Capital Budgeting Practices for Public Higher Education: Capital Needs

PresentersPresenters Dr. Derrick Manns, Assistant Dean of Academic

Affairs, Bristol Community College. Dr. Stephen Katsinas, Don A. Buchholz Chair of

Higher Education & Director, Bill J. Priest Center for Community College Education, University of North Texas.

E. Lander Medlin, Executive Director, Association of Higher Education Facilities Officers (APPA).

INTRODUCTION:INTRODUCTION:

A HISTORICAL REVIEW

Ernest Boyer on facilities…Ernest Boyer on facilities…

"Good facilities are essential to good learning.”

Background of current crisisBackground of current crisis The world’s first mass system of higher education

developed in the U.S. from WWII to 1980 (Kerr). Federal government provided critical funding for

facilities in both immediate post-WWII period, and during the 1960s “baby boom” era.

Facilities constructed during the baby boom era have aged, and need significant renovation.

Large increases in high school graduation class size, increased immigration, the need for lifelong learning/computer skill upgrading, in times of scarce state resources have amplified the crisis.

Literature review: The federal role in Literature review: The federal role in facilities has always been importantfacilities has always been important

PRE-BABY BOOMLand Grant Colleges Acts (1862, 1890)Post-WWI, veteran’s education aidPost-WWII, G.I. Bill (entitlement) AND

Surplus Property Act (1947)National Defense Education Act

Review of literature (cont.)Review of literature (cont.)

ADDRESSING THE BABY BOOM (1960s) Higher Education Facilities Act (1963). Higher Education Act, Title VII-Facilities (1965). 1970-present: Federal inaction, which coincides

with a growing deferred maintenance crisis. By 1990s, expanding student demand and need for

better facilities forces re-examination. Today, a crisis exists.

Purpose of the StudyPurpose of the StudyTo gather information on capital budgeting

processes used in the states to addresspublic higher education capital needs, to…

1. Identify what states are actually doing;2. Identify/highlight state practices to fund the

backlog;3. Develop methodology for comparing capital

budgeting consistent with operating budget methodology developed by MM Chambers/Ed Hines/Jim Palmer @ Grapevine;

4. Compare and update 2003-4 with 1996-7 data.

Key questions:Key questions:What is the level of state appropriations for

public higher education capital needs?What is the status of new facilities

construction, renovation, and deferred maintenance in public higher education?

How states are addressing facilities issues in light of large projected enrollment increases and tough budgetary pressures?

MethodologyMethodologyThis study was limited to the 50 states, and

did not include Washington, D.C., or any U.S. territories or possessions.

This study was limited by the time frame reviewed, 1998-1999 and 2003-2004.

SHEFOs supplied the data

States that completedStates that completedthe survey 1998-1999the survey 1998-1999

Alaska

Hawaii

States that completedStates that completedthe survey 2003-2004the survey 2003-2004

Alaska

Hawaii

States that completed 1998-9 States that completed 1998-9 and 2003-4 Surveysand 2003-4 Surveys

Alaska

Hawaii

State Responses, by RegionState Responses, by Region[regions consistent with GRAPEVINE] [regions consistent with GRAPEVINE]

39

10 11 8 10

All States NE SE NW SW0

10

20

30

40

50

Responding States

Facilities growth has been dramatic Facilities growth has been dramatic for years since 1950-for years since 1950-

1950 1960 1970 1980 1988 1994 2000 2004

Years

0

1

2

3

4

5

Gro

ss S

qu

are

Fe

et (

bill

ion

s )

What is the percent of state's total What is the percent of state's total operating funds set aside for operating funds set aside for

renewal & replacement?renewal & replacement?

14

4

2 23

1616

3

1

3

1

15

0-.09 1.0-1.5 2.0-2.9 3.0-5.0 5.1 or above na0

5

10

15

20 1998-99

2003-04

Are formulas used to request Are formulas used to request funds for capital needs?funds for capital needs?

7

29

10

29

Yes No0

5

10

15

20

25

30

1998-99

2003-04

How often are formulas for How often are formulas for capital requests reviewed?capital requests reviewed?

Yearly Every 2 5 + Not Regular Other0

2

4

6

8

10

12

1998-99

2003-04

What best describes the allocation What best describes the allocation process in your state?process in your state?

9

17

1

6

4

9

18

0

7

5

All to Campus

Most to Campus

Half to Campus

All by State Agency

Most by State Agency

0 5 10 15 20

1998-99

2003-04

Is there a comprehensive Is there a comprehensive statewide master plan for statewide master plan for

Facilities?Facilities?

Yes

No

37.5%

62.5%

yes

no

33.3%

66.7%

1998-992003-04

Master plans in high growth Master plans in high growth statesstates

STATE Facilities Master Plan

Arizona NO

California NO

Colorado NO

Delaware NO

Florida

Georgia NO

Idaho NO

Indiana NO

Maryland NO

Nevada NO

New Jersey NO

North Carolina YES

Oregon

South Carolina NO

Texas YES

Utah YES

West Virginia NO

How oftenHow often are comprehensive are comprehensive facilities audits conducted?facilities audits conducted?

Yearly Every 2 Every 3 Every 4 5 + Not Reg.0

5

10

15

20

25

30

1998-99

2003-04

Can you estimate the Can you estimate the replacement value for facilities replacement value for facilities

in your state?in your state?

Yes71.1%

No28.9%

Yes78.4%

No21.6%

1998-99 2003-04

Does your state have an estimate of Does your state have an estimate of amount of deferred maintenance?amount of deferred maintenance?

Yes55.0%

No45.0%

Yes76.3%

No23.7%

1998-99

2003-04

If data are collected on deferred If data are collected on deferred maintenance, how often?maintenance, how often?

Semiannual

Annual

Biennial

3-5 years

Not Regular

0 5 10 15 20 25

1998-99

2003-04

Reserve fund for deferred Reserve fund for deferred maintenance?maintenance?

Yes46.2%

No53.8%

Yes19.5%

No80.5%

1998-99 2003-04

Is increasing the number of those Is increasing the number of those going to college a priority?going to college a priority?

Yes84.2%

No15.8%

Yes89.5%

No10.5%

1998-99 2003-04

Does your state have enough capacity to Does your state have enough capacity to meet expected enrollment increases?meet expected enrollment increases?

Yes No0

5

10

15

20

25

1998-99

2003-04

ConclusionsConclusions Most states do not have coordinated master plans

to:– Assess, much less meet, public higher education capital

needs– Comprehensively address the deferred maintenance

crisis

This is evidenced by a lack of periodic system wide facilities audits, called for by APPA, NACUBO, and other agencies.

Conclusions (cont.)Conclusions (cont.) It appears states will be challenged, from a

resource availability perspective, to:– meet the dramatic increase in the number of HS

graduates over the next 10 years….– AND provide lifelong learning opportunities to

millions of returning older adult students…– WHILE SIMULTANEOUSLY addressing the

current backlog of deferred maintenance

Conclusions (cont.)Conclusions (cont.) At a minimum, states without long range

facilities master plans will likely be inhibited in meeting their longer term policy goals, particularly if increasing the rate of college-going among their adult populations is a priority (as most indicated).

RecommendationsRecommendationsA major study of the capital funding

patterns used by the states is needed.Continuation of longitudinal study of state

appropriations for capital needs.Coordinated state master plans for public

higher education should always include an assessment of capital needs.

Recommendations (cont.)Recommendations (cont.) The State Role in Funding:

States set “rules of the game” & boundaries of institutional practice regarding higher education facilities. State leaders should

a) create policies that promote creativity at the institutional level by governing boards, and b) consider dedicated and permanent revenue stream to fund renovation, and rehabilitation, to promote better long-term planning for public higher education capital needs.

Recommendations (cont.)Recommendations (cont.) At the federal level….

A matching grant similar to the Higher Education Facilities Act of 1963/HEA 1965 is clearly needed. A matching grant program would promote good state planning through the use of coordinated master plans for facilities, promote good state-level practices to effectively deploy capital resources, and help states address the crisis of meeting the college-going needs of students from Tidal Wave II.

Facilities Needs and SupportFacilities Needs and Support

Steve Katsinas

OverviewOverview

Facility problems are real, but there are other problems, too.

States lack good data.Pork barrel politics makes one worry

whether capital spending will be targeted to real needs.

Facility Problems are RealFacility Problems are Real

Budget pressures have led to deferral of needed work.

No one attends the ribbon-cutting for a new HVAC system.

Many buildings were put up in the 60’s and 70’s. They were often poorly constructed and are in need of major work.

But other claims on higher ed funds But other claims on higher ed funds are also legitimateare also legitimate

Technology, including the training of faculty and staff to use it;

Financial aid to expand financial access to lower income groups;

Pressures to increase compensation in light of gains by other well educated workers;

Investments in research and job training capacities;

States lack data on the problemStates lack data on the problem

Few states have good data on the condition of their facilities;

Few have good data on the magnitude of the deferred maintenance problem;

States would be more likely to respond if they had good, reliable data that could be tracked over time and compared to that of other states.

States lack comparative data on States lack comparative data on spendingspending

We have nothing on the capital side to compare to the Grapevine and Halstead data on public operating support for higher education.

Manns’s data provides a start, but it is especially important to collect capital spending data over time, since it is more likely to fluctuate.

States lack comparative data on States lack comparative data on spendingspending

The lack of capital spending data makes the Grapevine and Halstead data less useful.

What they describe as “operating” support may be used on a campus to finance capital expenditures or to service plant debt.

Generous capital support, may include support for equipment and major maintenance projects that others fund from operating revenues.

The politics problemThe politics problem

Projects may be funded for their symbolic value, rather than on the basis of need.

New construction has symbolic value to campus officials and community leaders, as well as to state officials, who often simply respond to local pressures.

The “Big Picture”The “Big Picture”

State support for HIED has declined since Vietnam. Slight budget recovery after the 4 recessions between 1973-2003.

HIED slipped to 3rd, after K-12 & Medicaid, in past decade as investments in prisons and Medicaid have exploded

YET, missions/expectations expanded Conclusion: THE CURRENT RECESSION

MAY MARK MAJOR SHIFT: from “doing more with less” To simply doing less

The “Big Picture”The “Big Picture”

 Term limits/changing political environment;

Heavy handed governors;Missions HAVE expanded for

all institutions at all levels (expectations are up, money is not);

Data on expanded enrollments.

National Projections indicate a dramatic National Projections indicate a dramatic increase in students graduating from H.S. increase in students graduating from H.S.

1995-1996 1999-2000 2007-2008 2011-20120

500

1000

1500

2000

2500

3000

3500Thousands

Projected college enrollments: Projected college enrollments: 1988-20131988-2013

1988 2000 20130

5

10

15

20

Concluding observationsConcluding observations

Derrick Manns’s data will help states examine their current efforts and improve their planning.

But better state level planning will help only so much.

E. Lander Medlin:E. Lander Medlin:

The National Perspective

CHANGES IN HIGHER CHANGES IN HIGHER EDUCATION COMMUNITYEDUCATION COMMUNITY

Rapidly escalating tuition increasesIncreased square footage of space to operate

and maintainMajor budget reductionsDozens of new unfunded mandates from

governmental regulationsIncreased demand for the use of new

technologies in classrooms, laboratories, offices, and residence halls

Accumulated Deferred Accumulated Deferred Maintenance (ADM) Maintenance (ADM)

Public Policy ImplicationsPublic Policy Implications

A FOUNDATION TO UPHOLDSUSTAINED INSTITUTIONAL

COMMITMENT TO ACTIONROLES & RESPONSIBILITIES OF THE

HIGHER EDUCATION COMMUNITYFACILITIES PREPARED FOR THE 21st

CENTURY

Definition of Accumulated Definition of Accumulated Deferred Maintenance: Deferred Maintenance:

Is maintenance projects from prior years and the current year that were not included in the maintenance process because of perceived lower priority status than those funded within available funding. Deferred maintenance includes postponed renewal and replacement maintenance and unperformed unscheduled major maintenance.

Why Perform Facilities Why Perform Facilities Condition Audit/AnalysisCondition Audit/Analysis

A Pro-Active Approach to:– Improve accuracy of forecasting future capital

renewal and maintenance needs;– Effectively prioritize ADM projects and target

funding against critical needs;– Compile an accurate data base of ADM projects

to effectively lobby for additional funding.

Definition of Definition of Facility Condition Index:Facility Condition Index:

FCI = deferred maintenance(divided by) current replacement value

General guideline is that FCI should be held below 5 percent.

The average Public Research University’s FCI rating is 7.5%.

A FOUNDATION TO A FOUNDATION TO UPHOLDUPHOLD

Develop public policies addressing facilities conditions & adequacy

Broad support for stewardship by campus leadership

Provide resources for facility reinvestmentRecognize impact of unsatisfactory facilities’

condition on institutional missionsCompeting demands on institutional resources

caused fractious approach

SUSTAINED INSTITUTIONAL SUSTAINED INSTITUTIONAL COMMITMENT TO ACTIONCOMMITMENT TO ACTION

Institute comprehensive strategic facilities planning

Integrated approach to financial and facilities management

Dependable funding sources and flexibility in expenditures management

Reverse decline in operations and maintenance funding levels

Seek external sources for ADM costs exceeding 5% of CRV

Roles & Responsibilities of Roles & Responsibilities of Higher Education CommunityHigher Education Community

Roles are interdependentDistinct roles in shaping policiesPreserved and balanced roles in the decision

making processActive leadership role by higher education

associationsImportance of consistent data collection

effortsSetting standards/benchmarks for quality

improvement

FACILITIES PREPARED FOR FACILITIES PREPARED FOR THE 21st CENTURYTHE 21st CENTURY

Dependable and integrated funding sources for capital reinvestment

Understanding the “learning” environment’s affect on the “physical” environment

Translation of accurate data into useful information to generate knowledge

Demand for electronic delivery systems and information technology

RETIREMENT OF ADMRETIREMENT OF ADMExercise autonomy in dispensation of total

base budgetAuthority granted for reinvestment of

annual energy budget savingsProactive educational program for

institutional administrators and trusteesInstituted special student fee in tuition

RETIREMENT OF ADM RETIREMENT OF ADM (cont’d)(cont’d)

Received matching state loans for specific energy projects

Received matching state $ for university-generated $ over $20M

State legislature approved bond issue

PRACTICAL APPROACHESPRACTICAL APPROACHES

THESE PRACTICAL APPROACHES PRODUCED OVER $200M ANNUALLY TOWARD THE RETIREMENT OF CRDM FOR EIGHT (8) INSTITUTIONS.

Thank YouThank You

Questions?

Next Steps?