The Facilities Arms Race

Ever-newer facilities…

Podcast by Daniel Barwick

A reader of the blog asked me to comment on what he sees as a frustrating situation among colleges in his state: what he calls the “arms race” of college facilities. Facilities are expensive to start with, and because students select their colleges partly, or in some cases entirely, based on facilities, colleges repeatedly try to out-do each other in their facilities. Some of these facilities are academic, and so colleges can at least justify their existence and expense with the claim that they are supporting the educational enterprise in a direct way. (Parenthetically, I guess I’d say that this claim is highly suspect, since it’s not at all clear that educational outcomes have improved at the rate of which instructional facilities are improved.) Other facilities, the ones that draw the most criticism but also draw the most students, are non-instructional. This includes everything from a small, simple “safe space” to $1 billion athletic complex.

My own school is certainly not immune to this issue. In the eight years that I have been at Independence Community College, we’ve built a veterinary technician center, a culinary lab, an adult basic education facility, a fabrication laboratory building, a weight room building, a new multi-use turf athletic field, a black box theater, and an additional dorm. We also remodeled our student union, relocated and built a new bookstore, expanded our dining hall, converted all of our classrooms to smart classrooms, replaced 100% of the physical IT network infrastructure, and dozens of other smaller facilities improvements. Some of these were required (like ADA improvements) but most were discretionary. Some of these are mind-blowingly expensive – wait ‘till you see the bill to resurface an entire parking lot!

This isn’t a fringe topic, and it’s not one that has been ignored in some higher education circles. The arms race to which my colleague referred is one that is probably familiar to all administrators. Each school tries to outdo the other, which causes the cost of attendance to increase (because someone has to pay for these improvements), which causes students to expect more for the higher cost or to begin to compare their school to others, which prompts a school to improve its facilities once again, and so on. The trap is that as expectations increase, no individual school has the option of throwing up his hands and saying, “sorry we just can’t afford to compete.” The students of a small community college expect that their wireless Internet will be just as fast and just as widely distributed as a much larger school.

(One of the real ironies is about the facilities arms race is that there may be fewer and fewer students to enjoy the facilities that we are ever-improving. Many schools have a substantial number of students who take online courses, and many of those schools have entire programs available entirely online. Of course, the students in those courses may live anywhere, and if they are not on campus, it’s doubtful they’re going to see much use out of the facilities for which they are probably indirectly paying.)

The arms race trap is frustrating on many levels: first, it clearly increases costs for students. Students pay for some portion of their education; i.e., what it costs to run the campus. Loan payments for new facilities, as well as increased operating expenses when a facility is substantially expanded or a new facility is built, increase costs. Moreover, the one type of building that tends to do the “best” when covering its costs (sometimes actually generating a profit), the shiny new dorm, usually does the best partly because the ratio of paying students to paid employees is the lowest, and partly because new dorms nearly always cost students more that the older dorms.

Second, it requires expenditures on non-instructional spaces of dubious value. The dubious value category reaches its height when a school improves or installs a facility without any data to indicate the facility will be used, and is just installing it because it will be noticed if it is NOT present. There are some kinds of facilities that are markers of certain types of schools, and if you want your school to be seen as having a certain level of service or a quality, you need to have that marker. The most obvious of these are fitness centers even when other fitness options are nearby, or health centers even when health options abound in an urban setting. (Schools are not the only organizations that face this problem – I remember a city manager who told me that it was critical for our city to have a golf course even if almost no one used it, because people who are thinking of moving here from the outside and are evaluating the city think of it in a very different way if they know it is the “type” of community that has golf courses. I recently heard the same argument offered in my city for the creation of a dog park. I’m actually sympathetic to these arguments – I’m not criticizing them; I’m just pointing out that the facilities arms race surfaces outside of education as well.)

Let’s be clear: the addition of the new facility always causes additional cost to the institution, the students, or both. I concede that there is a theoretical situation in which the institution simultaneously has a way to pay for construction and set aside costs for deferred maintenance, and somehow either sets aside cost for the future operating expenses of the facility or the facility generates enough revenue to cover its operating costs. I have never seen such a case, except perhaps in the case of a dorm, but in those cases, I have not been able to find an example which did not increase costs for students. (And if there are any of my podcast listeners or blog readers out there who are aware of such a case, I would be very grateful if you would send the details my way.) In the cases that I’m familiar with, the financial consequences of construction range from considerable to very considerable. The best-case scenario is that I have seen are ones in which a donor or a state agency has paid for the full cost of the building, and the activities in that building are enough to offset most of the operating expenses. That’s the best-case scenario, and I’ve only seen it a few times. Even in those cases there is no provision for true deferred maintenance, and there is certainly no plan for what to do when the building is at the point of replacement.

Deferred maintenance is one of those things that business officers in colleges worry about, but almost nobody in the public does. Yet it is the greatest unfunded liability of colleges, with the possible exception of pension debt. (Since most state systems carry their pension liability on the state books instead of on the books of individual campuses, one could argue that deferred maintenance is actually the largest unfunded liability of individual campuses.) Some campuses have hundreds of millions of dollars in deferred maintenance, and some state systems have tens of billions of dollars in deferred maintenance. Estimates vary, but in 2016 the total estimate of deferred college maintenance nationwide was $30 billion, according to a poll of university facilities officers. (I believe that the real number is much higher than this, probably about twice this amount – $60 billion. I have found that schools consistently underestimate or understate the amount of their deferred maintenance.) Add in the cost of building replacement for buildings at the end of their designed lifespan (which I don’t but it’s interesting to think about), and the nationwide bill is nearly $180 billion.

But aren’t donors paying for some of these facilities? While that’s true, there’s a whole bunch of reasons why this isn’t a good response to the problem:

First, donors are only paying for a minority of facilities. Most states contribute more to capital construction for their public colleges than donors do in those states.

Second, donors are rarely contributing to the operating expenses of those facilities. (Colleges usually claim that the new facility generates some additional revenue, either through increased enrollment or admission or something else, that will pay for the operating expenses. Are they right about that even half the time? No way.)

Third, if you go up to 30,000 feet, you see the worst problem of all: donor- funded facilities simply add to the deferred maintenance burden of campuses in the long term. Deferred maintenance refers to the problem of colleges and universities not having the resources for building upkeep. It can include deferring recommended servicing or upgrades to building systems, such as HVAC or electrical, or to replace components that have outlived their useful life, such as roofing or flooring. And deferred maintenance doesn’t event include the biggest cost of all: the eventual need to replace a building. The current lifespan of a commercial building is 50 years – colleges typically exist for a lot longer than that, so some think that deferred maintenance include the eventual cost of replacement of the building itself.

One possible objection is that it’s unfair to talk about the cost of building replacement. After all, when a McDonald’s is built in your city, is the franchisee calculating the cost of the eventual replacement of the building? No. The reason for this in the case of a business enterprise is because it is assumed that the cost of new construction will be paid for by future sales after the new facility is constructed. Construction isn’t typically paid for through savings – it’s paid for through a loan that is paid back after the facility is constructed, with income that exists because the facility was constructed and therefore generates revenue. But educational institutions don’t typically turn a profit that way. Public institutions certainly don’t. (Dorms are a notable exception, but they often make the math work by simply charging students more.)

This doesn’t mean that the cost of a replacement building needs to be calculated at the time the original building is constructed, but it does mean that institutions need to be aware that the building has a finite life. Why is this important? It’s because the McDonald’s in your city can be replaced often and easily, and in fact, it’s often desirable to do so, as the desired design of the restaurant changes to meet customer tastes or efficiency needs. Higher education facilities have a much longer intended lifespan. But more importantly, higher education institutions themselves have a much longer lifespan than the average business. My own school, in a state which is neither particularly old relative to the age of our country or particularly young, is nearly 100 years old. We plan for it to exist indefinitely. Can the same be said about a private business and the facilities that serve it? Rarely. The average age of an S&P 500 company is less than twenty years – compare that to the age of your campus.

The reason that I don’t consider the replacement cost of a building to be a relevant part of the equation is because having to sweat the replacement cost when it happens is healthy. If a building made good sense the first time around and received construction funding, and it makes good sense the second time around, it will likely receive construction funding again. The money follows the good ideas. It’s a rare building that’s just a vanity project for a well-heeled donor – most donors want to create something of real value, and as public dollars become more scarce, institutions are getting choosier too. That process of choosing is healthy.

Every new facility that we build using the excuse that a donor paid for it is really just a building that we have to re-build in the future. And the more expensive a facility was the first time around, the more expensive it will be to refurbish, rehab, or rebuild the second time around. I’m probably making this a bit more complicated than it needs to be – the simple fact is that the more complex facilities you build and the more maintenance you defer on those facilities, the bigger the day of reckoning will be.