California's Looming HOA Crisis?

3 Minutes Read

Are California HOA's Headed for Crisis?

In a recent article on HG.org from the Law Offices of Sebastian Gibson, the author, Sebastian Gibson, cites some serious challenges ahead for California HOAs and community associations.

It hints at the fears that the funding might not be there to manage HOAs and community associations properly. 

Is California any different than other state?  Florida faces similar challenges with inflation and insurance, yet taxation, regulations, and tax deficits in that state aren't as extreme.

However, is California the canary in the coal mine for the entire US? And will similar pressures be coming to your state?  California's always the leading edge, so understanding its issues could help you navigate your association's future challenges.

Tax Revenues Down, Costs Going Up

It's well known that real estate prices, regulations, and insurance, and rising operating costs are a challenge in the Golden State. And government debt is a big issue too. The charts below show that too clearly.  FED stimulus spending sent to the state has only delayed the debt financing issues California's government faces. And as we know, governments are downloading costs and services to undefended HOAs and community associations

The point of this is clear, that's there is a need for ultra-efficient management of HOA's in California.

In his warning article, Gibson highlights how dependent communities are on their HOAs, and that many of them lack management skills, oversight, systems, and funds to manage operations cost effectively and proactively. And if homeowners should have trouble paying their rising monthly dues within a recessionary crunch, then homeowners associations would be challenged to keep it together.

Financial State in California

And state tax reports reveal that a third of California's state budget comes from the US Federal Government. In 2015, 58% total tax revenues in California came from income taxes. As the chart shows, some believe the California Governor's revenue projections are unrealistic. Without FED bailouts, the state is looking vulnerable. See more California's debt financing situation.

california disposable income drops

This chart shows a potential shortfall of up to $40 billion for this fiscal year due mostly to disappearing personal income tax.

california revenue forecasts
See more at the California Legislative Analysts Office

As this chart from Statista reveals, tax revenues and expenditures have been climbing dramatically, but of late revenues are short by $13 billion. It's obvious that taxes will have to rise.

statista taxes vs expenditures. Screenshot courtesy of Statista

The Federal and California debt crisis are very real. Any hiccups in economic activity going forward can produce unpleasant events across communities.

If inflation should rise, and interest rates with it, and disposable incomes decline, in the midst of mortgage renewals ahead, it lends credence to a revenue shortfall situation for associations. Further, HOA insurance is rising strongly too, thus some associations may lack coverage for events that might happen in 2025. 

When Unexpected Events Happen

And there are a few reasons why an HOA could go bankrupt.

  1. First they could simply mismanage their budget, which is not far fetched. Many still manage manually and have a limited view of their organization, cost projections, nor anticipate being gouged by vendors/contractors who themselves are financially pressured by taxes and inflation. 
  2. They could get hit with a weather-related disaster, such as a heat wave that breaks HVACs, buckles roads and recreation surfaces, generates intense forest fires, or some floods that ruin roads and destroy buildings.
  3. They might be victim to home mortgage foreclosures as overleveraged owners fail to make their mortgage payments and then dues go unpaid or are delayed. 

A more likely scenario might be that some HOAs would fall victim to all of the above. And with insurance being denied by underwriters, how would associations protect their own assets?

The crisis has another dimension too if bankruptcy occurs.  For instance, a homeowners association legislation ensures all member homeowners are held accountable for a portion of the debts of the association.  That means the HOA will do whatever it can to obtain those funds, usually by levying special assessments, before they file for bankruptcy. Some personal property may be sold to get funds, and that threat will weigh on any prospective home buyers.

This is already happening in Florida where new building construction bylaws are forcing expensive assessments for condo owners there.

The Chain Reaction Outcome

Association failure would likely lead to all sorts of lawsuits, as residents file claims against HOA board members who breached their fiduciary duties. To protect themselves, board members should have insurance and use a professional level association management software to prove they've observed proper management practices, were transparent, informed before decisions, and were present at board meetings.

California has received vast amounts of monies from the Federal government via subsidies and beginning this year, for infrastructure development. Yet, the FEDs find themselves in dire financial straights and funding cuts and tax hikes could impact California's HOAs and community associations.

Never before has a state become so reliant on professional HOA managers. And more is being downloaded from local governments to community managers.  While municipalities had a fountain of stimulus cash to use, associations may find it more difficult going forward to obtain funding for essential services. 

Is all the above overstated, or is the "big fail" still well off in the future?

Given the possibilities, you're wise to manage with a modern association management system for efficiency, transparency, compliance, and to contend with revenue problems.

Using ManageCasa™, you're going to be more confident you have hedged against all threats.  All good decisions evolve from speaking with informed association sales team and trialing good platforms.

Contact our association sales pros now to learn more: 1 415 800 1245.

See more on comprehensive HOA software, as a necessity in HOA optimization and effective HOA problem solving. It's a good time to switch your HOA software.

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