Inflation

Where inflation hides inside a routine budget

Inflation does not show up as its own line item. It shows up as last year's contract, utility, and insurance numbers quietly costing more than the budget assumed. A board that copies each line forward and adds a flat percentage is guessing, not budgeting.

Most boards default to incremental budgeting without naming it: start from last year's figure and add an increment.

"the budget is prepared by taking the current period's budget or actual performance as a base, with incremental amounts then being added for the new budget period."

Source: Comparing budgeting techniques (Incremental v ZBB), Association of Chartered Certified Accountants

That increment is a guess about inflation, not a measurement of it. If the board's usual bump is smaller than what a specific contract, utility, or insurer actually charges this year, the gap does not disappear, it reappears later as a shortfall the board has to cover midyear.

Inflation hits reserves harder than the operating budget

The reserve study faces a version of inflation the operating budget does not: rising construction and material costs raise the dollar amount required to replace a roof or repave a lot, not just the price of doing routine work this year. Reserve study standards measure funding progress as a ratio, defined this way.

"Percent Funded: The ratio, at a particular point of time (typically the beginning of the Fiscal Year), of the actual (or projected) Reserve Balance to the Fully Funded Balance, expressed as a percentage."

Source: National Reserve Study Standards glossary, Community Associations Institute

If replacement costs climb, the fully funded balance climbs with them. A percent funded figure that looks unchanged from three years ago is not proof that inflation is not a problem, the dollar target behind that ratio may have grown even while the ratio held steady.

One national reserve-study firm has reported that most of the associations it studies are underfunded, and points to elevated construction costs as a contributing factor. Treat that as one firm's data on its own client base, not a verified national percentage, but treat the underlying pressure on replacement costs as real.

Florida requires a condominium association to update its property insurance replacement-cost appraisal at least once every 36 months, so a stale appraisal cannot quietly underprice a rebuild. Other states set different appraisal cycles, or none at all. Check your own state's condominium or common-interest-community statute for what applies to your association.

What to check before you apply a flat increase

Before rolling any line item forward with an across-the-board bump, work the actual sources of the number instead of guessing at them:

• Read the contract itself. Many vendor contracts carry their own escalation clause, and it may run ahead of or behind whatever percentage the board was planning to add.
• Compare a utility line to last year's actual usage and price, not just last year's budgeted amount. Usage swings can mask or mimic a price increase.
• Confirm the reserve study or insurance appraisal behind a reserve or insurance number is recent enough to reflect current replacement costs, not a figure from several years ago.
• Check whether a larger than usual increase would trip a statutory limit on raising assessments without a membership vote. California, for example, caps a board-approved regular assessment increase at 20 percent over the prior year without a member vote; other states set different thresholds or none at all. Check your own state statute and governing documents before assuming a specific cap applies.

None of this requires forecasting the economy. It requires treating each assessment-funded line as its own question rather than one shared guess applied everywhere.