How the Consumers Price Index (CPI) Impacts HOA Assessments
If you’re a board member of your community, you’re charged with determining your association’s annual assessment – and as part of your fiduciary responsibility to your association and its members, you must ensure any increases are appropriate and reasonable. As a result, many communities’ governing documents require associations to tie assessment increases to the Consumer Price Index (CPI). This solution standardizes the process and helps ensure fairness but often creates confusion for stakeholders.
If your community is professionally managed, consult your property management company for more information – a quality firm can leverage its budgeting and financial experience to provide guidance. But to get you started, we’ve compiled some information about the Consumer Price Index – what it is and what you need to consider before you get started.
1. What is CPI, and why is it important?
Some people mistakenly believe that the Consumer Price Index is a cost-of-living index, but it’s not – and it’s also not directly tied to the inflation rate. So, what is it? The Consumer Price Index (CPI) is a measure that tracks changes in price for typical goods and services sold throughout the country. The Urban Consumers' CPI measures how much two different types of urban consumers pay on average in various regions. While other factors like region or class are considered when determining this number, it can be used to evaluate cost-of-living differences between cities/towns based on their individual needs.CPI results are calculated monthly, semi-monthly, and semi-annually by the U.S. Bureau of Labor Statistics (BLS), which gathers information from thousands of retailers and service providers in key markets. As a result, consumers can compare apples to apples – or in this case, the price of today’s basket in a particular region, compared to what it cost one or more months and/or years ago.
2. Which index to use?
As we just noted, the BLS doesn’t just publish one Consumer Price Index based on one group of consumers in one area. Instead, it releases several indices measuring the spending of two groups, Urban Consumers (CPI-U) and Urban Wage Earners and Clerical Workers (CPI-W), at various times of the year. CPI results for these groups are published monthly for four key regions of the country, semi-monthly for 11 metropolitan areas, and semi-annually for 13 additional markets. With so many CPI options, it’s critical that your community’s governing documents specify which index must be used to ensure transparency and manage homeowner expectations.3. What is your base period?
In CPI terms, the base period is the timeframe in which the BLS sets the average Consumer Price Index to 100 – which helps facilitate relative comparisons over time. Again, clarity is essential – make sure your community’s governing documents spell out the base period during which assessments will be calculated to avoid confusion and build consensus.4. Plan for contingencies.
Using the CPI to determine assessments, your association will likely have adequate funds available to cover your community’s basic maintenance and upkeep. But your allocation may not be enough to cover the costs of unforeseen repairs, projects, improvements, or emergencies, so your association may need to collect a special assessment if these needs should arise.Your community, like many others, may be using the Consumer Price Index to determine your annual assessment – after all, it’s a proven method for ensuring fairness and consistency. But it’s vital to ensure that your governing documents include specific details about the process to ensure accuracy and avoid confusion. It’s a good idea to have your association’s legal counsel review your governing documents and provide clarification or revisions if necessary. A good property management company can leverage its budget and financial experience to provide more information on this complex topic.