Budgeting for building upkeep: strategies for tackling deferred maintenance across campus.
Aging buildings, a recent economic downturn and pressure to invest in new construction has led to rising deferred maintenance backlogs on campuses nationwide. In fact, since 2007 these back logs increased 15 percent at private institutions and 18 percent at public universities. That's according to "The State of Facilities in Higher Education: Benchmarks, Best Practices and Trends," a 2014 report from Sightlines, a Connecticut company that helps colleges manage their facilities investments.
Deferred maintenance refers to the issue of colleges and universities not having the resources for building upkeep. It can include not being able to perform recommended servicing or upgrades to building systems, such as HVAC or electrical; to replace components that have outlived their useful life, such as roofing or flooring; or to address minor problems before they become bigger, such as plumbing.
It's a national issue showing no sign of subsiding. Eighty-six percent of administrators in another study indicated that funding for facilities--renovation and new construction--is a major need, according to the "2014 National Survey of Access and Finance Issues" published by the Education Policy Center at The University of Alabama.
Every campus has at least some deferred maintenance, explains Brian Hutzley, vice president of finance and administration at Colgate University in New York. After putting off past maintenance projects when the economy stalled, leaders at many institutions are finding it difficult to fit them back into the budget.
But there's good news: Realistic strategies for addressing deferred maintenance do exist. Here's how some forward-thinking colleges and universities are tackling the issue.
Colgate is among the institutions that are making progress on deferred maintenance. "We're being very strategic about it," says Hutzley, whose school was named "America's most beautiful college campus" in 2014 by The Princeton Review--in part because of its historic stone buildings.
Colgate personnel spent the summer of 2014 assessing deferred maintenance at all of its buildings and determining that the total cost was in the neighborhood of $151 million. Safety codes, modernization, reliability and utility infrastructure were major factors in determining when each maintenance project would take place. Officials knew that $1 of maintenance deferred would likely cost in the neighborhood of $4 later, so they worked hard to prioritize the work. "If you're constantly delaying, you'll have more emergencies," says Hutzley.
Projects were identified and placed into one of three buckets based on condition: one to three years, four to seven years, or eight to 10 years. Roof work, window replacements, heating system renovation and mechanical system upgrades were among the needs. Colgate drew from its operating budget, borrowed money and tapped into donor funds to commit $150 million over the next five years. Forty to 45 percent of that amount will be devoted to deferred maintenance, with the remainder being invested in projects such as a new athletic facility, a Center for Art and Culture, and a new Career Services building.
It's an issue campuses will always have, says Hutzley. "You just want to make sure you're not going backwards."
Finding a new revenue stream
At 180 years old, Oglethorpe University in Atlanta is dotted with aging buildings and deferred maintenance. Money was put aside to tackle the most crucial projects but not enough to avoid a backlog of needed repairs. A decade ago, the university was operating in the red due to lower enrollment and was simply unable to invest significantly in its infrastructure, President Lawrence Schall says. "If the money isn't there, it's not even a choice to defer. You just have to."
His solution? Come up with a plan to generate new revenue to pay for the needed campus repairs and maintenance.
In 2007 the university developed a facilities master plan, setting aside seven acres it envisioned leasing to a real estate development partner for a project that would support campus life. Officials envisioned a structure like a hotel being built on the spot, with the requirement being that any partner would lease rather than purchase the land.
In 2013, Gables Residential was selected to build a four-story, 375-unit apartment complex, a park, a classroom building, shared parking and a fitness center. Anyone can lease there but Oglethorpe students have the right of first refusal. Since the university had run out of housing space, the building also addressed the need for more student housing without requiring new construction.
Rather than receiving an annual payment for each of the 99 years of the lease term, Oglethorpe was paid a lump sum of $12 million. The administration decided to divide the funds into six categories of expenses, "all of which are deferred maintenance projects of one kind or another," says Schall. These included the replacement of a major HVAC condenser serving the science facility, making classroom buildings more accessible and improving safety in residence halls. The university had been budgeting $300,000 a year in deferred maintenance just to address the most serious needs, but now with the inflow of $12 million, it can take the annual income of $600,000 being generated and also put that toward catch-up, for a total of $900,000.
"We probably should be spending $2 million," says Schall, but the $900,000 will help the university "eat at the most significant pieces of deferred maintenance."
Borrowing maintenance funds
Public universities rely heavily on state funding to help maintain their physical plants, with borrowing the primary means of funding maintenance and repairs.
The University of Massachusetts' five campuses were built by the state, which is also responsible for maintenance. Unfortunately, after the 1970s, the state curtailed its investments in facilities and they started to deteriorate, says Christine Wilda, the system's treasurer and senior vice president for administration and finance. In 2008, the state issued a $1 billion bond over 10 years to fund new research and academic buildings. "They have recently made much-needed investments in new facilities," she says, "but little in the area of deferred maintenance."
Officials realized they couldn't wait any longer to address some building issues. If it didn't make a sizeable investment now, deferred maintenance would only continue to mushroom, says Wilda. "We wanted to keep it level or declining."
So UMass began investing its own operating funds and issuing its own bonds to finance the needed repairs, which included general academic space renovations, along with student lab improvements and roadway reconstruction.
"We have a $3 billion deferred maintenance obligation that we need to ensure our capital plan addresses," says Wilda. Its minimum threshold to maintain its facilities is around $130 million per year, says
Wilda, but investing $300 million annually over the next five to seven years would effectively whittle away at its deferred maintenance backlog. At that pace, the amount of deferred maintenance the university is dealing with could be brought within acceptable levels.
UMass can borrow on its own, without state approval--within limits. It has a self-imposed cap of 8 percent on borrowing, "to avoid going too far," says Wilda. "This is the opportune time to look at financing due to the historically low interest rates," she says. "The savings are enormous."
Refocusing funds--and donors
Rather than generating new funding or borrowing, Centenary College of Louisiana officials worked with what they had--uncommitted donor funds.
When President David Rowe arrived on campus in 2009, Centenary was in the midst of a capital campaign to build a new science building. The stock market crash put those plans on hold. However, the existing science building still needed repairs. So Rowe approached donors who had contributed to the science building campaign to request permission to use the money they had given to renovate the old science building instead. He got the go-ahead.
The science faculty and facilities department came together to prioritize maintenance issues, keeping in mind that the goal was to replace the building eventually. "They addressed things that weren't flashy, but that the building needed fundamentally, like windows, lighting, roofing and HVAC," says Rowe.
He also began asking other donors if the college could use their funds to address deferred maintenance across campus. With their okay, the college began to remediate needs, such as power and HVAC.
Centenary's uncommitted donor funds were also used for more visible projects. When Rowe asked four student organizations for recommendations on spending $100,000 to attract and retain students, the result was construction of a multiuse pavilion by the intramural fields and purchase of golf carts to help transport campus visitors.
Budgeting for depreciation
Colleges don't generally budget for building depreciation, says Rowe, but his team decided to buck that trend. Centenary started phasing in funding for depreciation over five years. Although about 10 percent of its total facilities expenditures per year should have been set aside for deferred maintenance, the college had no funds for this. Prior to this, Rowe says, the school had done what most schools do: "react and repair. With Centenary Renewal and a policy of budgeting for depreciation, we adopted a new approach: catch up and stay ahead."
To create a reservoir of cash to address some of its maintenance needs, Centenary is completing Year 4 of a five-year plan to phase in 100 percent funding of its depreciation expense, which is $2 million to $2.5 million annually.
Budgeting for building repair and maintenance has become a top priority. "It's not easy, popular or glamorous, but it's essential," says Rowe. It's needed to keep community members safe and learning uninterrupted, but also for the health of the college. "The physical plant symbolizes the strength and character of an institution," he says.
"When buildings and systems begin to erode, so does morale and confidence on campus," Rowe adds. "By addressing deferred maintenance, you can help bolster confidence in the college."
Marcia Layton Turner is a Rochester, New York-based, writer.
Policy shifts needed to combat deferred maintenance
"In today's environment, there simply will not be enough money to address all repair, modernization and infrastructure needs," says Mark Schiff, president and chief executive officer of Sightlines, publisher of the report "State of Facilities in Higher Education: 2014 Benchmarks, Best Practices & Trends."
Policies designed to improve space management and capital allocation can help higher ed institutions reduce deferred maintenance backlogs and better leverage existing campus assets. Per Sightlines, some of the strategies that leading educational-Institutions are implementing include:
* Shelving new net square footage. Curtailing new construction puts emphasis back on existing structures and increases pressure to remove buildings that are beyond repair and replace them with more efficient structures.
* Slowing the growth of deferred maintenance. Campuses of all sizes are reallocating budgets to improve maintenance of existing facilities and reduce the backlog amassed over the last few decades.
* Consolidating campus functions under one larger, more efficient, roof. This is counter to the historical practice of acquiring land and smaller buildings.
* Generating funds for deferred maintenance by monetizing campus noncore facilities. Public-private partnerships are being forged to generate income from campus housing, parking, and available retail space.
Schiff advises enacting policies that create consensus to best optimize the impact of finite institutional resources.
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|Title Annotation:||CAMPUS FINANCE|
|Author:||Turner, Marcia Layton|
|Date:||Aug 1, 2015|
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