Having a proper, fiscally responsible budget in place is necessary for the successful operation of any homeowner’s association. Just as with any budget, income and expenses must be considered - for an HOA, this income mainly comes in the form of owner assessments. When projecting yearly expenses for an association, those serving on boards of directors must take into consideration rising costs of things like utilities, insurance, labor, materials, etc. As we all know, things tend to get more expensive as time goes on. When necessary to cover the expenses of the association, board members may have to increase homeowner assessments. Though this isn't always the most popular decision, it is one that sometimes must be made by those serving on boards to ensure that the association's expenses are covered for the year.
Laws Governing Assessment Increases
For some associations in North Carolina formed prior to 1999, the governing documents stated how budgets and assessment increases were approved. Some association documents allowed the board to approve, some required a percentage of the membership to approve, some allowed the board to increase assessments up to 5% or 10% without a vote of the membership. However, the NC Planned Community Act, created in 1999, states for associations created after January 1, 1999, that assessments must be proposed to the membership and then ratified which requires a 51% vote from the entire membership, not just those attending the meeting.
There are two state statues in South Carolina that address community associations - the Horizontal Property Act, which is rather narrow in scope and discusses mainly condominiums and co-ops, and the South Carolina Non-Profit Corporation Act, which details the regulations governing non-profit corporations like HOAs. In South Carolina, requirements for approving budgets and increasing member assessments are dictated by the association's governing documents.
Communication is Key
When a board is seeing rising costs and finds an assessment increase is necessary, communication with the membership is key whether it be through an e-blast, letter or a post on their website. The last thing you want is homeowners getting a higher bill they were unaware of. Keeping everyone in the loop and garnering member support will make proposed increases go over more smoothly.
I can't emphasize enough the importance of good communication and transparency, not only in informing members of a proposed increase, but informing them of why it’s necessary. If a budget shows the proposed amount of funds needed for the upcoming year and income and expenses for the prior year, this creates a sort of "budget narrative" which shows members exactly where the increased costs lie.
When Should Changes Be Proposed?
When proposing increased assessments, owners can expect the changes to run with the fiscal year of their association. A lot of associations review and ratify budgets at the annual meeting but it doesn't have to be done then - it can be done at a separate meeting called for that specific purpose. Whichever way your association chooses to handle announcing and voting on increased assessments, a good rule of thumb is to have proposed changes presented to members at least 30 days prior to the beginning of the new fiscal year.
The Right Decision May Not Always Be the Popular One
Not increasing assessments over a 5-10-year period generally isn't a good idea and can lead to financial disaster. When a board's claim to fame is never raising assessments, this often speaks to problems in operating accounts or inadequate reserve funds.
The reality of it is that board members must increase assessments when needed and not keep the rates artificially low in order to remain popular. If assessments are never increased, you're essentially "kicking the can down the road" and it will catch up to you eventually, whether in the form of running out of money to maintain operating expenses or depleting reserves.