Abstract: Capital Renewal and Deferred Maintenance

Introduction

Historical Perspective. The dramatic expansion of higher educational capacity in the years after World War II has left colleges with a serious backlog of underfunded capital needs for facility renewal and replacement. Enrollment has expanded from 2.3 million students in 1950 to an estimated 20 million by 2016.

Institutions grew from 1,800 to more than 4,000 in the same period; existing institutions expanded for the student influx. The confluence of normal capital facilities aging and older facilities obsolescence, changing pedagogy, advances in  information  technology,  and  a less homogeneous student body means that buildings, grounds, infrastructure, and equipment are in serious need of maintenance, capital renewal,  and modernization. The majority of new facilities did not  factor routine maintenance, repairs, or repurposing costs into the initial budgeting process. The severity of the deferred maintenance legacy is exacerbated by poor design, inferior construction,  higher  utility  costs, inflation, inadequate funding, and increased regulations. The problem is acute, with more than 75 percent of facilities 30 to 40 years old.   A call for action began in    the early 1970s, coming to national attention in a 1980 Time article and with the national infrastructure crisis, strengthening the case for dealing with problems associated with deferral of major maintenance.

Deferred Maintenance and Capital Renewal

Deferred maintenance is major maintenance or capital projects which have not been funded. In the late 1970s and early 1980s, APPA (the leading educational facilities management association) and the National Association of College and University Business Officers (NACUBO) proposed a cost-deficiency evaluation technique called the Facilities Audit, which was designed to evaluate the true extent of the underfunding problem. Many institutions were rocked by the extent of those needs, and retreated into denial of the problem and continued underfunding of a solution.

Capital Renewal and  Major  Maintenance.  Capital renewal and major maintenance refer to the cost of  major repairs and replacements. Funding can come from either the capital funds budget or current fund  operations, depending upon an institution’s accounting thresholds for capital expenditures versus expenses. A well-defined capital renewal program will place the budgeting for major building and infrastructure system repair and replacement and new construction in the capital renewal and replacement budget rather than the annual operating budget.

Unintended Consequences.  In  the  early  1980s,  the scope of the underfunding issues came to the top of the agenda for facilities managers, administrators and governing boards. The term deferred maintenance became associated with a failure in management and produced a stigma towards the facilities officer who reported on the extent of the funding shortfall. A shift to terms such as capital renewal, facilities  equilibrium, capital asset management, and strategic capital development ensued.

Additional Definitions and Standards. (1) U.S Navy terminology uses “sustainment” for maintenance and “recapitalization” for facility restoration, modernization, or replacement. (2) The introduction of new accounting standards and definitions began in 1999. The Federal Accounting Standards Advisory Board and the Governmental Accounting Standards Board issued guidelines for applying depreciation as a measure of liabilities (and resulting erosion of capital asset value) and defining deferred maintenance as what was not performed when it should have been. Maintenance is defined as both preventative and normal repairs, excluding cost of modernizing and upgrading assets.

Condition assessments and life-cycle costing were proposed as tools for deriving ongoing maintenance costs for deferred maintenance and new asset acquisitions. Allowable methods for deferred maintenance cost estimation were (1) field inspections, (2) mathematical models, and (3) predictive modeling, or  a combination of all three.

Capital Asset Management

In the late 1980s, Financial Planning for Guidelines for Facility Renewal and Adaption proposed a comprehensive capital asset management strategy to assess future costs for plant renewal, modernization, and deferred maintenance backlog reduction.

Institutions began to recognize that the Facilities Condition Assessment (FCA) needs to incorporate the backlog of underfunded major maintenance and ongoing life-cycle needs. An emphasis was placed on asset portfolio management, recapitalization requirements, and strategic planning. In 1991, AME proposed a uniform set of indicators and reporting tools, including the Facilities Condition Index (FCI), now the most commonly used facilities indicator. The formula for FCI is the deferred maintenance backlog divided by current asset replacement value. A more detailed FCA methodology replaces generic condition ratings with detailed cost projections for resolving deficiencies, revising data formats for uniformity, and increasing assessment scope to include infrastructure.

Cost of Owning Facilities

The concept of capital renewal evolved over time to include both the one-time cost of building a facility and the ongoing stream of maintenance and repair costs over the asset’s lifetime.

Cost of Ownership Concept.  By the 1990s, total cost  of ownership gained industry-wide acceptance.

Life-Cycle Forecasting. Life-cycle forecasting is the model for projecting the stream of ongoing asset maintenance costs and is used for proactively setting aside budgetary resources to meet those needs.

Strategic Capital Investment Model

The strategic capital investment model allows institutions to quantitatively balance the need for major maintenance and new construction against the actual total cost of ownership.

Improving the Capital Planning and Budgeting Process

The issue of deferred maintenance is an ongoing issue, despite increased attention. Improvements in planning and budgeting require a more comprehensive approach involving multidisciplinary teams and all relevant stakeholders. The institution mission and vision must be proactively balanced with the realistic  cost  implications of expanding capacity and repurposing current facilities. Realistic capital planning and budgeting can lower costs and increase satisfaction with facility resources.

Strategic Capital Development Model

The strategic capital development model is an ongoing analytically driven and consensus-based plan for capital investment. The six phases of an integrated and comprehensive plan are project organization, strategic review, needs assessment, capital projects and campus master plan, strategic funding framework, and ongoing implementation.

Estimating Capital Renewal/Deferred Maintenance

An effective plan for capital renewal and deferred maintenance reductions emphasizes realistic macro and micro funding estimates.

Macro-Level Estimating. These estimates address long-term capital renewal and deferred maintenance costs. The annual cost of operation and regular maintenance (not including deferred maintenance costs) should average between 0.5 and 1.5 percent of the aggregate current replacement value (CRV) while the cost of capital renewal should average from 1.5 to 3 percent of CRV.

Micro-Level Estimating. These estimates address short-term (1 to 5 years) deferred maintenance backlog reduction costs. Budgetary requirements vary widely between institutions and are best addressed through a comprehensive and detailed FCA.

Facility Quality Metrics. These metrics update  the scope of the FCI methodology with major upgrades to facility functionality. The FQI formula divides the maintenance and functionality upgrade cost by asset CRV and can easily exceed the building CRV.

Setting Priorities for Capital Renewal/Deferred Maintenance

Clear priorities must be outlined for capital renewal, replacement, and deferred maintenance. Major repairs and maintenance are reserved for essential facilities; new construction is financed separately from maintenance and repairs; and deferred maintenance and functional renovations are funded case by case in a separate budgeting process.

Prioritization Process. The prioritization process includes an objective analysis of how essential the asset is to the institution’s mission versus a subjective analysis of institutionally codified prioritization criteria. Sorting projects by building type and specifying the current and future requirements that assets fulfill are major parts of building an internal priority matrix; then, budgetary constraints, possible economies of scale, and FQI must also be considered.

Intangible Factors. Intangible factors (e.g., institutional morale, historic preservation, risk of postponing needed repairs, quality of institutional environment) are more difficult to objectively quantify.

Funding Strategies for Capital Renewal/Deferred Maintenance

Cost projections for capital renewal and deferred maintenance often fail to tie needed budget allocations to specific funding sources. Capital funding sources are largely drawn from revenue bonds, endowments, and auxiliary enterprises.

Capital Renewal/Deferred Maintenance Program Management

A comprehensive capital renewal and deferred maintenance program requires careful planning and consistent system monitoring.

View Facility as Collection of Components and Systems. The impact of individual deteriorating components on the overall system must be constantly assessed.

Keep Track of Facilities Conditions. Thorough audits of the physical condition of facilities must be performed annually.

Maintain 5-Year Major Maintenance and Capital Renewal Program. A 5-year capital renewal program has the flexibility to respond in emergencies, alleviating most major budgeting surprises and shortfalls.

Know  Differences  Between  Maintenance,   Repairs, and Major Maintenance. Devoting staff to routine and preventive maintenance reduces the future load of major maintenance (see Figure 2.1).

Figure 2.1. Maintenance

Manage Maintenance as Opposed to Maintaining Management. Integrating budget allocation guidelines with daily task assignment prioritization generates better decision-making while creating fewer budgetary uncertainties. One of the many positive results is improved staff morale.

View Facilities Management as  a  Support  Service. The facilities department is essentially a service organization. Limitations of funding shortfalls can often be remedied with prompt and personal attention to issues raised by community members and clear communication about realistic solution options. The facilities manager should conduct an ongoing assessment of facilities and maintenance requirements to better manage institutional assets.

Action Plan

A comprehensive action plan for managing capital renewal and deferred maintenance must include campus support, a work plan, inventory management, a priority matrix, a detailed budget, new funding options, and public awareness. Constant vigilance is necessary to prevent further deterioration of facilities and the accumulation of new deferred maintenance costs.