When money is tight, most board members’ first instinct is to cut the HOA budget. Other options are available, such as charging homeowners higher assessments. Faced with financial shortfalls, would an HOA board be wiser to save money by reducing the budget or earn more money by imposing an HOA fee increase?
Cut the HOA Budget vs Raising HOA Fees
Like any other organization, a homeowners association relies on funds to continue operations. These communities must pay for various expenses, including but not limited to maintenance costs, management fees, insurance premiums, and contractor fees.
At the start of the year, the HOA board uses budget projections to calculate how much it would need to collect in regular dues. Sometimes, these dues can fall short, resulting in a budget deficit. This means that the HOA does not have enough funding to cover its projected expenses.
When that happens, the HOA board has two main choices: cut the HOA budget or raise dues. Both options come with risks, and it is important to consider them before deciding.
The Downsides of Reducing the HOA Budget
Making budget cuts can potentially lead to a drop in service quality. Vendors and services are among the first areas where the board makes cuts. That usually means switching to a cheaper vendor or reducing the frequency of service. Naturally, the community’s appearance might take a hit, leading to lower property values.
Delaying maintenance can also result in larger repair costs later on. Sure, the HOA board might save money now by postponing plumbing repairs, but this tactic can cause problems to worsen. In the future, these problems can become irreparable or too damaged for a simple fix.
Finally, residents can grow dissatisfied with their HOA if the board fails to explain these cuts. Cuts to essential services and required maintenance will affect the community, and residents may not take pride in their neighborhood anymore as property values go down.
The Downsides of Raising HOA Fees
Wealthier communities may not feel the effects of fee increases, but it’s not the same for everyone else. Many communities have residents living on a fixed income, and rising dues might reduce their household budget. Homeowners must cut back on their own expenses or find additional jobs to keep up with HOA payments.
This can ultimately lead to a higher delinquency rate for the HOA. When too many homeowners can’t afford higher dues, delinquencies will inevitably rise. The HOA can certainly make collection efforts, but there’s no guarantee it will be able to make up for the loss. Plus, foreclosing on too many homes can give the HOA a bad image.
Raising dues will undoubtedly result in pushback from homeowners, especially if the board fails to explain the reason behind the increase. Additionally, the increased fee will likely stay that way to accommodate future expenses.
When to Cut the HOA Budget
Certain situations might call for budget cuts rather than dues increases. Here are the scenarios wherein the board should cut the HOA budget instead.
1. Expenses Exceed Income, and Reserve Funds are at Risk
If the HOA is consistently spending more than it earns from dues or other sources, it’s a warning sign. Over time, this can deplete reserve funds, which are set aside for major repairs or emergencies. In this case, the board may be better off cutting the HOA budget to avoid insolvency or large special assessments.
The HOA board should identify any recurring costs that cause the budget to go into the red. It is best to cut back on these items and prioritize essential services.
2. Raising Dues Would Create Financial Hardship for Owners
Sometimes, costs rise, or vendors have unexpected increases, but the board knows homeowners are having financial struggles. In this scenario, raising dues will inevitably lead to higher delinquencies, so the best option is to cut the HOA budget. This is more common during an economic crisis.
3. The HOA Has Wasteful or Non-essential Spending
Over time, HOAs might accumulate unnecessary expenses without the board noticing. It essentially becomes the norm to continually pay for these expenses, examples of which include underused subscriptions, too frequent services, or redundant contracts.
Cutting back on these expenses or eliminating them altogether can free up funds for the HOA. Better yet, this won’t even impact the quality of life and services, as they weren’t being used to their full potential anyway.
The HOA board should conduct an audit of every line item in the budget to identify redundancies or non-essential spending. From there, the board can either renegotiate their contracts or cancel the services completely.
4. Residents Agree to Scale Back on Services or Amenities
In some cases, residents are willing to sacrifice certain luxuries or services to avoid an increase in dues. For example, residents might agree to cut back on pool hours, clubhouse rentals, or seasonal decorations. As a result, the HOA can keep dues at the same rate while still making up for budgetary shortfalls.
Of course, this will require the HOA board to survey homeowners first. Gauge their willingness to scale back on these items or hold a meeting to identify which services residents are willing to part with.
When to Raise HOA Dues
Raising dues and assessments is typically an unpopular choice, but it is sometimes necessary. Here are the times when a board should increase HOA fees rather than cut the HOA budget.
1. Inflation Increases Operating Costs
Inflation can cause operating costs to rise. Vendors might raise prices, insurance premiums can go up, and utilities can get more expensive. If costs continue to rise year after year but dues remain the same, the HOA will end up with an underfunded budget.
2. Reserves are Underfunded
Reserves are integral to covering major repairs and replacements in the future. If reserves fall behind, an HOA may be forced to impose a large special assessment down the line. The board should commission a reserve study or update an existing one to calculate how much it should collect every year.
It is worth noting that some states require HOAs to have reserve funding. In Virginia, for instance, Section 55.1-1965 requires associations to fund their reserves and conduct a reserve study at least once every five years. Apart from state laws, the HOA’s governing documents may contain similar requirements.
3. Cutting Essential Services Would Harm the HOA
Some services can’t be cut without compromising safety or the quality of life. These include security, trash removal, snow removal, and emergency repairs. When costs for these services rise, the HOA can’t just cut back on them. Instead, the HOA must raise dues.
Board members should know how to prioritize core services when planning the budget. It is best to label each expense as essential or optional, especially when presenting the budget to homeowners. This way, residents will understand why some expenses can’t be cut.
4. Long-Term Projects Require Funding
Communities often want improvements like upgraded lighting, landscaping, or amenities. These usually require significant funding. By increasing the dues gradually every year, an HOA can slowly prepare for these projects without charging a large special assessment.
How to Fight a HOA Fee Increase
In general, the HOA board can set or raise fees according to the needs of the community. It is part of the board’s job to consider the association’s best interests, which includes planning for its maintenance and betterment.
Homeowners can’t fight fee increases in the traditional sense. They can push back and voice their concerns, but this is not a guarantee that the increase won’t push through, especially if it’s warranted. What homeowners can do is make sure to attend meetings and share their opinions with the board.
In some communities, the board is required to get approval from homeowners for fee increases over a certain percentage. This depends on state laws and the governing documents. For instance, in Arizona, Section 33-1803(a) states that HOA fee increases beyond 20% require a membership vote.
If state laws are silent, homeowners might find an HOA fee increase limit in their CC&Rs or bylaws. Some governing documents also impose a vote requirement for increases above a certain amount or percentage.
A Balanced Approach
When deciding whether to cut the HOA budget or increase dues, board members should consider the community’s condition and needs. More often than not, it is best to use a mix of targeted spending cuts and small dues increases. This ensures that homeowners aren’t faced with too-large fees in one go while still maintaining essential services.
Cedar Management Group provides financial management and reserve planning services to HOAs and condominiums. Call us today at (877) 252-3327 or email us at help@mycmg.com to get started!
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