The governing documents of many homeowner associations peg annual dues increases to the Consumer Price Index or CPI. For example, a typical CPI provision may read: “the annual dues may be increased no more than the average CPI index for the prior 12 months.” Board members and our company are often asked by members of the association why the CPI is not a reasonably accurate method to determine dues increases. In some cases we have had members inquire as to why an association is not pegged to the CPI and why can’t the association utilize this measure when calculating dues increases.
The Consumer Price Index measures changes in the price level of consumer goods and services purchased by households. The CPI is defined by the United States Bureau of Labor Statistics as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” The index is computed monthly as a weighted average of sub-indices for different components of consumer expenditures such as food, housing and clothing, each of which is in turn a weighted average of sub-sub-indices.
In a nutshell, the CPI is a statistical estimate constructed by using the prices of a sample of representative items, the prices of which are collected periodically. The annual percentage change in a CPI is used as a measure of inflation and the basis for many association dues increases.
On the surface it may appear to be reasonable to use CPI to base dues increases, however, the main point to consider with utilizing the CPI is what items are representatively sampled and does an association purchase those representative items. The sample is of course weighted, but are the sample items what an association would generally purchase and are the items or services purchased by an association inflation or price sensitive?
First consider what would make up the items in the CPI sample. Durable goods such as appliances, automobiles, and non-durable goods such as gasoline and food prices would almost certainly factor into a CPI sample.
Secondly, consider the major expenditures that an association incurs: utilities and services. These two expenditures generally make up between 85% to 100% of an association’s total budget. This is when some will argue those are items that are represented in the CPI sample. However, the weighted average of those items is what is in question. Utilities such as municipal water and regulated utilities such as electricity are not generally constrained by market conditions or the economy. Municipalities increase utility rates no matter the economical situation, while regulated utility providers can do the same. What skews the CPI is that, in difficult economic times, sample items that make up the CPI are subject to deflation or elimination (such as car prices and appliances prices that tend to decrease, and certain services eliminated by consumers).
Another facet to consider with the calculation of the CPI is the price for services. Some CPI advocates will argue the point that the cost of services will decline as well in tough economic time. Where this argument can fall short is that associations provide services that cannot be eliminated or even reduced per the association’s governing documents.
The philosophy of the index is that it is inspired by, and approximates the notion of, a true cost of living index. CPI may or may not be a valid cost of living index, but using this index to peg association expenses has always fallen short of reality. WDPM
Copyright – William Douglas Management, Inc. 2016