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Overview of Higher Education Deferred Maintenance

Presented to theLegislative Subcommittee

on Higher Education Deferred Maintenance

August 24, 2008 at 12:00 PM

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• Define general maintenance, capital maintenance and deferred maintenance.

• Explain the need to address maintenance on an ongoing basis.

• Review how higher education historically has dealt with deferred maintenance.

• Discuss how deferred maintenance could be funded.

• Discuss how to utilize BRIM/HEFIS facilities inventories to calculate the amount to set aside for maintenance.

• Discuss how we deal with obsolete facilities.

• Provide recommendations.

Presentation Goals

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• General or Normal/Routine Maintenance: Cyclically planned or unplanned work activities funded through the normal annual budget cycle to achieve either the originally anticipatedlife of a fixed asset (i.e., buildings and fixed equipment) or to provide a suitable level of performance.

This activity would include the routine changing of filters, cleaning and lubricating motors and pumps, replacing parts, repainting individual rooms and hallways, flood coating roofs, sealing parking lots and roadways, etc.

Definitions

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• Capital (Major) Maintenance/Repairs: Repairs or replacement paid from the capital funds budget and not normally funded by normal maintenance resources received in the annual budget cycle.

• Repairs would include work to restore damaged or worn-out assets/systems/components (i.e., large scale roof replacement after a wind storm, periodic repainting of entire buildings, major sidewalk repairs, etc).

• Replacement would include an exchange of one fixed asset for another that has the same capacity to perform as the original (i.e., replacing a transformer that has blown up or an air handling unit that has reached the end of its useful life).

Definitions

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• Deferred Maintenance: Work that has been deferred on a planned or unplanned basis to a future budget cycle or postponed until funds are available.

Roof replacements, major building component repairs, mechanical equipment, underground utilities and roads and walkways are often projects that are deferred to the next budgetcycle.

Failure to perform needed repair, maintenance and renewal as part of normal maintenance management creates deferred maintenance.

Definitions

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• Inevitably building systems and components deteriorate, become obsolete and need replacement.

• Underfunding of major maintenance and capital renewal leads to a backlog of deferred maintenance which results in:

• Non-code compliant and unsafe buildings and unreliable infrastructure.

• Failing HVAC, electrical and plumbing systems that jeopardize the usability of space necessary for academic, student and administrative activities.

• Unattractive buildings and grounds that deter enrollment strategies essential to tuition-dependent institutions.

Importance of Addressing Maintenance on an Ongoing Basis

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• Around 1977, legislation was passed to allow the Board of Regents to pool all Registration and Tuition Fees to fund capital projects.

• By the early 1980s, it became apparent that a funding mechanism was needed to deal with maintenance and deferred maintenance needs.

• The Board of Regents implemented a building renewal formula which calculated the amount of funding that should be invested in a building annually to minimize the accumulation of deferred maintenance projects.

History of Maintenance Funding

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• The basic premises of the formula were that it:

• Be based on construction costs.

• Reflect the current year building value.

• Recognize that building renewal ought to cost less than building replacement.

• Recognize that older buildings require more renewal funds than younger buildings.

• Reflect the effects of building renewal projects already accomplished.

• Be applied to an entire facility in an actuarial manner, generating a pool of funds to be used on major renewal projects.

History of Maintenance Funding

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• The Board of Regents began allocating deferred maintenance (building renewal) funding to the institutions based on the building renewal formula in FY 1984.

• These formula-based allocations continued after the Board of Regents was replaced in 1989 by the University System Board of Trustees and the State College System Board of Directors until the pooling of Registration and Tuition Fees ended:

• Around 1994 for the University System institutions; and

• In 1998 or 1999 for the State College System institutions.

• After these dates, institutions kept their capital fees and the funding of deferred maintenance became an institution matter.

History of Maintenance Funding

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• Some institutions have done a better job of addressing deferred maintenance than others, perhaps because they have more capital revenue to address their deferred maintenance needs.

• The table on the following page shows the formula driven deferred maintenance (Building Renewal and Capital R&A) allocations received by the institutions from FY 1985 through FY 1992.

• The total allocated to the institutions during this eight-year period was slightly more that $103.8 million.

History of Maintenance Funding

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History of Maintenance FundingEight Year Summary

Building & Campus Renewal and Capital Repair & Alteration Allocations From FY 1984-85 through FY 1991-92 By System/Institution

Building Renewal Capital R&A Total

Board of Directors System:Bluefield State College $2,440,000 $1,160,000 $3,600,000Concord College 2,999,000 1,452,000 4,451,000Fairmont State College 3,312,000 1,683,000 4,995,000Glenville State College 1,774,000 818,000 2,592,000Shepherd College 2,650,000 1,310,000 3,960,000Southern West Virginia Community and Technical College 864,000 432,000 1,296,000West Liberty State College 3,343,000 1,573,000 4,916,000West Virginia University Institute of Technology 3,107,000 1,463,000 4,570,000West Virginia Northern Community College 1,565,000 609,000 2,174,000West Virginia State College 3,018,000 1,441,000 4,459,000 Sub-Total $25,072,000 $11,941,000 $37,013,000

Board of Trustees System:Marshall University 10,743,000 4,113,000 14,856,000Potomac State College of West Virginia University 1,822,000 667,000 2,489,000West Virginia School of Osteopathic Medicine 1,302,000 386,000 1,688,000West Virginia College of Graduate Studies 113,000 18,000 131,000West Virginia University 32,050,000 13,852,000 45,902,000West Virginia University at Parkersburg 1,223,000 523,000 1,746,000Sub-Total $47,253,000 $19,559,000 $66,812,000

Total $72,325,000 $31,500,000 $103,825,000

System/Institution

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• Currently, the principal sources of revenue to fund deferred maintenance are:

• State appropriations, which have been infrequent ($7 million in FY06 and $8 million in FY08); and

• Student fees, which are regular and constant but inadequate after paying for debt service, on-going capital projects funded from cash collections, and other expenses. The two principal fee sources for funding deferred maintenance are:

• E&G (Educational & General) Capital Fees; and

• Auxiliary (Operating) and Auxiliary Capital Fees.

Financing Deferred Maintenance

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• The Table on the following page shows a comparison of debt service payments for FY 2008 versus estimated gross E&G Fee deposits into the special revenue account established by the State Auditor to receive these funds.

• Estimated gross deposits could not be shown for Auxiliary and Auxiliary Capital Fees due to the imprecise revenue coding used to make deposits to this special revenue account.

• Assuming the estimates are reasonably accurate for E&G Fee deposits, they indicate that funds should be available at most institutions to help meet E&G building deferred maintenance needs after debt service payments are made. It needs to be noted that institutions already use a substantial percentage of these funds for this purpose.

Financing Deferred Maintenance

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Financing Deferred MaintenanceHigher Education Bond Debt and Fee Collections Comparison

Fiscal Year Ending June 30, 2008

Institution Bond Debt System Bond Debt

Institution

Institutional Debt Service

Payments 2008

Auxiliary & Auxiliary Capital Fee Collections

2008

System Debt Service

Payments 2008

E&G Capital Fee Collections

2008(2)

Bluefield State College -$ -$ 25,039$ 901,486$ Concord University - - 318,646 1,359,928 Fairmont State University(1) 4,873,925 - 986,115 3,933,307 Glenville State College 965,672 - 252,882 914,365 Shepherd University 3,377,927 - 528,294 2,988,345 West Liberty State College 1,091,811 - 661,749 2,022,351 West Virginia State University(1) 438,335 - 382,986 1,545,186

Marshall University(1) 3,413,826 - 4,694,021 5,987,036 West Virginia School of Osteopathic Medicine - - - 905,548 West Virginia University 13,833,152 - 9,855,350 22,324,018 Potomac State College of WVU - - 82,691 WVU Institute of Technology(1) - - 247,888 222,475

Blue Ridge Community & Technical College - - 116,832 379,753 Eastern WV Community & Technical College - - - 24,250 New River Community & Technical College - - 21,658 480,243 Southern WV Community & Technical College - - - 155,015 WV Northern Community College - - 31,531 268,784 West Virginia University at Parkersburg - - 124,036 493,776

Total 27,994,647$ -$ 18,329,720$ 44,905,866$

Notes:(1)Includes Community College Capital Fee Revenue as listed below: Marshall Community & Technical College 714,247$ West Virginia State Community & Technical College 542,320$ Community & Technical College at WVUIT 222,475$ Pierpont Community & Technical College 1,329,749$ (2)Estimated E&G Fee Collections

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• BRIM maintains a database of all facilities, including higher education facilities, insured by BRIM. The insured value listedfor each facility is reported by an institution when it adds thefacility to BRIM’s insurance pool. This value is usually the construction cost.

• A drawback to using the BRIM building values is the fact that they are not routinely updated to keep pace with inflation. Forexample, a building value entered by an institution in 1990 could still be the insured value in 2008 if the institution has not updated the value since it was entered in 1990.

• The HEPC has developed its own inventory of buildings which includes more detailed building specific information than is available from BRIM. The HEPC’s information system is called HEFIS (Higher Education Facilities Information System).

Calculating Maintenance Set-Aside

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• HEFIS is currently being used to identify classroom and classlabutilizations rates at each institution -- how often a classroom or classlab is used during the week and how many student stations are filled when it is used.

• HEFIS is also being used by institutions to enter their capital appropriation requests for the HEPC’s and Council’s annual appropriation requests to the State Budget Office.

• HEFIS can be expanded to add any number of applications that are dependent on having a system-wide building and room inventory, including keeping track of capital projects undertaken by the institutions and in running a building renewal (deferred maintenance) formula that will calculate how much should be invested in each building annually to keep deferred maintenance at bay.

Calculating Maintenance Set-Aside

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• An example of how the HEFIS building inventory could be used to calculate how much should be invested in each building annually for deferred maintenance is illustrated in the Table onthe following page (although the BRIM building values were used for this example).

• For the example in the next Table, we assumed that 2% of the current replacement value of each facility should be set aside (or invested) in each facility for maintenance to keep from accumulating a backlog of deferred maintenance.

• The 2% factor was used because, generally speaking, most deferred maintenance formulas work out to between 2% to 3% of the current value for all facilities system-wide.

Calculating Maintenance Set-Aside

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• The Table identifies:

• The total number of insured facilities -- 599

• The total square footage -- 21.3 million square feet

• The total BRIM structure value -- $2.6 billion

• The E&G facility structure value -- $1.9 billion

• The Auxiliary structure value -- $689 million

• How much we should be investing annually at 2% of the current value for maintenance:

• $38.3 million for E&G facilities; and

• $13.8 million for Auxiliary facilities.

Calculating Maintenance Set-Aside

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Calculating Maintenance Set-AsideHigher Education Maintenance Index

InstitutionBldg

Count SQFTBRIM Structure

ValueE&G Structure

Value

Auxiliary Structural

ValueE&G

MaintenanceAuxiliary

MaintenanceTotal

MaintenanceBluefield State College 20 370,571 27,672,174 25,573,841 2,098,333 511,477 41,967 553,443 Concord University 37 832,610 78,957,251 46,233,772 32,723,479 924,675 654,470 1,579,145 Fairmont State University 33 1,543,414 227,154,600 143,799,000 83,355,600 2,875,980 1,667,112 4,543,092 Glenville State College 45 537,898 41,717,648 25,044,456 16,673,192 500,889 333,464 834,353 Marshall University 75 3,891,729 593,472,210 454,023,210 139,449,000 9,080,464 2,731,135 11,811,599 Shepherd University 54 1,098,857 235,520,852 157,732,231 77,788,621 3,154,645 1,495,772 4,650,417 West Liberty State College 59 974,018 68,785,117 27,158,373 41,626,744 543,167 950,166 1,493,334 WV School of Osteopathic Medicine 11 259,450 69,663,575 69,079,250 584,325 1,381,585 11,687 1,393,272 West Virginia University 508 9,416,524 1,005,048,122 761,405,263 243,642,859 15,228,105 4,872,857 20,100,962 Potomac State College of WVU 46 421,856 46,190,957 35,104,127 11,086,830 702,083 221,737 923,819 WVU Institute of Technology 24 842,666 107,482,256 67,623,206 39,859,050 1,352,464 797,181 2,149,645 Subtotal 4-Year Institutions 912 20,189,593 2,501,664,762$ 1,812,776,729$ 688,888,033$ 36,255,535$ 13,777,547$ 50,033,082$

Blue Ridge Community & Technical College 2 52,875 - - - - - - Eastern WV Community & Technical College 9 34,179 - - - - - - New River Community & Technical College 8 101,143 8,285,000 8,285,000 - 165,700 - 165,700 Southern WV Community & Technical College 9 289,226 32,914,160 32,914,160 - 658,283 - 658,283 WV Northern Community College 7 302,672 30,608,280 30,608,280 - 612,166 - 612,166 West Virginia University at Parkersburg 8 312,461 29,129,146 29,129,146 - 582,583 - 582,583 Subtotal 2-Year Institutions 43 1,092,556 100,936,586$ 100,936,586$ -$ 2,018,732$ -$ 2,018,732$

Total 955 21,282,149 2,602,601,348$ 1,913,713,315$ 688,888,033$ 38,274,266$ 13,777,547$ 52,051,814$

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• Generally speaking, most buildings are assumed to have a useful life of about 50 years. Even if the building is well maintained, in 50 years the floor tile is worn-out , the electrical, HVAC systems are out of date, windows have deteriorated, etc.

• Identifying obsolete buildings on a college campus is a fairly easy endeavor. Deciding what to do with them is far more difficult. For example:

• Are they historically significant?

• Should they be renovated?

• Should they be demolished?

• How do constituent groups -- faculty, staff, alumni, local community -- view the building?

Obsolete Facilities

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• A calculation frequently used in deciding whether to renovate a building or demolish it is to determine whether the cost of renovation will exceed two-thirds of the current replacement value. If it does, from a purely dollar and cents perspective, it makes sense to demolish it and build a replacement building.

• How do the HEPC and CTC institutions currently identify and document obsolete buildings?

• It’s supposed to be done through the campus masterplan process.

• Every ten years institutions are to undertake a major review and update of their campus masterplans.

• At that time, one of the required objectives is to identify obsolete buildings for demolition or renovation.

Obsolete Facilities

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• A survey request was sent to the institutions asking them to identify obsolete facilities that could be demolished on their respective campuses. Responses were received from the following:

• Marshall University: Hodges Hall (unoccupied), Erickson Alumni Center and Career Services Building on the Main Campus; Faith United Methodist Church on 5th Avenue; and Building 2 and House 1 (both unoccupied) at University Heights. Cost estimates for demolition were not provided.

• West Virginia University: Co-Ed Building at WVUIT ($1,000,000); St. Francis Elementary School, Evansdale Campus ($1,200,000); and College Park Apartments ($900,000) and Facilities Zone Shop, Downtown Campus ($30,000).

Obsolete Facilities

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• West Virginia University at Parkersburg: Workforce and Community Education Building ($60,000 for demolition and $2,500,000 for a replacement building).

• Fairmont State University: Drive-thru bank building adjacent to the Gaston Caperton Center in downtown Clarksburg. A cost estimate for demolition was not provided.

Obsolete Facilities

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• Move from one-time funding, which rewards institutions that are not properly investing in maintenance, to a systematic approach that requires confirmed annual investments by:

• Maintaining a system-wide building inventory; and

• Annually running a building renewal formula which identifies the investment institutions should be making on a yearly basis to reduce accumulated deferred maintenance.

• Guarantee that sufficient capital revenues are available for maintenance:

• For E&G facilities, require institutions to spend E&G Capital Fees up to the amount the maintenance formula requires annually for E&G facility maintenance, after meeting debt service requirements, before spending the funds for other purposes.

Recommendations

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• For Auxiliary facilities, which are required to be self supporting operations, ensure that fees are sufficient not only to operate the auxiliary operation, but also are sufficient to meet the annual maintenance formula requirement and to build a reserve for major renovation or replacement. This may require a significant Auxiliary Fee increase at some institutions.

• Guarantee that institutions utilize E&G and Auxiliary Capital funds properly (which are special revenue accounts):

• Through the state budget process, require that an appropriate amount be line itemed in the budget bill for maintenance from both E&G and Auxiliary Capital Accounts.

Recommendations

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• In a separate list apart from the budget bill, have the institutions identify the deferred maintenance projects they intend to fund from the line item appropriation in the budget bill.

• Establish a maintenance and capital project tracking module in HEFIS to track institution progress in completing projects.

• Supplement deficient institution or just CTC institution funds with state appropriations.

• Consider excluding capital fees from the annual tuition and fee cap increase.

• Consider one-time funding to remove obsolete facilities from institution inventories.

Recommendations

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Questions???

Richard Donovan, Interim Co-Director of Finance and FacilitiesWest Virginia Higher Education Policy Commission1018 Kanawha Boulevard, East, Suite 700Charleston, West Virginia 25301Phone: (304) 558-0281Email: donovan@hepc.wvnet.edu

Dennis Taylor, Vice Chancellor for AdministrationWest Virginia Higher Education Policy Commission1018 Kanawha Boulevard, East, Suite 700Charleston, West Virginia 25301Phone: (304) 558-4016Email: dtaylor@hepc.wvnet.edu