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Homeowners Associations and Their Impact on the Local Public Budget

Ron Cheung

May 2010, English

The primary objective of homeowners associations (HOAs) is to provide their members with services that supplement the municipal provision. Access to HOA services is restricted to members only. In this paper, Ron Cheung, discusses how this form of submunicipal government affects municipal spending, revenues, and tax base. Based on a 30-year (1970–1999) panel data set for 110 California cities, he finds that increases in planned development (a proxy for measuring the presence of HOAs) led to a small decline in public spending. A 10 percent increase in the number of planned development units decreases total expenditures by 1.51 percent. According to his regressions, the only service reduction that has a significant negative impact on non HOA members is parks and recreation. As park spending is a tiny component of a local budget, the welfare losses for non HOA members are likely to be small.

In terms of the impacts of HOAs on municipal revenue, Cheung finds that cities with fast growth in the number of planned development units experience a small decline in own-source revenues. He estimates that a 10 percent increase in planned development units per capita leads to a 1.7 percent drop in own-source revenues. In cities with a high level of planned development, the share of property taxes in own-source revenues dropped from 30 percent in 1970 to 14 percent in 1999. More reliance was placed on user fees and charges, with their revenues increasing by 0.5 percent for every 10 percent jump in planned development units per capita. Overall, the revenue impacts of HOAs are modest.

Regarding the secession of HOAs from the municipality, which will in turn shrink the municipality’s tax bases, Cheung presents a detailed case study from California’s San Fernando Valley. The case study shows that a high level of planned development can engender support for political secession. Yet, Cheung concludes that more research is needed to understand the causality.

This paper was presented at the Lincoln Institute’s Land Policy Conference of 2009 and is Chapter 12 of the book Municipal Revenues and Land Policies.