A Method for Arriving at Assessment Adjustments

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This is based upon a letter sent March 4, 2009 to our Management with a request that this be distributed to the board members. It should have been received prior to the March board meeting, and our board members have had ample time to read and to absorb this.

I have observed some of the planning process used by our association in determining assessments. There are a range of emotions displayed by the board and by unit owners when the subject of assessments is discussed. I have previously written to the board about analysis I have made and of my assertions on how we got to where we are. In October, 2008, I began a study to assess using different techniques to determine our monthly assessments. I determined that there was an alternative method that would have yielded lower assessments had the boards consistently adhered to a simple schedule of adjustments using data published by the U.S. government.

My study of past assessments provided some insight into how we arrived at our current assessments and the consequences of the path chosen by the board in 1982 and the following years, until 2000. I have included those insights here. What also follows is a comparison to the alternative method of raising assessments, which seems to be a simple, reliable tool for use in determining assessment adjustments.

Of course, board members and unit owners may choose to ignore the data presented here.

I have several purposes in writing this. I am interested in the “how” of our arrival at this particular financial point in time. I want to provide our board with useful information so as to avoid repeating how we got to this point. I am also very interested in tools that can aid in the decision making process. For example, without knowing the details of the future (inflation, etc.) how can we prepare, that is, how much should our association save each and every year, for the repairs that will undoubtedly be required?

Upon reading what follows, one can conclude that there was a time when our assessments were simply too low. The association appears to have been operating with a "technical" deficit for at least a decade, beginning in the 1980s and nearly to the year 2000. We had sufficient funds to operate, but insufficient for reserves. The current management and recent boards addressed the problem and our assessments have risen. However, we continue to make up for the shortcomings of the past. Finally, on reading this, you will get some idea of just how large a financial hole we had dug for ourselves.

I have listened to unit owners (and that includes members of the board) who seem to have difficulty comprehending how things became the way they are. The following should prove useful in determining how this occurred. The why, I cannot say, because I was not a unit owner in the 1980s and 1990s and so I did not attend meetings. If you did, perhaps you can shed some light on the "why". I am very interested in that!

This chart shows the actual assessments voted by the board each year, commencing with 1983 and continuing to the most recent vote in 2008. The assessment increase is shown as a percentage. There are several things about these increases. 1) They were very erratic prior to 1996. 2) They were zero or a negative value (a decrease from the assessment of the prior year) for several years prior to 1996. 3) They increased dramatically in 1999 but the pace of increases has since tapered off.

The following charts are derived from spread sheets I have made, which included the actual assessment amounts, the percentage of adjustment voted by the board each year, and the COLA or cost of living adjustment determined by the U.S. government. The U.S. government has different legal and economic bodies that generate this information. Most COLA data is backward looking, i.e. published after the fact. My spreadsheets and the resulting charts use data which is forward looking. I use the Social Security Administration annual benefit adjustment. This is a percentage, issued in the fall of each year by the SSA, which determines the increase in SS benefits for the following year. It is an attempt to anticipate cost adjustments on a year to year basis. For example, in 2008 this was published as a 5.8% increase, applied in 2009.

Each chart has two trends. One is derived from the actual decisions made by the board. The other is an alternate, derived from the COLA adjustment, and indicates the result if the boards had based the annual assessment adjustment solely using the government COLA adjustment. The difference between these two trends indicates a gap which in our association’s case, was a shortfall in saving. That gap continued each and every year and as a consequence, our savings rate fell further and further behind.

The first chart is a comparison of the monthly assessments using the two methods. It has two trends; one is the actual, average monthly unit assessment and the second is an alternative COLA based assessment. The alternative assessment replaces the percentage increase voted in 1982 by the board, with the percentage calculated by the U.S. government for SS benefits in 1982. This is repeated each year from 1982 to 2008. This is chart No. 1 “The High Price of Avoiding Assessment Increases” so named because prior to 1995 the board chose zero or negative adjustments for several years. You will note that the trends cross in collection year 2001. Prior to that time, our assessment increases consistently lagged those deemed necessary by the government COLA method. If left unchecked, this would result in operating deficits, i.e., the inability to meet basic financial needs. Later boards and our current management, apparently in recognition of this, have since 2001 raised our assessments annually by a rate above that of the COLA percentage. This has resulted in today’s higher monthly assessments as compared to using the alternative, COLA method. It has also built up our reserves. I chose 1982 to begin because this is the first year the board chose a negative or zero assessment adjustment. Assessments began in 1979 and the interval until 1982 provides too unstable a starting point, as boards attempted to find their footing and establish assessments that would fund ongoing "operational" needs.

Chart No. 2 “Annual Assessed Amounts Collected” depicts the total assessments collected annually from the period 1983 to projected for 2009. The amounts collected annually are trended using the two methods, and the trends cross in 2001. The amounts collected using the percentages chosen by the boards were lower during the years prior to 2001 than the amounts that would have been collected using the U.S. government percentages. As the assessments have increased each month, so too have the amounts collected. The amounts collected annually are now much greater than they would have been had the U.S government percentages been used. However, the space, or area between the trends to the left of the point of crossing is nearly equal to the area to the right of that point, which means that we have finally collected an amount sufficient to make up for the difference since 1983!Chart No. 3 “Accrued Amounts Using Actual Assessments and Alternative COLA Method” shows the long term effects, the sum of all assessments collected from 1983. It compares the sums collected using the board selected percentage adjustment to the sums collected using the U.S government SSA COLA method. The U.S. government COLA percentages consistently grew the savings at a higher rate. By December 31, 2009, the actual, total assessments collected at the association, for the period 1983 through 2009 is projected to be $16,028,211. During that same period, using the COLA method $15,910,181 would have been collected. These are nearly identical with a difference of 0.74%. The trends do not include interest accrued on saved funds.
Chart No. 4 “Monthly Assessments Using Actual Method and Alternative COLA Method“ compares the average monthly amounts collected per unit using the board selected adjustment method and alternative COLA adjustments from 1982 to the present. If it looks familiar, it is! Chart No. 4 is identical to Chart No. 1 and I repeat it here with this additional information: In 1999 the assessments at our association began to rise at a faster rate. Prior to 1999 the assessments consistently lagged those which would have been collected, had the U.S. government COLA SSA adjustment percentages been used. In 1999 the average assessment was about $135 and had increased to about $291 by 2009. Today, my actual assessment is $308.57, but had the U.S. government alternative percentages been consistently used, my actual assessment today would be a much lower $216.90. The reason is simply this: our current assessments are an attempt to collect in the period 1999 to the present, the sums of money that were not collected in the prior period 1983 to 1998. This difference is the space or area between the two trends on the graph below. The "gap" prior to 1999 seems deceptively small, but it wasn't, and the difference is now saved as our "reserves": The final chart trends the assessment adjustments as percent change voted by the board, compared to the percent change which the U.S government COLA method used for the same period of 1982 to 2009. You will observe that the percentages voted by the board were quite erratic prior to 1995. You will also observe that the U.S. government method was nearly always below 5%, and was as low as 1.3% in 1986 and 1998. There is one caution. In the period 1978 to 1982, prior to the trends and during a period of pronounced inflation, the U.S. government COLA percentages were above 8.0% for four years.
All of this is for exploring possibility using “what may have been”. However, several observations and conclusions can be drawn from the data shown in the charts.

1. Had the association boards used a simple method of calculating assessment adjustments based on U.S. government SSA COLA and collected assessments consistent with inflation increases, we would have today achieved the same balance sheet and reserves. However, in the process we would have had smoother, consistently smaller assessment increases and would today have lower monthly assessments.


2. Using assessment increases below the COLA percentages is an inferior method, as experienced by our Association.


3. The pace of assessment adjustments should moderate to the COLA rates, and has.


4. The COLA method may not assure sufficient funding for large capital projects, such as the planned roofing and paving projects. This is because specific, actual costs are unknown. Further analysis is required.


5. The COLA method, it has been pointed out, includes factors not of direct concern by our Association. For example, changes in the cost of food. However, the point of the analysis is to review a forward looking, annual method that would avoid the issues we have experienced and smooth the adjustments, from year to year. The analysis speaks for itself.


6. The association is now collecting funds at a rate greater than the COLA method would, because our monthly assessments are higher. The impact on future balance sheets cannot be determined with certainty until the true costs and timelines of capital projects is known.


7. To avoid large “spikes” using the COLA method (e.g. 14.3% as in 1980) and consequential disruption to the budgets of unit owners, it is advisable to adjust very low COLA percentages upwards to provide some short term smoothing and avoid large increases. This requires analysis of future, anticipated balance sheets.


8. This data can empower condominium boards to consider using the U.S. government COLA percentage increases as basis for the minimum for assessment adjustments, if that method is not now used.

I provided this data to our board on March 4, 2009 and I hope that this is useful and will have some influence on the predilection of the board when the time comes to vote for assessment adjustments. I will be doing additional analysis and I welcome comments.

The following is the SSA website which includes the COLA data I used. http://www.ssa.gov/OACT/COLA/colaseries.html