Condo Media - October 2011 - 14

MAINE N e w s

by Jack Carr, P.E., RS, LEED-AP

R e g i o n a l

The Inflation Dilemma
Associations Grapple with CPI and Reserve Funds

C A I

I

n New England, inflation is something we have ignored for many years. Since the 1980s, inflation has averaged down to almost negligible amounts. Furthermore, we’ve grown used to making investments that approximate or at least keep us ahead of inflation based on our rate of return. Unfortunately, those days may be over. We hear it in the public discourse over the cost of living … whether it be from retirees disputing Cost of Living Adjustments (COLA) or from working citizens who would like higher salary increases. The argument has been that the government inflation indices, such as the Consumer Price Index (CPI), are out of synch with what average Americans are facing. The problem is that the factors influencing inflation indices such as the CPI are diverging. We’ve seen commodity prices increase in oil, gasoline, electricity, base metals and grains, while the value of assets such as housing and many consumer goods decrease. These are all factors that influence the CPI.

The figure for non-residential maintenance and repair applies to many multi-story condominium associations due to the nature of their complex maintenance and repair tasks. The problem rears its ugly head when it comes to reserve accounts. Funds are collected ahead of time to meet the need of anticipated future capital expenditures. In the past, we expected these funds to grow over time to help fund the future costs. Today’s reality is that these funds may earn 1 percent annually with smart management. This leads to a declining real value of the reserve account, as inflation is eating away its true value. The problem for many community associations is doubled since the members of the association face the same problem. Retirees rely on Social Security and other entitlement programs that are indexed to government inflation figures, namely the CPI. This leads to a reduced ability of the members of the association to pay for an increasing target of reserve funds for their association into the future.

Community Associations and the CPI
This “divergence” of inflation components may average out in the CPI, but it’s hitting full force with select industries such as community associations. A look at the latest Bureau of Labor Statistics (BLS) figures ending July 1 reveals the following increases in just the past year: • Residential maintenance and repair: 8.2 percent • Non-residential maintenance and repair: 11.4 percent

Creative Strategies
So, the major question is: “What do we do?” One answer is to look at alternative means to manage your future inflation risks and to think seriously about risk management. As an example, a community association manager recently said about a reserve study for a property that its major asset is 12 miles of roads. Their reserve study will likely be heavily weighted toward the cost of asphalt paving in the future. If they are collecting reserve funds now to fund road replacements in the future, their

normal response would be to invest these in some bank financial instruments such as CDs. If they look at their balances and future obligations in detail, they might ladder their CDs to obtain slightly higher interest rates. So let us consider an alternative idea. An association like this one might “consider” alternate strategies, such as hedging as a part of their portfolio. Asphalt paving has a strong correlation to oil prices. If the price of oil goes up, the material cost of asphalt typically follows. A strategy their board might consider (the key word is “consider,” as there are risks involved) is to invest a portion of their reserve funds in financial instruments that track the price of oil. Today, it is much easier to do this type of investing through Exchange Traded Funds (ETF) than in the past when it meant taking long positions in commodity futures and managing their contract terms. If the cost of oil goes up substantially in the future, the value of their investment and the cost of their capital projects go up, cancelling each other out depending on the levels invested. The reverse is true if the cost of oil goes down. There is obviously much more to discuss about taking your reserve funds to this level, but this subject is being brought up because the future dictates that we think “out of the box” in contrast to what we have done in the past, given the future that has been handed to us. CM Jack Carr, P.E., RS, LEED-AP, is senior vice president with CriteriumEngineers in Portland, Maine. He is a member of the Condo Media board and a frequent author and speaker.

14

CONDO MEDIA • OCTOBER 2011



Condo Media - October 2011

Table of Contents for the Digital Edition of Condo Media - October 2011

Condo Media - October 2011
Contents
From the CED’s Desk
President’s Message
CAI News
CAI Regional News
Asked & Answered
Homeowner’s Corner
Maintenance
Legal
Operations
2011 CAI-NE Annual Condo Conference & Expo
Vendor Spotlight
Legislative Update
Meetings
Board Member Insight
Advertisers Index
Classified Service Directory
Condo Media - October 2011 - Tip1
Condo Media - October 2011 - Tip2
Condo Media - October 2011 - Condo Media - October 2011
Condo Media - October 2011 - Cover2
Condo Media - October 2011 - BB1
Condo Media - October 2011 - BB2
Condo Media - October 2011 - Contents
Condo Media - October 2011 - From the CED’s Desk
Condo Media - October 2011 - 3
Condo Media - October 2011 - President’s Message
Condo Media - October 2011 - 5
Condo Media - October 2011 - CAI News
Condo Media - October 2011 - 7
Condo Media - October 2011 - 8
Condo Media - October 2011 - 9
Condo Media - October 2011 - 10
Condo Media - October 2011 - 11
Condo Media - October 2011 - 12
Condo Media - October 2011 - 13
Condo Media - October 2011 - CAI Regional News
Condo Media - October 2011 - 15
Condo Media - October 2011 - 16
Condo Media - October 2011 - 17
Condo Media - October 2011 - 18
Condo Media - October 2011 - 19
Condo Media - October 2011 - 20
Condo Media - October 2011 - 21
Condo Media - October 2011 - Asked & Answered
Condo Media - October 2011 - 23
Condo Media - October 2011 - Homeowner’s Corner
Condo Media - October 2011 - 25
Condo Media - October 2011 - Maintenance
Condo Media - October 2011 - 27
Condo Media - October 2011 - 28
Condo Media - October 2011 - 29
Condo Media - October 2011 - Legal
Condo Media - October 2011 - 31
Condo Media - October 2011 - 32
Condo Media - October 2011 - 33
Condo Media - October 2011 - Operations
Condo Media - October 2011 - 2011 CAI-NE Annual Condo Conference & Expo
Condo Media - October 2011 - 36
Condo Media - October 2011 - 37
Condo Media - October 2011 - 38
Condo Media - October 2011 - 39
Condo Media - October 2011 - 40
Condo Media - October 2011 - 41
Condo Media - October 2011 - 42
Condo Media - October 2011 - 43
Condo Media - October 2011 - 44
Condo Media - October 2011 - 45
Condo Media - October 2011 - 46
Condo Media - October 2011 - 47
Condo Media - October 2011 - Vendor Spotlight
Condo Media - October 2011 - 49
Condo Media - October 2011 - Legislative Update
Condo Media - October 2011 - 51
Condo Media - October 2011 - 52
Condo Media - October 2011 - 53
Condo Media - October 2011 - Meetings
Condo Media - October 2011 - 55
Condo Media - October 2011 - 56
Condo Media - October 2011 - 57
Condo Media - October 2011 - 58
Condo Media - October 2011 - 59
Condo Media - October 2011 - Board Member Insight
Condo Media - October 2011 - 61
Condo Media - October 2011 - 62
Condo Media - October 2011 - 63
Condo Media - October 2011 - 64
Condo Media - October 2011 - 65
Condo Media - October 2011 - Classified Service Directory
Condo Media - October 2011 - 67
Condo Media - October 2011 - 68
Condo Media - October 2011 - 69
Condo Media - October 2011 - 70
Condo Media - October 2011 - 71
Condo Media - October 2011 - 72
Condo Media - October 2011 - Cover3
Condo Media - October 2011 - Cover4
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