Life-Cycle Funding for Capital Assets
Brigham Young University’s long-term view for monitoring and funding capital assets achieves significant savings, keeps things in good repair, and attracts other institutions to the model.
By Douglas Christensen
The advantage of the resulting capital needs analysis (CNA) approach is that it is part of a holistic, data-driven system that allows us to make effective decisions about resource allocation. On a micro level, it establishes a comprehensive, life-cycle inventory of current assets and incorporates them into a listing of all retrofits, repairs, or additional projects that need to be completed. The integrated approach creates a complete capital plan that can project the total cost of asset ownership for the institution. In dollars and cents, this life-cycle approach to asset monitoring has saved millions of dollars each year by maximizing length of asset use and managing the decisions needed to optimize return on investment. Another major benefit is that, after the cost of an initial inventory, the only additional cost is for keeping the inventory database valid. This initial investment has paid for itself many times.
One of the most important aspects of CNA has been the ability to leverage the concept. All institutions use the same program to deal with annual and projected capital needs. However, since the software program is based on general principles, it allows each institution to adapt CNA to its culture and management style. Detailed documentation of revenues and auxiliary support divisions’ assets also allows each institution to view all its capital needs as well as those of the entire system.
In fact, the capital needs analysis approach has stimulated much interest on the part of other institutions, a number of which are outside higher education. One of the early adopters was Elmendorf Air Force Base in Alaska. Honolulu International Airport is using the system as are a number of school districts, including the Provo and Box Elder districts in Utah. The Church of Jesus Christ of Latter-Day Saints worldwide organization itself demonstrates the flexibility and scope of the system, which is used in missions based in such areas as England, Africa, Canada, Italy, Israel, South America, and many other places where the church supports assets, infrastructure, buildings, and facilities. The kind of assets managed can range from property to temples, from mission homes to farms.
CNA’s popularity led to the creation of a company called AxisFM (www.axispointe.com) that helps organizations understand and implement the system. In addition, the company partners with BYU in offering an undergraduate degree program that trains future facility leaders in CNA’s principles and application.
This ability to apply CNA beyond our university walls led to BYU’s selection by the National Consortium for Continuous Improvement in Higher Education for NCCI’s 2008 Leveraging Excellence Award (see sidebar, “Innovation With a Long Reach”). “While many award programs recognize innovation and improvement,” says NCCI President Roderick Wallick, vice president for finance and operations at Wheaton College, Norton, Massachusetts, “this award recognizes cases when those improvements have been actively leveraged for greater impact.”
The challenge to the CNA’s application to higher education is that, with competition for scarce funds, institutions may not want to—or cannot—do the work of the required inspection and database maintenance without greater certainty of obtaining the related funding. However, at a time when colleges and universities are facing huge financial challenges, competing for demanding students, and committing to green building requirements, the BYU model offers ways to fund, build, and maintain quality campus facilities on a prescribed timetable while maximizing limited funding resources. Also, the system clearly quantifies budget needs across distinct periods of time.
Developing an Overarching Process
The initial work was a study, requested by the Commissioner’s Office of the LDS Church Educational System, to define the scope of capital needs, analyze the results, and calculate long-term resource requirements for BYU–Provo, Utah; BYU–Hawaii, Laie; BYU–Idaho, Rexburg; and LDS Business College, Salt Lake City. The scope of capital needs within each institution would include capital replacements, retrofits, improvements to existing assets, and any additional or expanded assets. In other words, the requirements would include all capital funding needs.
The CNA model centered around three major concepts:
- Management of all existing assets and assessment of the impact their life-cycle needs would have on capital funding.
- Use of one-time-only projects to extend economically the useful life of existing assets.
- Based on current use of existing assets, the planning and justification of one-time projects for adding more assets and buildings to the institution—and determining the long-term impact that those additions would have on the total resource funding model.
These three issues became the foundation and scope of the original study and were added to subsequent studies, as a more comprehensive capital management program began to take shape. This capital needs solution has become a proven way to keep assets aligned with resources and with the future mission of the institutions and of the church. It has become such an integral part of operations that we created the Capital Needs Analysis Center in 1986 to coordinate for the board of trustees and the Commissioner’s Office the higher education needs of the system. The center provides the policies, documentation, and schedule by which the church education system completes all CNA processes.
Our initial study produced a detailed look at the needs of each of the four institutions. A methodical process resulted in (1) capturing a database of capital assets; (2) designing a plan by which to establish annual funding priorities for capital purchases, facilities construction, andmaintenance of existing assets; and (3) conducting an annual inspection, along with completing an updated study every five years, to determine capital needs for the next time period. The study became the basis of our strategic operational model, which included our key priorities and principles (see sidebar, “Principles That Define Capital Needs Management”).
Identifying capital assets. Creation of a sophisticated and detailed database, with the assistance of BYU’s computer services division, has been a cornerstone of the needs analysis model. In a series of meetings, our various shop and division leaders determined which assets ought to be collected.
To collect the list of assets and their locations, we scheduled physical inventories to be taken on all four campuses. Inventory forms were distributed to the appropriate staff—custodial crew for the count of interior items located in rooms, hallways, and so on; shop personnel for items at the building level, such as utilities, roofing, exteriors, and the like; and grounds and utility shop personnel and planners for general site and utility distribution systems on campus. Remarkably, staff completed the inventory forms within the requested period of 120 days. Asset information included summary codes, quantities, replacement cost, remaining life, and so forth (see figure ).
Analyzing funding needs. The first question we wanted to answer was: What are the long-term funding needs of the four campuses? So, we worked on determining the remaining life of existing assets. Since a 40-year cash flow projection would cover the life cycle of most assets, we used that 40-year timeline and plotted the cash flow projections on a graph.
The thinking behind using 40 years was that there are very few systems that will last more than 40 years. We look at carpet, for example, as a system that has a 10-year life; so we know that if we start with new carpet, we’ll need to replace it four times during the 40-year cycle. Other systems (draperies, equipment, lighting, and so forth) will have different life cycles. Buildings and other facilities, such as tennis courts or parking lots, will last for several decades. So, across 40 years, we will have replaced everything at least once and will not have any major surprises in budget needs as we go from year to year. If we used a five-year cycle, and a building needed a major replacement in year 10, we would not have budgeted for such a large expenditure. The 40-year annual average cash flow gives budget officers an idea of the long-term impact on resources.
Inspecting capital needs annually. We developed a process for (1) conducting yearly inspections and reviews designed to verify the remaining life cycle of items with remaining life of one or two years (prior to requests being approved for funding); (2) tracking problems coming from repairs or emergencies during the year to see if replacement is needed or if the remaining life is not progressing as planned; and (3) determining a new or revised remaining life period, if useful life could be extended. The goal in this process is to maximize useful life by deferring replacement until the useful life has actually been spent. It also allows those who manage these assets to better align the assets to their real or actual life cycles, making the projection of funding needs in the database more accurate.
The users and stakeholders of each institution complete the annual review process for facility master plan projects, such as retrofits, improvements, space remodeling, mandatory or compliance-related upgrades, and any other additions, and then make their priorities known at the college or division level; these are shared with the appropriate vice presidents.
Setting priorities. The vice presidents choose the capital needs projects that best align with the mission, vision, values, and objectives of the particular area, submitting their priorities to the campus planning group at each institution. The list of needs suggests funding amounts for each project, and funding resources are not finalized until all of the institutions’ needs are reviewed. Once that review is complete, the campus planning committee approves the annual capital needs request at each institution.
Funding sources are determined for three types of asset funding: items included in the database inventory, facility master plan items, and special projects. Using the database inventory, the life-cycle system estimates the total needs for the next 40 years. Based on that number, we can calculate (by dividing the totals by 40) what the average annual funding needs are for each institution.
One of the earlier concerns for the LDS Church and its educational system was the inability to foresee future funding needs; the new model gave us that information. We needed to know what the capital funding requirements were to maintain the existing campus. We added to this an annual average funding amount for facility master plan items. All special projects, such as new buildings, were handled as a separate need, with funds attached to approved special projects.
This unique approach guided the board of trustees in knowing what the long-term funding requirements were both for life-cycle needs and one-time projects. As assets changed and were added, we updated the database and the resources needed. We also revised study costs to accommodate for inflation. These adjustments allowed for consistent funding needs.
The initial funding for all the institutions was around $7 million, which came from the LDS Church’s funds for appropriated needs. Revenue-producing units submitted their requests to spend retained earnings. Even though many of the repairs, replacements, or retrofits were not capitalized, the capital funding process was used to manage those assets due to their periodic recurring need. The board’s position was that the institutions’ operating budgets did not contain sufficient funding to cover all periodic recurring funding needs, so one-time capital funding would be used to offset all asset renewal and replacement. (Accounting principles now require that we specify the projects and line items that need to be capitalized or recapitalized.)
The goal is to maximize useful life by deferring replacement until the useful life has actually been spent.
The first inspection led to our initial five-year plan for managing capital assets. We took the database’s list of items with five years of remaining life and inspected them to verify that within the next five years they would actually need replacement. Items that were determined to have a longer life were deferred and noted in the database as having remaining life in excess of five years.
Since we did have some deferred maintenance and capital renewal at the institutions, the board of trustees decided to focus on catching up on those before addressing the entire 40-year cycle. So, at that point, the database of items included in the five-year plan was frozen, and we calculated the average annual funding needs for each of the five years based on those identified assets. High-priority items could be substituted and funded during the five-year freeze period, but the amount of total capital funding plus an inflation factor would remain the same. Any funding saved could be repurposed to fund additions, new buildings, one-time projects, and so forth, during that five-year period.
The first annual average life-cycle needs request was calculated at less than $9 million. The board of trustees reviewed the proposal and suggested an initial funding amount of $7 million based on its desire to see how the system would work and whether the suggested life cycles would hold up. This was the first time that an annual limit had been set for capital funding. Prior to that, each institution proposed for the annual budget its line-item requests for each perceived need. It was more a wish list than a deliberate plan, making it frustrating for budget planners to set priorities.
Once the new system was established with limits and processes, the budget planners became informed partners with the institution facilities managers. Folding each institution’s needs into one request and verifying priorities through inspections and reviews also proved to be an important point of trust and support.
If expenses in a given year were higher than the annual average funding limit, funding was taken from a savings bank that bridged temporary gaps or held unspent funds for future use. That is, if needs were lower or higher than the limits established in the capital budget, the difference was deposited or taken from the bank. This allowed for level funding over the five-year period for budgeting purposes, and the institutions could fund their needs accordingly, using the bank. Since 1981, when we put this process in place, there have been savings and withdrawals from the bank; but the cost for asset needs has not exceeded the bank balance. Since we’ve been able to extend the useful life of assets, we’ve also stretched the cash flow requirements such that we’ve been able to save funds.
After the first five years, the program began moving to an online system. The funding requirements became an annual adjustment that reflected all the changes during the year. The funding was planned to take care of every asset inspected and all one-time projects.
The process has proven to be a trusted system in terms of the institutions determining what their real needs are and the board of trustees providing the necessary funding. This same concept works throughout the entire system. Being aware of the needs and predetermining the funding requirements have been keys to the program’s effectiveness. And, the trust issue behind making sure the limited funds are spent on real needs is critical. Any violation or loss of that trust would doom the system.
Beginning in 1985, we began to invite the remaining institutions of the Church Educational System to be a part of the CNA program. The church then began adopting the principles for its use in 1989, starting in the United States and then expanding internationally in the 1990s. For many institutions, such as the church’s Missionary Training Center and its motion picture studio at the Provo campus, the capital funding comes from church appropriations, and annual needs requests are presented and approved through the respective church departments. The church seminary and institute program supports thousands of educational facilities around the world. These entities follow the same principles in caring for those properties and buildings.
As institutions were added, all their assets were defined and added to the CNA database. Since all properties have locaters, the database allows for summing assets by location. If we want to know, for example, how much carpet, roofing, or pavement we have in a particular campus, building, floor, or room, the system can provide that information.
Support files include other information for each location, including funding sources, funding responsibilities (who is responsible for the particular budget assigned to each asset), room types, priority codes, benefiting college (which institution will receive funds designated for a one-time project), vice president flag (which vice president is assigned to each project in the master plan), project status, and system code (for projects in which more than one asset will be managed together). This approach ties together these support files and any other needs to give the management team a look at the total cost of owning each asset or system.
The CNA principles include a focus on the person responsible for the particular asset’s care and maintenance. The process works from the bottom up, beginning with the life-cycle inspections and relying on upward communication as to asset status. In some cases, maintenance is outsourced and technicians provide the key data and information. Other times, employees handle data collection and related communication. In any case, actions start with the maintenance person who shares decisions with a supervisor, who then passes the information to other levels of upper management. The one-time projects are handled in a similar fashion, with middle management generally communicating the information to the top.
If these principles are followed, the process is adaptable anywhere. The annual review and funding exercise allows people in any area to complete the designated process within their own environments. Because they do this annually and the database is online, the annual review determines the current needs. Each area is responsible for its related database and what is tracked, with tracking based on a standard list of assets. To ensure that the database remains accurate, category leaders work with their respective areas to verify content.
We know that the flow of capital dollars needed for asset renewal and deferred maintenance for our higher education institutions was a lot higher in the past than it is today. However, at this point, it is difficult to estimate and quantify the exact impact of capital needs analysis. What we know for sure is that none of the users of CNA have deferred or capital renewal maintenance outstanding. If there is deferred renewal, it is because of delays in the management decision to move forward. The trustees know that existing assets are being maintained and can meet the needs of administrators.
It is less expensive to keep a campus at a high standard than to fall behind and try to catch up.
We also come out well when we compare our campuses’ capital expenditures to those of others. The national average for capital expenditures in higher education is estimated at 2.30 percent of the current replacement value (CRV) of the campus each year. That percent would be higher if deferred maintenance were included. In contrast, the BYU higher education units spend 1.53 percent of campus CRV each year. The differential of 0.77 percent of the current replacement value of the campuses means annual savings in the millions of dollars for the four campuses.
We also count as a benefit the value of what we learn about assets and how we invest to extend their useful life. This translates into better buildings that are much more efficient and effective, while representing lower lifetime costs. The life-cycle costing we do for maintaining new facilities and systems will continue those savings. The bottom line: It is less expensive to keep a campus at a high standard than to fall behind and try to catch up.
Overall, we feel that we have fulfilled the mission of our capital needs analysis efforts, which are captured in the following statements:
- To provide the stakeholders of the Church Education System a framework and process for asset management and leadership consistent with the principles of good management and leadership.
- To establish, manage, and ensure the integrity, usefulness, and trust of the agreed principles.
- To be a trusted partner in assisting people to do the right things needed for an effective learning environment.
- To ensure that the long-term investments in assets are appropriate, needed, and aligned with the vision for higher education in the Church Education System.
Steve Maynes, director of facilities, LDS Church Worldwide, summarizes the impact of CNA this way: “The main thing is that capital needs analysis envisions facilities as assets—not expenses—in the way that one would look at a retirement account or an endowment. The system allows us to preserve those assets—both high-tech and historic—in a deliberate, businesslike manner. We move away from crisis mode to work plans that are based on a hierarchy of needs, established costs, and an annual plan of work.”
DOUGLAS CHRISTENSEN is director, office of facility solutions, Brigham Young University, Provo, Utah.