How the Consumer Price Index (CPI) Impacts HOA Assessments

Posted on Wednesday March 09, 2016 |



Nobody likes to see prices go up for things they want or need, whether it’s a plane ticket, a quart of milk or even a college degree.  But as we all know, rising inflation often leads to rising costs – and that can impact the budget assessments set each year by homeowners associations (HOAs) or community associations. 

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) – a solution that standardizes the process and helps ensure fairness, but often creates confusion for stakeholders.

If your community is professionally managed, consult with your property management company for more information – a quality firm will be able to 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 the Consumer Price Index?
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 rate of inflation.  So what is it?  The CPI is actually several indices that measure the changes in price over time for a standard market basket of goods and services in over 200 categories – everything from food, to medical care to transportation and more.  These are the average prices paid by two different types of urban consumers in various regions of the country.

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 clearly specify which index must be used in order 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 – that helps facilitate relative comparisons over time.  Again, clarity is very important – make sure your community’s governing documents clearly spell out the base period during which assessments will be calculated to avoid confusion and build consensus.    
  
4. Plan for contingencies. 
By 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 important 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 if necessary, provide clarification or revisions. A good property management company can also leverage its budget and financial experience to provide more information on this complex topic. 
 
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