Long-Term Performance

Schools across the country are finding it increasingly difficult to obtain adequate annual funding for upkeep of their physical plants. Consequently, there is an ongoing erosion in the value and utility of school buildings. A new approach to the budgeting process has the potential to improve the ability of schools to obtain maintenance and repair funds. This approach is based on the use of the Facilities Condition Index (FCI) as a budgeting tool, where maintenance is viewed from the perspective of attempting to keep the physical value of the facilities at as close to 100 percent of replacement cost as is reasonable.

Addressing facilities as investments This budgeting system is based on consideration of three types of investments: maintenance and repair; renewal; and deficiency correction. Only by addressing all three of these can investment in schools be maintained.

*Maintenance and repair. Perhaps a more useful term for this is preventive maintenance and repair. Preventive maintenance is the periodic inspection, cleaning, adjustment and, where applicable, lubrication and working-component changeout for finishes, building envelope and mechanical/electrical systems. Repair is defined as the fixing or replacement of building components, and becomes necessary when a component becomes damaged or fails prior to the expiration of its useful life.

Preventive maintenance occurs throughout the lifetime of a building, and is required to keep systems in good working order and to avoid having to spend money on repairs. Since preventive maintenance costs are usually buried in M&O budgets, it is difficult to obtain isolated cost data. The best way to do this is to work with school maintenance staff to estimate the cost for each line item in a preventive-maintenance checklist.

Typically, much of the preventive maintenance can be done by maintenance staff with only a minor outlay of funds, but service contracts for HVAC systems, sewerage ejectors and other mechanical equipment may need to be considered. Budgeting for minor repairs that may be expected to develop during the school year, like glass replacement, also should be folded into the preventive-maintenance budget. However, generally speaking, monies for repairs other than minor ones should be included as part of the deficiency correction budget.

*Renewal. At the end of its useful life, each component of a building must be replaced-this is the renewal process. For example, the lifetime of a roof is approximately 20 years, so school administrators can budget now for the next roof renewal cycle. Some other typical component lifetimes are: *Heating, ventilating and air conditioning systems-30 years. *Hot-water heater-15 years. *Vinyl flooring-12 years.

The concept of renewal is closely related to that of depreciation. In the private sector, buildings and equipment are permitted for tax reasons to depreciate in value every year, and the amount of such depreciation is a tax-deductible expense. Theoretically, if this amount were reinvested in the building or equipment every year in a process of continuous renewal, the value of this property would be maintained at its initial level.

Component renewal has been an area typically ignored by schools. Like other buildings, schools can be expected to go through several life cycles before they are abandoned. In each cycle, a large fraction of their components must be replaced or given major overhauls. Since the lifetimes of most components can be estimated, it is an easy task to plan and budget for renewal many years in advance.

Adding up the renewal costs that are required for the various building systems for each year of the planning period will produce a wave-type curve that extends out into the future. These curves can form the basis for renewal budgeting in a school system. An example is shown in Figure 1.

A simpler but less accurate system often used is based on a 50-year straight-line depreciation. Clearly, 50 years is a simplification, since most components of a building do not have 50-year lifetimes. However, the government permits higher-education facilities with research grants to recover, as part of their approved overhead, depreciation based on a 50-year life cycle. Also, private-sector real property is required by the IRS to depreciate over 47 years, which is close to the 50-year rule of thumb.

Using a 50-year life cycle is tantamount to a 2 percent depreciation rate per year, and this is what the majority of research institutions build into their overheads. Interestingly, the government will permit institutions to recover more than 2 percent depreciation if a component-by-component depreciation schedule, similar to the renewal analysis, is prepared and approved.

Due to its nature, the straight-line method will result in overfunding in some years and underfunding in other years, and is therefore not as useful as support documentation for review boards and taxpayers as is the cyclical renewal analysis. If the straight-line method is used, a rate of at least 3 percent is recommended to provide comparable funding on average to that required by a cyclical renewal analysis.

*Deficiency correction. In all institutions, no matter how good the maintenance, repair and renewal programs, deficiencies will develop. Funding for these must be foreseen, estimated and budgeted.

Deficiencies stem from a number of processes. The most common deficiencies come about through lack of timely maintenance and repair. This results in component deterioration and the need for deferred maintenance. Another cause of deficiencies is failure to renew a component when its useful life is over. The unrenewed and deteriorated components then become added line items in the backlog of deferred maintenance. The third common cause of deficiencies in schools is the changing of building codes and school-building standards, a recent example being the Americans with Disabilities Act (ADA). Unaccomplished code-compliance items are considered deficiencies.

Keep in mind that while changes in academic programs often result in the need for physical improvements, such improvements are typically not part of building maintenance and renewal, and consequently are not considered deficiencies.

As with a renewal analysis, the starting point for deficiency budgeting is an architectural/engineering survey to define and estimate all deficiencies. The FCI can then be calculated and compared to a target of 5 percent for solidly maintained buildings (See "Figuring your FCI" sidebar).

In schools, deficiency budgeting often is spread over several years, prioritized by FCI and/or by functional category. Typical functional categories include air/water quality, life safety, building envelope, energy, HVAC and ADA/accessibility (See Figure 2).

Such categorization allows different levels of funding to be explored by developing a restorative program that takes category into account. For example, deficiencies in the life-safety category are usually considered the highest priority, which would be corrected in year one of a restorative program. As another example, all deficiencies across a school district in one construction category, such as HVAC, could be packaged together and bid out to a single contractor.

Benchmarking for progress The concept of FCI, combined with recognition of the three types of annual physical-plant investments that are required, can become the basis for the M&O budgeting process. A restorative program can bring FCI into line with that of a well-maintained school system. Thus, a budgeting scenario would be worked out to reduce FCI systematically over a period of time down to a reasonable level. This could be done with accelerated funding for deficiency corrections for a few years until the FCI is restored down to a value of 20 percent, with a follow-up program of lower-level funding until the FCI is depressed to the 5 percent level.

Unfortunately, facilities-assessment inspectors find many schools with FCIs up to 50 percent, and even higher FCIs are not rare. For these school systems, the FCI provides a benchmark that can be used to support funding requests. Administrators can use it to increase the persuasiveness of their arguments in the budget review process. Without adequate funding, the FCI will increase in a vicious cycle of new deficiencies, breeding more and worse deficiencies until building replacement or gut renovation becomes necessary. On the other hand, with adequate funding, administrators can develop phased programs to reduce the FCI over a period of years down to a justifiable level. To accomplish this, the budgeting process will have to provide for all three categories of reinvestment.

For a large school district, thousands of deficiencies can be expected, and the logistics in cataloging, prioritizing, packaging, budgeting and contracting out the corrections can become a major challenge. Many different types of software are available to planners that can provide help in this task.

Software can be helpful in getting comprehensive information on deficiencies, such as the building that the deficiency occurs in, the room, a description and photo of the deficiency, category, cost to repair, and linkage to CAD documents. It also can be used to test effectiveness of deficiency correction budgets. The measure of effectiveness is how the FCI changes each year in response to the investment sequence. Various funding options can be tested to determine their effects on FCI.

The FCI is a useful tool in prioritizing the school buildings to be slated for repair. A list of each building in a system, together with its FCI and the cost to correct the building down to an FCI of 5 percent, can be used to select those facilities in the worst condition, or those that can be corrected in a cost-efficient manner.

Another benefit of FCI is that if it is tracked over time, school administrators can begin to benchmark the effectiveness of maintenance and repair at the various schools in a system.

Given the fact that almost any building will have deficiencies, the question arises as to what comprises a reasonable level of deficiencies. Such a level can serve as a benchmark for school committees and school administrations. Once a benchmark exists, then these bodies can develop short- and long-range funding goals that will allow achievement of the benchmark. This is where the FCI concept comes in.

FCI is defined as the ratio of the cost of correcting all the deficiencies in a given building to the cost of replacing the entire building: Cost of Deficiency Correction FCI = Replacement Cost of Building

As an example, consider a 100,000-square-foot school with a replacement value of $100 per square foot, totaling $10,000,000. If the school had a deficiency backlog of $1,000,000, its FCI would be 10 percent. Some buildings have FCIs approaching 100 percent, and for these it is more effective to replace the entire building than to attempt to correct its deficiencies.

An FCI benchmark of 5 percent is considered an acceptable level of deficiencies by most industry professionals. On average, FCIs in schools tend to exceed the 5 percent benchmark greatly; many school buildings are found to have FCIs above 20 percent, and FCIs up to 50 percent are not uncommon. This is indicative of the historical trend of underfunding school maintenance and repair budgets.

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