Addressing Capital Renewal of South Carolina Public Institutes of Higher Learning May 28, 2021 Introduction On February 4, 2021, The Commission on Higher Education (CHE)’s Committee on Finance and Facilities moved to create a task force to undertake an in-depth analysis of deferred maintenance at the public institutions of higher learning (IHLs) Chaired by Commissioner Patrick White and comprised of finance and facility officers from the research, comprehensive, and technical college sectors, the Task Force met a total of four times to discuss this important issue Historically, the CHE has reported on maintenance needs at the public IHLs Most recently, the CHE included a total amount of maintenance needs in its 2017 Comprehensive Permanent Improvement Plan analysis Using data it collects from institutions every three years, the CHE estimated a performance gap of $661 million for institutions to bring all of their academic and administrative (education and general) facilities to a minimum of 80 percent condition This number may have been interchangeably used with “deferred maintenance,” but, as the task force finds below, is not a good barometer to calculate capital renewal needs While the 2017 analysis provided a general idea of outstanding maintenance needs at the public IHLs and used the best available data, there were certain limitations The first, was that the analysis used building replacement costs as determined by the state’s Insurance Reserve Fund (IRF) to gauge the performance gap Replacement costs set by the IRF typically undervalue the actual cost to build a like-new replacement or perform certain repairs and renovations This is because the replacement cost values a facility using equipment and finishes similar to when the facility was constructed In other words, the replacement cost of a 100,000-square foot facility constructed in 1950 will be significantly less than a similarly sized facility constructed in 2020 When quantifying maintenance needs costs, the IRF replacement cost metric underestimates actual cost because labor, supplies, equipment, and materials costs are typically not discounted based on a building’s age The second limitation with the reported $661 million figure is that it assumed all maintenance costs are equal For example, if a facility had a condition of 60 out of 100 and an assigned IRF replacement value of $10 million, the analysis estimated that it would require $2 million to bring it up to a building condition of 80 out of 100, or 20 percent of the IRF replacement value However, the cost of maintenance and renovation work varies across systems Certain work on one system, however needed, may not increase the overall building condition by the proportionate share of capital renewal cost to the building’s replacement value Based in part on the limitations of the CHE’s historical analyses in quantifying maintenance needs at the state’s public IHLs, the task force endeavored to complete six objectives on the topic of deferred maintenance: Develop a standardized definition of deferred maintenance to be used by all public IHLs, Develop a standardized calculation method of deferred maintenance to be used by all public IHLs, Develop a performance management framework on deferred maintenance Recommend tools to enable public IHLs to track and manage deferred maintenance at their institutions, Recommend best practices for reasonable facility conditions at public IHLs, and Recommend a reporting framework of outstanding deferred maintenance, performance targets, needs, and performance gaps Deferred Maintenance vs Capital Renewal Different groups may define deferred maintenance in slightly different ways The common theme across definitions is that maintenance that should have occurred was delayed or postponed For example, federal accounting standards define deferred maintenance as: “Maintenance and repairs that were not performed when they should have been or were scheduled to be and which are delayed for a future period." Maintenance and repair include activities meant to keep an asset in an acceptable condition This can include preventive maintenance; replacement of parts, systems, or components; or other activities to preserve or maintain an asset Maintenance and repair; however, should be distinguished from capital improvements, which may upgrade or increase capacity of a current asset There are several reasons why deferred maintenance exists A common case is a lack of resources For example, an institution did not have funding available to meet all its maintenances needs Other examples may include prioritization, i.e., an institution had higher priorities than completing maintenance, such as constructing a new facility for a new program, or an institution chose not to complete the maintenance purposefully because it has plans to divest or replace a facility in the near future In other instances, an institution may have deferred replacement of an asset that has exceeded its actuarial life expectancy because the asset may still be in good repair While deferred maintenance looks at past needs, recently trade groups and other organizations have moved away from using the term “deferred maintenance” to “capital renewal” needs Like deferred maintenance, capital renewal includes maintenance or repairs that maintain or extend the life of an asset that should have occurred but were deferred to a later date Capital renewal, however, does not include routine maintenance institutions perform as part of their operations Rather, it focuses on major maintenance and repairs of an asset meant to preserve or extend the asset’s useful life In addition, capital renewal looks at upcoming and future needs, based on the lifecycle of an asset, while deferred maintenance looks at the maintenance backlog Because capital renewal includes not only the maintenance backlog but also upcoming maintenance needs, reporting capital renewal needs is more informative and reflective of the maintenance institutions should undertake to keep their existing facilities at an acceptable condition level Calculating Capital Renewal Needs To ensure like comparisons of capital renewal needs at every South Carolina public IHL, there must be a standardized quantification approach There are two main inputs to ensure comparability: A standard universe of capital renewal needs; and A standard approach to assign costs to those needs What Should Be Included as Capital Renewal As noted above, capital renewal encompasses maintenance needs that an institution should undertake to preserve or extend the useful life of its assets Institutions should only include maintenance, repairs, and replacements of assets that affect the useful life of the assets and not routine maintenance Capital renewal also does not include projects meant to modernize or enhance an asset or facility While most institutional assets consist of building facilities, there are also other capital assets certain institutions must maintain, including roads, sidewalks, utilities, and other infrastructure These assets should be included in the calculation of an institution’s capital renewal needs if the institution owns and maintains the infrastructure Institutions should not report, however, on auxiliary assets that have dedicated funding sources derived from user fees This includes athletics, housing, dining, bookstore, and parking facilities In addition, capital renewal should not only include assets that need repair, such as a leaky roof, but also assets that have reached the end of their functional life This could include systems that may be well maintained but not operate efficiently anymore How to Quantify Capital Renewal Needs In reporting maintenance needs in the past, the Commission on Higher Education used a formula based on a building’s condition and the replacement value of facilities as determined by the Insurance Reserve Fund As noted in the introduction, this approach underestimated maintenance costs A better method to calculate costs is to use current material and construction cost data to estimate capital renewal needs While each college or university likely has records of costs based on recently completed maintenance projects, developing a statewide cost database available for every public IHL will be more efficient and less time-consuming for institutional staff A number of companies aggregate this information and could provide it for the higher education system’s use With the database, public IHLs could then determine the overall cost needed to renew their assets based on current building and asset conditions and report this information to the Commission on Higher Education and other stakeholders annually Reporting on Capital Renewal Needs When reporting capital renewal needs, institutions should reflect on the importance of different facilities and systems and the groups that benefit from them As such, institutions should categorize capital renewal needs into distinct buckets based on the overall importance to fulfilling the educational mission: Critical Capital Renewal Capital renewal affecting facilities or systems that, if untreated, would have adverse effects on the safety or wellbeing of students, faculty, staff, or visitors This can include capital renewal projects addressing: A facility’s integrity, such as the building structure, envelope, or roof Life Safety, such as fire prevention, detection, and suppression for existing systems ADA Compliance, such as elevators and disability access for existing systems Temperature and humidity control, such as heating, venting, and air conditioning systems Utilities, such as electrical, water, sewer, and gas supply or distribution Important Capital Renewal Capital renewal needs, while important, if left untreated would not impact an institution’s ability to provide adequate services to students, faculty, and staff This can include capital renewal projects addressing: Roads and parking lot resurfacing Sidewalks, crosswalks and pedestrian walkways Lighting and illumination systems Building weatherization, such as caulking, masonry pointing, and fenestration Other Capital Renewal Systems and assets that need to be maintained but will not seriously impact an institution’s operations if not taken care of This includes capital renewal activities addressing: Interior finishes, such as flooring, walkways, and ceilings Irrigation systems Hardscapes and plazas Signage and wayfinding Stormwater systems Improvements to energy efficiency In addition to labeling capital renewal needs into the three above general categories, public IHLs should report on facilities that have substandard building conditions yet are not capital renewal needs These can include facilities the institution plans on demolishing and therefore not need resources for capital renewal Addressing Capital Renewal Institutions must plan for the maintenance and upkeep of their facilities over a long time-horizon After an initial capital investment to construct or perform an extensive renovation on a facility, system components will need various renovation or replacement over the years Buildings typically are designed and constructed to last fiftyyears While this means that the buildings depreciate at a rate of two percent per year for accounting purposes, in actuality, replacement and renovation costs vary as system components age at different rates Figure shows various needs over a hundred-year period for a typical building using representative costs Figure As shown, there are peaks and valleys based on the individual lifecycles of system components with little to no cost the first five years after construction to greater cost in years where multiple or important systems need replacement Institutions can help mitigate the peaks and valleys of capital renewal needs by owning a diverse portfolio of assets However, as shown in Figure 2, there are two large waves of construction in higher education – buildings constructed from 1970 to 1995 and from 2002 to 2009 Based on the various lifecycles of the buildings and their components, institutions must plan for the years in which there will be greater capital renewal needs to prevent a capital renewal backlog from growing This greater need is expected to occur between 2030 and 2045 Figure Reporting on Existing Facilities Conditions and Needs As discussed above, currently public IHLs provide the CHE detailed condition surveys of their education and general facilities every three years The CHE uses institutional ratings of individual building systems to calculate an overall condition score for each education and general facility greater than 3,000 square feet Historically, the CHE has used this data, along with Insurance Reserve Fund replacement values, to estimate outstanding maintenance needs Unlike the building condition score the CHE uses, many industries report on building conditions using a simple index known as the Facility Condition Index (FCI) Because of its widespread adoption and relative simplicity, public IHLs should report facility conditions using this index the Institutions should use up-to-date repair cost needs from the statewide database discussed above and a normalized replacement value to determine each education and general facility’s FCI As noted above, the only replacement value data institutions and the CHE have come from the IRF While this data is likely accurate for newly constructed buildings, it underestimates costs to bring a facility to like new condition for older buildings because it estimates replacing assets with similar functionality as when originally constructed Because of this discrepancy, the FCI will be skewed lower for older facilities When requesting data from the institutions, the CHE will provide a conversion table that institutions can use to adjust their facilities’ replacement values Public IHLs also provide the CHE, along with the Executive Budget Office, Joint Bond Review Committee, and State Fiscal Accountability Authority a five-year outlook of their permanent improvement project plans in the statutorily required Comprehensive Permanent Improvement Plan, or CPIP Because the institutions spend considerable time compiling their CPIPs, the plan is an ideal vehicle for institutions to document their capital renewal needs Under statute, institutions are required to include any potential permanent improvement project they may plan to undertake over a five-year plan horizon in their CPIPs To link capital renewal needs with their proposed permanent improvement projects, institutions should include in every proposed CPIP project affecting an education and general facility how much of the proposed budget will reduce capital renewal needs and the projected impact the project will have on that facility’s FCI score Annual Report to the CHE When institutions compile and submit their CPIPs to the CHE, institutions should also report on their outstanding and projected capital renewal needs over the five-year period in a companion report to the CHE regardless whether the needs relate to a permanent improvement project This report should document, by facility or system, critical, important, and other capital renewal needs An institution may also provide outstanding capital renewal needs that the institution has actively chosen to forgo, for example capital renewal needs at a building the institution expects to demolish or capital renewal it will combine with a larger renovation project in the future The report should also include, by facility, the current FCI score and the overall FCI score for each institution’s campus and the planned amount of capital renewal it will undertake during each of the five years The CHE, in coordination with the institutions, will develop a template to ensure reporting uniformity In addition, each institution should include projected FCI scores for their campuses based on various funding schema at the end of the five-year period At a minimum, an institution should project campus wide FCI scores based on no capital renewal funding from the legislature and if the legislature fully funds the capital renewal needs requests of the institution Each institution should include sufficient narrative explaining the basis of its projections, including any constraints it faces, such as availability of swing-space or higher institutional priorities From those various projections, institutions should provide a five-year campus-wide FCI target and the projected funding gap, if any, to reach that target When the CHE provides its recommendations to the Joint Bond Review Committee and State Fiscal Accountability Authority, it will include the institutions’ reports on capital renewal needs and base its recommendations, in part, on those needs The first annual report to the CHE will be due in summer 2022, which will correspond with the FY 2022 23 CPIP If by that time the CHE has not yet procured a database of capital renewal costs to the institutions, each institution should estimate capital renewal costs based on the data their facilities departments use when budgeting projects Prior to providing findings to the Joint Bond Review Committee and the State Fiscal Accountability Authority, CHE staff will hold meetings with the institutions to discuss submittals and allow the institutions an opportunity to revise their reports based on the shared methodologies Statewide Asset Management Tools Prior to agencies submitting budget requests for fiscal year 2022-23, the CHE will explore available enterprise resources to help institutions manage their facilities and track capital renewal needs on their campuses Because the state’s IHLs vary in size and resources, procuring a statewide system that can be used by every institution may provide efficiencies Recommendations and Conclusion The Task Force respectively submits its recommendations to the Commission on Higher Education to create a framework for reporting on capital renewal needs of the institutions Beginning in the Summer of 2022, the Task Force recommends that each South Carolina public institution of higher learning report to the CHE: Capital renewal needs of its education and general facilities and other infrastructure, based on critical, important, or other needs over a five-year period; Amount of capital renewal it plans to undertake each year of the five-year period; Facility Condition Index (FCI) scores for each of its education and general facilities and overall campus; A five-year FCI target for its campus based on institutional priorities and plans; and Funding necessary to reach its five-year FCI campus-wide target In addition, the Task Force recommends each public IHL in its annual Comprehensive Permanent Improvement Plan report the impact each permanent improvement project will have on a particular facility’s capital renewal needs To aid in reporting capital renewal needs, the Task Force recommends that the Commission on Higher Education seek to procure a construction cost database The Task Force also recommends the CHE explore enterprise-level asset management software for potential use by the public IHLs Reducing the backlog and managing capital renewal needs is necessary to ensure the ongoing health of South Carolina’s public system of higher education These recommendations are an important first step in understanding the capital renewal needs of the public IHLs and ultimately reaching a state of equilibrium in the maintenance of the State’s education and general assets Dated this 28th day of May, 2021 Commissioner Patrick White, Chair, CHE Commissioner Linda Dolny, CHE Commissioner Hugh Mobley, CHE Darryl Bridges, Francis Marion University Derek Gruner, University of South Carolina Cara Hamilton, Tri-County Technical College Harold Hawley, Horry-Georgetown Technical College Mike McGinnis, Medical University of South Carolina John Morris, College of Charleston Rick Petillo, Clemson University