A Capital Budgeting White Paper

Allocation of Limited Capital Resources among Competing Priorities:

The Case for a Qualitative Model for Higher Education

Mark W. Beck

“Institutions of higher education–be they large public universities or small private colleges–are not homogeneous organizations. Because of differing missions, goals, programs, histories, traditions, laws, and explicit procedures, they obtain and expend revenues, or financial resources, in myriad ways. Therefore, there is no universal model about the best way to allocate financial resources within higher education.”

                       

                                                --John R. Carnaghi

                              

INTRODUCTION

A critical challenge for capital budget officers is the allocation of traditionally constrained resources among a seemingly limitless set of competing priorities.  In a campus setting, there may be a strategic plan that helps guide expenditure to target the highest priority programs or needs. The problem is compounded further at the multi-campus or system level, where institutions of equal importance present competing needs with very different (yet equal) benefits for the whole. 

Allocation based on the merits of each project and/or the performance of the institution itself is a process that can be quantified. The results of such a process, regardless of how rigorous and sophisticated the process may have been, are then presented to decision-makers who make qualitative judgements that can minimize or even negate the numerical outcome. Ironically, this is not always a bad thing; and, in fact, rarely is the result of a quantitative decision accepted and implemented without debate. 

Politics has a place in allocation decisions.  At a minimum, it provides a “check and balance” against the technical nature of a scoring system.  It’s like hanging a framed print on your wall. With a tape and level, you can measure exactly the position of the image to be sure it’s right, but you still have to stand back, look carefully at the frame on the wall, and perhaps make an adjustment or two (in spite of what the tape measure is telling you), just to be sure.

Successfully presenting and defending (if you will) allocation decisions requires that the process through which they are made is both clear and simple.  Typically, the process used to select candidate projects for funding from a multi-institutional pool should be:

• Participatory.  Feedback from multiple stakeholders in the process, both as it is being developed and as it is being applied to the candidate projects, can help mitigate (though likely not eliminate) post-decision conflicts. 
• Easily understood.   All calculations should be straightforward and easy to explain.  The number of criteria should be reduced to only those that are most important to make the decision.
• Incentivizing.  The process should reward positive behavior.  It could, for instance, include weight for institution’s performance vis-à-vis established strategic goals like program growth, or something more directly related to facilities like maintenance spending.  It should provide an “incentive” for institutions to do more.
• Consistent.  To be fair, all criteria should apply to all projects from all institutions. 
• Transparent.  Simple matrix tables and graphs should be sufficient to explain the reasons for relative project priorities.  There should be no “black boxes.”  This would apply to use of online forms and other such methodologies.  The “value” of funding one project vs. another should be visible and, if not universally accepted, at least agreeable to all participants at the end.

THE TECHNICAL PROCESS: EXAMPLES

Illinois—Western Illinois State University

According to a report by EAB.com, Western Illinois University's Master Plan Strategic Renovation Matrix, is a tool used to determine renovation priorities on campus. The report describes it as follows:

When facilities leaders are facing a backlog of deferred maintenance, how can they decide which buildings to update now—and which ones to wait on?  When prioritizing projects, building condition is typically the most accessible information. However, renewal needs do not always align with institutional strategic priorities, and comparing quantitative condition data against qualitative factors (such as impact on student success) can be challenging. By weighing the impact of individual projects on strategic goals, Facilities leaders can develop final projects lists that balance maintenance needs with broader institutional priorities.

Some campuses accomplish this with ranking systems that incorporate both condition-based and strategic factors into the decision-making process. One tool that clearly articulates inputs and simplifies the prioritization process is Western Illinois University’s (WIU) Strategic Building Renovation Matrix, shown below. WIU’s ranking system, specifically focused on simplifying building renovation decisions across campus, includes ten metrics such as utilization, staff and student needs, and maintenance needs.

Each metric is weighted to reflect its relative strategic importance. Facilities fills out the condition metrics, while deans fill out the other metrics for buildings their departments occupy. Each metric is evaluated on a five-point scale, resulting in a final score up to 110 points. While some campuses take a similar approach to rank renovation projects, most institutions use a less sensitive scale (e.g., projects are ranked on a scale up to 30 points), resulting in less differentiated outcomes. By comparison, WIU’s matrix yields a wide range of final scores, which enables leaders to easily compare and prioritize renovation projects. 

Each criterion category is given an importance value of 1-5, which is then multiplied by the multiplier weight to determine the final category value. Category values are summed to determine strategic renovation factor (out of 110). 

The Ten criteria used in the WIU model are defined as follows:

1. Utilization by Students and Faculty: The higher the building utilization by students and faculty, the higher the number. The higher the utilization number, the higher the number is on the matrix, and vice versa. This can be quantified by the Space and Utilization study. (Multiplier 2.0)
2. Life Safety and ADA Compliance Needs: The greater the need for life safety and ADA upgrades, the higher this number is on the matrix. (Multiplier 3.0)
3. Fundable (State Funding or Corporate Partnerships): If funding is available for a renovation specifically allocated for a particular building, the greater the number is on the renovation matrix. (Multiplier 1.0)
4. Master Plan Factor: If the Master Plan recommends renovation, in whole or in part, within a given time frame (within five years, ten years, or fifteen years), the higher the number is on the matrix. A recommended renovation within five years would have a higher value on the matrix than a recommendation within fifteen years. (Multiplier 2.0)
5. Faculty, Staff and Student Needs: The higher the Faculty, Staff and Student needs in this space, the higher number on the renovation matrix is. (Multiplier 3.0)
6. Visibility to Campus, Community, and Prospective Students: The more visible the building is, the higher the number on the matrix. (Multiplier 2.0)
7. Building Exterior Needs (Roof, Brick, Curtain wall, Glazing, etc.): The more exterior work the building needs, the higher the number is on the matrix. (Multiplier 2.0)
8. Deferred Maintenance Needs (MEP, HVAC): The more heating, ventilating, air conditioning, plumbing, etc. building needs, the higher the number is on the matrix. (Multiplier 3.0)
9. Facilities Condition Assessment Factor: The Facilities Condition Assessment, updated 2014, outlines the deferred maintenance needs, criticality of work needing to be done, and associated renovations estimates. The greater the need for facilities repair/replacement, the higher the number on the matrix. The matrix factor is inversely proportional to the FCA value, as the FCA’s scale 1 as buildings in the worst condition. (Multiplier 2.0)
10. Other: Here input other contributing factors which are not otherwise easily categorized. (Multiplier 2.0)

The process appears to include both clear definitions and a fairly simple scoring format.  The presentation (figure above) is also fairly easy to read and understand.  Weighting does introduce a mathematical bias that may be difficult to explain or defend, but there are useful components of this overall system that may be worth modeling.

Massachusetts—The MA State Deferred Maintenance Process

The Massachusetts process is described in this linked presentation.  The description available online does not include the algorithms used by the computer system to generate the outcomes, nor does it explain the pre-established weighting system.  Regardless, the process includes some useful components and outlines evaluation criteria, like those below, that might be useful in other applications.

Utah—The Utah Capital Project Prioritization Process

According to the Utah System of Higher Education, each year, the Utah Board of Regents re-evaluate the capital facilities needs of its institutions. This prioritization is conducted after an extensive evaluation process including project site visits by the Regents’ Capital Facilities Committee, space inventories, and various scoring methods.  The process is described in some detail in the policy, here, and includes some significant points-driven scoring methods that results in a black box-style decision. As you may expect, the results of the algorithm are open for discussion within the executive and legislative branches of state government prior to receiving funding consideration.

NO BLACK BOXES: MARYLAND’S BALANCED APPROACH

The current approach to capital budgeting, as practiced by the University System of Maryland (USM) Board of Regents each year, is successful because it effectively balances the quantitative/technical aspects of decision-making and the political process that gives it credibility.  We try to blend an understanding of the need with an iterative discussion between the presidents of each institution and an oversight body (the Board of Regents).  We do all we can to leave the human element in the mix.  Participation in the process, after all, is the best path to wider acceptance of the outcomes.  And in this age of tighter budgets and stronger scrutiny (from inside and out), a political process is far more effective and defendable.

When it comes to capital decision making, USM's capital budgeting process is more about consensus building than optimizing future value, though that's the intent of the consensus effort.  Our basic role in the capital planning office is the preparation of a consolidated budget request to the State of Maryland for the design and construction of facilities to serve the twelve separate and somewhat divergent missions of institutions of the USM.  Given the decentralized nature of the System itself and the fact that the authority to make strategic decisions on campus rest primarily with the campus president, our role in capital budgeting is to take the project priorities established by the institutions and integrate them (typically without changing their relative priority) into a single State request. 

Space deficits, building condition, enrollment and other measures of need are considered in the process, but the state capital budget process in Maryland is traditionally project-driven--from the individual departmental requests right up to the hearings before the Legislative Budget Committees.  The relative placement of a project at one campus vis-à-vis one at another campus is, by long-standing practice (driven by statute), the product of a qualitative, iterative and deliberately political process controlled mainly by the various arms of the State government. And the development and adherence to a long-term project queue is a critical reason for the success of the process.

The Pew Center on the States, in their Grading the States report, once said the following about capital management in Maryland government: 

Maryland does do a good job of thinking ahead. It’s a national leader, for example, in its use of strategic planning techniques for its infrastructure. A unified five-year capital plan contains a careful listing of projects by agency and function. Projects are prioritized, and the list is updated each year in the process of preparing the capital budget request presented to the General Assembly. A thorough system of project-monitoring helps the state keep its construction initiatives on time and within budget. Because there is a prudent emphasis on quality control before projects begin, costly change orders have decreased in recent years. Capital spending hasn’t kept up with what’s needed, but Maryland has a good handle on its requirements and is closer to meeting them than most states.

In this age of limited resources and “zero-sum” budgets, formulaic capital funding based on some established measure of allocation (no matter how well intended) could mean that nobody receives sufficient funding to accomplish all of the projects they truly need.  In developing an allocation model, there are a variety of quantitative measures that might be considered, including:

•Percentage share of Statewide or System-wide total
•Relative size of deferred maintenance (facilities renewal) backlog
•Availability of space (reported deficits based on Statewide norms)
•Number of projects in the capital queue
•Square feet per student

•Capital allocation per student

Though they are critical in helping guide funding decisions, quantitative measures alone fail to adequately capture all the parameters of the issue.  A more effective method of making capital budget decisions combines quantitative measures with an evaluation of progress against the goals and objectives of the institutional mission—the Strategic Plan.  In general terms, the Board of Regents has established fundamental mission-specific goals for the allocation of capital funding among (State) projects, for example:

•Academic quality
•Capacity for enrollment
•Research facilities
•Building repair and replacement
•Sustainability & hazard mitigation

There are also building-specific priorities used to compare similarly important projects (especially renovation), like these:

1.  General habitation issues
            •  Building envelope
            •  Structural integrity
            •  Environmental abatement
2.  Code, life safety, ADA
3.  Soft priorities
            •  Reconfiguration (program, convenience)
            •  IT / technology
            •  Historic preservation
4.  Finishes (cosmetic vs. protective)
5.  Furnishings

  

So how can we know that, when the funds have been fully allocated, the most critical (i.e., strategic, beneficial) projects have been funded from a selected pool of the most appropriate candidates.  The current practice at the USM approaches this task in three logical, interwoven steps:

1.  Project Qualification

Each project must meet the following conditions before it will be considered:

·       The project is consistent with the institution's mission;

·       The project is consistent with Regent's priorities, particularly undergraduate education;

·       The project is a priority in the institution's facilities master plan.

·       There is a clearly documented need for the project (e.g. current or projected space deficiencies; mitigates functional or physical obsolescence)

2.  Project Prioritization

Five and Ten Year Budgets.  Since the project queue (based on the Governor’s CIP) establishes the first 5 to 6 years of a 10 year plan, the Regents role focuses on determining mid- to long-range priorities that roll into the CIP from those “out” years.  In general, the following factors are used to determine which projects will receive the highest priority during the deliberation of the CIP:

·       Projects with prior year funding;

·       Timely projects to support achieving approved strategic plans (e.g. meeting approved enrollment growth at targeted institutions);

·       Cost effective renewal of existing facilities to meet current and projected needs in lieu of new construction to reduce the impact on the operating budget;

·       Projects with infrastructure in place to support it and/or new infrastructure projects to meet current and projected facility needs;

·       Projects with planned or committed external funding;

·       Projects that improve environmental and/or life-safety conditions;

·       Building Type: undergraduate and graduate education; research; infrastructure.  Administrative and conference center spaces are not a priority, and will be considered only if funds are available after other needs have been met.

·       Building Condition: condition codes represent the physical status of a building.  These codes will be a consideration in establishing the relative priority of building renovation and replacement projects.

Annual Budget.  The following are factors that are used to determine which projects will receive the highest priority within the “Asking Year” CIP request:

·       As a first step, projects that were included in the Governor’s CIP for the given year typically receive first tier consideration.  A second tier is established for those that are new to the CIP or accelerated within the CIP to the given year.  Each tier is prioritized as follows:

·       Justified requests for additional funding for construction and equipment on previously funded projects that are underway, are usually placed at the front of the queue (after an institution has done all possible to reduce the cost and value-engineer the project).

·       Requests for equipment funding for buildings already funded for construction receive first consideration;

·       Requests for construction funding for buildings already funded for design receive the next level of consideration;

·       Requests for planning for new projects are next; followed by requests for acquisition of property by institutions.

3.  Iterative Review and Revision

This is the political side of the process and it’s where the bulk of the process (time and effort) occurs.  The product of the Qualification and Prioritization effort is not a final budget, but an initial draft that is then critically and objectively discussed, reviewed, debated, and revised—often many times over—during the course of the budget development process.  Currently, the USM Board of Regents process includes the following formal steps in this iterative exchange:

            Institution Submissions (March)
            Draft to Presidents (April & May)
            Feedback from Presidents (May)
            Workshop with Regents / Hearing with Presidents (May)
            Follow-up w/Presidents (June)
            Regents Finance Committee (June)
            Approval by Board of Regents (June)
            Submit to State (June 30)

CONCLUSION

As the president of one of our USM institutions is fond of saying to me when I distribute capital budget materials, the success of the process is measured by how equally unsatisfied all of the stakeholders are in the result.  There’s some truth to this.  There’s seemingly never enough to go around.  Furthermore, funding isn’t always evenly distributed among requesting institutions.  Through the progression of the capital budget over time, the priorities (the relative size of the “pie pieces”) shift in importance, depending on changes in the strategic direction of the institutions and the System as a whole.  

Photo Source

Ideally, all should be balanced; but in a dynamic environment of demographics, politics, economics, and funding streams, “balanced” cannot mean static or unwavering.  Always fond of a sailing reference... You might even say that the dynamics of the capital budget are similar to a ship riding through swells and lateral currents in a rough sea.  In the case of this literal vessel, “balanced” means moving and shifting—even changing direction temporarily—to meet immediate demands on the vessel, while following the best course possible to a desired destination.   

The difference in the Maryland model is that everyone is involved in the process from start to finish. And the result is better for it.

Renovate or Replace?

Over a decade ago, one of our constituent institutions here in Maryland was faced with a difficult decision that, on its surface, seemed rather straightforward: Renovate (and possibly expand) a poorly configured building with significant structural and mechanical problems, or replace it with a new one.

Cost aside, the seeming obvious answer was “replace,” but the State wasn’t so sure. They asked us to justify the replacement decision. Fortunately, all benefits aside, the cost to renovate was so high that, when you weighed the qualitative, functional value of the product you had when you were done, replacement stood out as the best response. The project has now been funded and is in design. 

In searching for a “best practices” model that might be applicable to higher education, I came across an interesting article related to health care facilities.  Granted, some institutions may have hospitals allied with them and the lessons are immediately applicable. But for most of us, adapting lessons from the health care field will require a bit of translation. Here’s what I came up with.

The article begins by stating that a thoughtful (health care) campus planning process must include the following:

• Accurately quantify the real clinical [let’s say “programmatic and space”] needs;
• Identify a diversity of sustainable planning options;
• Accurately price the hard, soft and hidden costs of the options;
• Analyze the trade-offs of cost, disruption, image and the value of "new"; and
• Calculate a tangible return on investment.

 Interestingly, with a couple of minor changes, these are identical to the steps we might take in evaluating a general campus facility.  So, when looking at the various options available to facility planners, what are the “elements of success” we should be looking for? The article cites seven, and I’d [adapt] them as follows:

1. Zoning and operations. [What’s your ideal bubble diagram?] The zoning [of various functions within] the [facility] should be clear and intuitively understandable, with adjacencies that support efficient operations. This is the initial planning diagram that determines the relationships of the individual pieces…
2. Orientation and circulation. The movement of people, materials and vehicles should be logical, intuitive and convenient, with an obvious sense of arrival, convenient and adequate parking, a focal center of the campus, and clear and easy wayfinding connecting the pieces together. [I’d add, for a campus facility, that the movement of students within the building, and as they interact with faculty and staff, should be similarly optimized.]
3. Growth and adaptability. There should be a logical method for expanding the campus, allowing for flexible planning and phased, incremental growth. This is often a challenge at older, established medical centers in urban settings and raises the question of whether to relocate to a space with more room to grow. [For our general buildings, the option here is one like that faced with my Maryland example: Is there room to effectively grow the program within the existing facility to meet future demands.]
4. Patient and family focused. The integration of family is an important component in the larger picture of patient care. Facilities should accommodate families with learning environments, diversion and delight, spaces for children, and a sense of safety and security. [I like this one for the health care example, but the parallels are obvious for a general higher ed building: Are the various needs of all potential users—students, faculty, staff, visitors—met within the facility and, if not, how must the existing facility be modified? Can it be modified?]
5. Sustainability. To preserve our natural resources, our buildings should conserve energy, responsibly reuse materials and be built only on sustainable sites. A more careful selection of sites will preserve existing natural sites. A more sophisticated look at building envelopes and the integration of HVAC systems will require less energy to heat and cool, a cost that has exponential importance over the life of the building. And a more careful look at materials reuse will reduce initial capital costs while conserving our natural resources.
6. Market share. What improvements or programs can expand reach, attract the best medical talent and grow patient volumes? How can these programs be enhanced either through new or renovated construction? Will new technologies demand new space or can they be accommodated in existing structures and their respective infrastructures?
7. Cost. Finally, all costs should be considered, including initial construction, phasing, financing, fees and, most importantly, the long-term operational costs of maintaining the space. Institutions too frequently look at the first costs of construction without analyzing the long-term implications of these decisions. This often is a case of capital and operating budgets not being integrally linked in a causal way. Those responsible for planning and building health care facilities should be integrated fully with those responsible for operations.

It’s interesting that the cost aspect, while significant, is just one of seven considered.  In an environment where we are able to look more closely at qualitative or technical aspects of proposals from consultants, for instance, and then consider cost; it makes sense that we do the same for our facilities decisions.

THE DECISION

In looking at these conditions, then, what kinds of outcomes might support replacement, vs renovation?  The article proposes a list and then goes into some detail about each. I’ll provide the list alone here, though I’d refer the reader to the original article for that detail.

The case for replacement would include the following elements:

• Aging facility and infrastructure [that cannot be adequately improved in the long term]
• No space for expansion
• Adjacencies and zoning are failing
• Opportunity to sell the campus [not typically something we’d find on a college campus, but worth including in this list]
• Great site available [sometimes there’s a better place to go]
• Beneficial financing [particularly for auxiliary facilities—a public/private opportunity, for instance, is worth considering for a replacement]
• Supportive donor

 The case for renovation, on the other hand, might include the following: 

• Good campus condition [if the building can be easily adapted, it may make sense to consider it]
• Space to grow and adapt
• Great existing location
• Limited alternative sites
• Urgent needs and timeline
• Limited capital

 This last point is spot-on. Like the article says, 

“Money is the real driver for most renovation or replacement decisions. It takes significant capital to build a new [facility], replacing everything in a new location. In addition to the bricks and mortar, the hidden elements of utilities infrastructure, roadways, equipment, furnishings and fees significantly add to the replacement cost. 

"Without significant capital, it is nearly impossible to consider replacement.”

Mold on Campus

The problem has been with us for years.  In the 1980s, as a married student with small children, my wife and I were living in a campus-run housing development and mold began showing up on the inside of the exterior walls, just below the windows. My wife would clean the walls with bleach and, soon thereafter, it seems the problem would return. Our neighbors began having similar mold issues and it wasn't long thereafter when the campus housing group came through and addressed both the HVAC problems and the insulation in the buildings, including the installation of a new interior wall.  That resolved the problem, at least for the duration of our stay.

Photo source and Wake Forest article here

Fast forward to 2019 and mold on campus is still poses significant problems for university facilities departments across the country.  An article in the Chronicle of Higher Education quoted one student as saying, “I realize that housing is doing the best that they can. But this is definitely an inconvenient thing to have to deal with, and definitely made my semester harder than it already was.” All commercial and residential construction is prone to moisture and temperature control problems, and mold mitigation is big business.  But the confined and "assigned" nature of university housing, in particular, makes dealing with it absolutely critical.

The purpose of this post is to share two important resources for facilities managers:

The first is the EPA's own resource page, here, that outlines best practices for addressing (and inhibiting) mold growth in buildings.  A number of excellent documents are linked to the page, as well.  The page and the EPA's mitigation guide (linked on page) serves "as a reference for potential mold and moisture remediators. Using this document, individuals with little or no experience with mold remediation should be able to make a reasonable judgment as to whether the situation can be handled in-house. It will help those in charge of maintenance to evaluate an in-house remediation plan or a remediation plan submitted by an outside contractor. Contractors and other professionals who respond to mold and moisture situations in commercial buildings and schools may also want to refer to these guidelines."

The second is a page related to the US Green Building Council's LEED program and a possible point for mold remediation, linked here.  Many institutions (including all in our Maryland system) are required to utilize LEED or a similar high performance rating system in the design and construction of our buildings. Given the similarly important goal of addressing mold on campus, it seems reasonable that we'd likewise be interested in achieving this alternative point. The details for doing so are shown on the linked page. The stated goal of the possible point is "to reduce the potential presence of mold in schools through preventive design and construction measures."  Credits in indoor air quality and thermal comfort must be achieved.