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Our answer is essentially ... yes. The importance of inflation
in reserve fund planning is highly overrated.
This opinion, we know, is not universal. Far from it. We're
told that it's essential to account for the effects of inflation
when preparing a reserve fund plan.
But we believe there are several things wrong with
introducing inflation into your plan. Please stay with us as
we explain what they are.
One of them is - you've got to create your expenditures
plan and your funding schedule in today's dollars anyway.
So what's the point of inflating them when you've done all
the real work without the inflation factor? Well, there is one,
but it's not terribly convincing. It's simply this: The point of
inflating your basic uninflated dollars is that "traditionally",
people like to see them ... the inflated numbers. Why?
We're not sure, but traditions die hard, and this one's been
around for a while.
The point is, your future expenditures are planned for by
using the costs, today, of doing the repair work. Decisions
must be made regarding how often every given repair should
be done, and whether the work should be done in stages.
And so on. Then the figures, in today's dollars are plugged
in. That's how the expenditures plan is created.
For your owners' contributions, decisions are made in regard
to whether or not the expenditures (in today's dollars) call for
a funding level of "x" dollars a year, or "y" dollars a year, and
whether they should be level throughout the plan period, or
whether they should show a decreasing trend, or an
increasing trend. (Or a little of each). And all this work is
done in today's dollars, as well.
Once these decisions are made, there you have it. You're
done.
Well, maybe you're not. Because, as we remarked earlier,
there are people who'll insist on wanting to see all those
numbers, "after inflation". All well-and-good, but what
inflation rate do you use? If you asked a dozen friends (or
residents, or reserve fund specialists) they'd give you a
dozen answers, all different. Which answer will be closest to
reality?
We'd also contend that the inflationary effect on condo
expenditures will rarely resemble the inflation estimates for
the economy as a whole, or for consumer prices if you were
inclined to use those indices as a base. Why? Because the
things that a condo spends money on ... utilities, wages, the
hourly rates for elevator repairers, the price of oil-based tar
for the driveway, don't behave like the general indices do.
So not only is any inflation rate choice inherently
problematic, but estimating one for condo work is even
trickier.
Having said all that, people will want to see inflated
numbers, so pick a number and stick it in there. For one
thing, they will show that owners' contributions will be raised
a little bit each year because of inflation, and that may
provide the traditionalists with the numbers they like.
Otherwise it's quite useless. But we have to concede that
the delivery of a reserve fund plan without them wouldn't be
accepted. That's why reserve fund software - (go to
Google and type reserve fund software) - allows for the
display of both the uninflated values and the inflated values
despite our feeling that the latter doesn't really add anything
useful to the output.
Finally, we're aware that other viewpoints and arguments
exist. If you'd like to offer yours, please feel very welcome to
get in touch with us. Might even have enough material for a
follow-up article!
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