per home because many residents wanted more landscaping services so our community would have a better appearance.
Our 2019 balanced budget was based on $270 per month, not the $265 per month that we are all paying. We were able to reduce assessments to $265 because of a budget surplus in 2018 that allowed us to lower assessments by $5 per month. So, from a budget point of view, costs for 2019 were based on $270 per month. Inflation toward the end of 2019 was 1.75% and was estimated to reach 1.8% by December, but for this discussion I will use the rate of 1.75%. This means, to maintain facilities and services at their current level, that costs must go up by 1.75% or $4.73 per month. (1.75% of $270).
Next, we need to add in the costs of increased labor as a result of state-mandated increases in the minimum wage. The minimum wage will increase from $10.50 to $15 by the year 2022. We must pay this increase each year, and it will mean a labor cost growth of about 8% per year. Because a company like Troon employs more than half of its staff at minimum wage, you can see this increase can be considerable.
As a result, the Board implemented labor cost increases for 2020 at 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. With inflation at 1.75%, we did well to hold labor cost at 1.5% for those that were not minimum wage. Combined labor costs will then come in at about 4% - 5%.
We need to keep in mind that our HOA does not permit contracts longer than one year. This can work against us when trying to contain 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 the increased minimum wage, contract costs have increased. For example, our security contract went up by $1.50 per unit per month. The landscape contract went up by $3.50 per unit per month. The latter is for two reasons: residents wanted increased service, which requires more labor, and the minimum wage requirement. These two contracts alone increased costs to the HOA by $5 per unit per month.
Now, let’s talk about Reserves, which we refer 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 as well as common area personal property and equipment. The Finance Advisory Committee (FAC) initially considered setting this portion of the assessment at $45 per unit per month starting in 2020. However, this would mean our 30 year cash flow forecast would include eight years in which our funding would be less than 70%, an amount considered to be the minimum financially responsible level for reducing the risk of special assessments.
As a result, FAC recommended we put an additional $2 per unit per month (for a total of $47 per unit per month) into the Replacement Fund in 2020. The increase in the funding rate starting in 2020 will mean that the 30‑year cash flow forecast to be below 70% in only two years. Over the long term, the Board agreed this is wise because it provides residents with added confidence that we should not need a special assessment, which is one factor in maintaining home values.
After accounting for all these different concerns, our increase in costs was projected at $15 per month per home for 2020. Because the balanced budget for 2019 was $270 per month, this meant we were trying to keep assessments for 2020 below $285 per month. Through the budget process of looking at expenses we might not need, or costs that could be reduced, the balanced budget came in at $281 per month per home. Because the HOA had a projected surplus for 2019 of $331,000, the Board decided to use this surplus to reduce the balanced budget assessment by $8 per month, making the net assessment $273 per month for 2020. This amounts to a net increase to residents of $8 per month beginning in January.
But keep in mind that our balanced budget in 2020 is $281 per month, and we will have two more years of minimum wage increases. So, we have two more years of increased costs that are 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 least 4% per year. Hopefully, if we can maintain some efficiency, we can keep from exceeding that 4% level. However, given state-mandated cost 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 require a reduction of maintenance and/or services, not my first choice.
Even after considering all these factors, I take a moment to stare at the sunset and recognize that we still live in a beautiful place that is worth every penny. Paradise is the perfect description; so, without a doubt, I will always contend, “It doesn’t get any better than this!”