Budgeting Appropriately for Increasing Costs with Regular Annual Assessments

By David A. Kline, Esq.

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Civil Code section 5600(a) requires an association to “levy regular and special assessments sufficient to perform its obligations under the governing documents and [the Davis-Stirling Act].” To that end, Civil Code section 5605 gives boards of directors the authority to increase regular assessments by up to 20%, without a membership vote.

As costs naturally increase over time due to inflation, material costs increase due to supply chain shortages and insurance premiums increase in response to the rising risk of drought-fueled wildfires, directors of common interest developments often find it difficult to manage their association’s budget.

Although it is important for board members to carefully scrutinize an association’s costs, consistently and steadfastly refusing to increase regular assessments to account for rising costs can lead to disastrous results for homeowners. Eventually, a hefty special assessment may be needed when long deferred maintenance results in property damage, or worse.

Often, candidates for the board of directors make campaign promises to cut regular assessments claiming they will reign in years of alleged financial mismanagement. And, board members often tout an association’s consistent level of regular assessments as evidence the association is well-managed and financially stable. In fact, these arguments are misplaced. Artificially keeping assessments low can be a major red flag, often indicating significant financial struggles around the corner. This is especially true now with inflation and the difficulties of obtaining goods and services.

Too often, boards of directors ignore the advice of the association’s experts, defer routine maintenance, fail to adequately fund the reserve account in accordance with the approved reserve funding plan, or otherwise kick their problems down the road for future boards and homeowners to address. This simply delays the inevitable and often ends up costing the association and the owners more in the long term and may create the need for a large special assessment to perform needed work in the community. Owners are often shocked when hit suddenly with a large special assessment and may have difficulty paying it when they prepared their own household budget based on an assumption of their association’s financial well-being.

When boards decide to forego a long-term warrantied roof replacement project, opting instead for a short-term patch job, or delay replacing corroded and worn-out pipes despite multiple leaks, for example, associations may find themselves paying not just to replace the broken common area components (often at a greater expense than would be paid if the board had been more proactive), but may also have to pay for the avoidable resulting damage to the separate interests as well. This can be much more expensive for homeowners in the long run, especially if the association’s insurance carrier denies coverage for damage due to the association’s alleged failure to properly maintain the failed component.

This is not to suggest that delaying an important infrastructure project is never appropriate. It may be appropriate for a board to prioritize repairing damaged structural components that threaten the health and safety of the residents above less critical repairs. However, boards of directors, and candidates for the board of directors, should be candid with the members about the rising costs that they anticipate. Homeowners should not be surprised by moderate, incremental increases in regular assessments from one year to the next. Anyone who pays attention to the news is well aware of rising inflation and community associations are subject to this like everyone else.

Sudden unexpected special assessments are never welcome, but they are particularly frustrating when they could have been avoided with honest and transparent budgeting decisions – this includes annual assessment increases to keep up with rising costs.

Boards should expect small incremental increases to most budget line items each year to keep up with inflation and make these annual assessment adjustments as needed in an effort to avoid large increases or special assessments in later years.