Legislative update [Feb. 8, 2008]

February 8, 2008 Volume 2008, Issue 3

2008 LEGISLATIVE UPDATE Technical College System of Georgia

The Week Ahead:
Lawmakers will reconvene on Monday, February 11, for day 15 of the legislative session.
The Senate Higher Education Subcommittee of Appropriations will meet on Tuesday, February 12, at 8:00 p.m. (Room 310, CLOB Building) to vote on the 2008 amended budget.
The Senate Higher Education Committee will meet on Tuesday, February 12, at 3:00 p.m. (Senate Mezzanine Room)
The House Higher Education Subcommittee of Appropriations will meet on Wednesday, February 13, at 1:30 p.m. (Room 415, CLOB Building)

House Passes 2008 Amended Budget
The House Appropriations Committee passed its version of the 2008 amended budget which includes no changes for the Technical College System. The bill does, however, include vast differences from the Governor's recommendation in funding for the K-12 system as it relates to the school equalization formula. House Bill 989 will now go to the House floor for a vote. For details, log on to www.legis.state.ga.us, select the Georgia House of Representatives, then select House Budget Office, and then choose Budget Documents from the drop-down menu. The amended budget is HB989 Tracking House Version.
House Pushes for Additional Oversight of Georgia Lottery Corporation
The House Higher Education Committee approved legislation on Thursday that would increase legislative oversight for the Georgia Lottery Corporation, whose board members are currently appointed by the Governor. The proposed legislation sponsored by Rep. Bill Hembree includes wider representation by providing legislative leaders with the authority to appoint two-thirds of the board. House Bill 919 also expands the membership of the Georgia Lottery Corporation Legislative Oversight Committee.
According to Hembree, the Lottery's board of directors would approve, disapprove, amend or modify any bonuses or incentive packages recommended by the Lottery's chief executive officer. The oversight committee would periodically review and evaluate the success with which the authority is accomplishing its statutory duties and functions.
Rep. Pat Gardner offered an amendment to ensure that one of the board of directors from both the House and Senate would be from the minority party. The amended version of HB 919 passed unanimously and will now move to the Rules Committee for consideration by the full House.
Rep. Hembree also introduced a companion resolution which encourages the Georgia Lottery Corporation to take a more conservative approach with the distribution of bonuses and incentives for lottery corporation personnel. HR 1154 passed unanimously and heads to the Rules Committee for consideration on the House floor.
According to Rep. Hembree, HR 1154 and HB 919 are designed to ensure the continued success of the lottery program for years to come.

Other Information:
For more information on House and Senate members along with contact information, log on to www.legis.state.ga.us and click on "Find your Legislator".
For a complete list of Legislators representing each technical college, log on to www.ciclt.net/dtae.
To access live committee meeting broadcasts in the House and live broadcasts from the House and Senate floor, log on to www.legis.state.ga.us, then select Georgia Legislative Network and chose from the menu of broadcasts.

2008 Legislative Update

Page 2 of 2

House Committee Reviews Funding for Major Repair &
Rehabilitation of Postsecondary Facilities
The House Higher Education Subcommittee of Appropriations, chaired by Rep. Bob Smith, met at the GPTV building on Wednesday. Kent Caruthers, a nationally-recognized expert in the area of higher education funding formulas, gave an overview of a study conducted by his firm, MGT of America, on the funding practices for major repair and rehabilitation of postsecondary education facilities. The study evaluated the MRR funding requirements for both the University System and the TCSG.

The study concludes that Georgia should maintain the structure of the current formulas for MRR but noted that the building replacement values and the recommended annual replacement percentages are woefully inadequate. According to Caruthers, although MRR projects are not as glamorous as other projects, they address the critical need of the state to protect its investment in facilities. "In the words of the Fram Oil Filter commercial from the 1970's you can pay me now or pay me later," said Caruthers. Representatives from the University System and the TCSG participated in a question and answer segment of the presentation (see attached report for additional details).
Agency's Name Change Legislation Introduced
Senator Seth Harp and others introduced legislation (Senate Bills 434 and 435) that changes the agency name from the Georgia Department of Technical and Adult Education to the Technical College System of Georgia. This legislation is one of the top priorities of the system and will continue to be monitored throughout the session.
Legislation Proposed to Create the "Higher Education System of Georgia"
Rep. Bob Smith introduced legislation on Friday that would abolish the boards that control the TCSG and the Board of Regents and replace them with a new Georgia Board of Higher Education. The bill would also consolidate the TCSG and the University System of Georgia to form the Higher Education System of Georgia. Under Rep. Smith's bill, state lawmakers from each of the 13 congressional districts would elect one member per district to the newly-created board. The Governor would appoint five, all of whom would have to be ratified by the Senate.

Contact information for the Division of External Affairs:
Laura Gammage lgammage@dtae.org (404) 374-6557

A REVIEW OF FUNDING PRACTICES FOR MAJOR REPAIR AND REHABILITATION OF POSTSECONDARY EDUCATION FACILITIES
Submitted to: Representative Bob Smith, Chair HR 1082 - House Higher Education Finance
and Formula Study Committee Georgia House of Representatives
Submitted by: MGT of America, Inc. Tallahassee, Florida
January 24, 2008

TABLE OF CONTENTS

PAGE

1.0 INTRODUCTION................................................................................................... 1
1.1 Project Objective......................................................................................... 1 1.2 An Understanding of MRR Projects ............................................................ 1 1.3 Importance of MRR Funding ....................................................................... 2

2.0 PUBLIC POSTSECONDARY EDUCATION FACILITIES IN GEORGIA ............... 3
2.1 Overview of Space by Type in Georgia Postsecondary Education............. 3 2.2 Funding Sources for Facilities on University System Campuses................ 4 2.3 Age of Facilities in Georgia Postsecondary Education ............................... 5 2.4 Building Replacement Value....................................................................... 7

3.0 CURRENT MRR FUNDING APPROACHES IN GEORGIA................................ 10
3.1 History of State Funding for MRR Over Past Decade............................... 10 3.2 University System of Georgia Funding Model for MRR ............................ 11 3.3 Technical College System Funding Model for MRR ................................. 11

4.0 APPROACHES FOR FUNDING MRR IN OTHER SETTINGS ........................... 12
4.1 MRR Funding Practices in State Systems of Higher Education................ 12 4.2 MRR Funding Practices in Private Industry and Government................... 14

5.0 ASSESSMENT OF CURRENT GEORGIA MRR FUNDING PRACTICES ......... 15
5.1 Assessment Criteria .................................................................................. 15 5.2 Assessment of Funding Adequacy............................................................ 16 5.3 Assessment of Equity ............................................................................... 16 5.4 Assessment of Simplicity .......................................................................... 16 5.5 Assessment of Responsiveness. .............................................................. 16 5.6 Assessment of Data Validity and Accuracy............................................... 17 5.7 Overall Assessment. ................................................................................. 17

6.0 RECOMMENDATIONS ....................................................................................... 18
6.1 Employ a Common Model for Both Systems ............................................ 18 6.2 Restrict Funding Eligibility to Resident Instruction Space ......................... 18 6.3 Endorse a Simple Model Similar in Structure to Current Model................ 18 6.4 Incorporate More Current Building Replacement Values.......................... 18 6.5 Adopt Higher Percentage Rate for Funding. ............................................. 18 6.6 Commit to Long-Term Implementation...................................................... 19

1.0 INTRODUCTION

This report provides an assessment of the current processes used by the Georgia General Assembly to appropriate funding for major repair and rehabilitation of facilities on the campuses of public colleges and universities. The report also introduces alternative approaches used in other states to determine funding requirements for facilities repair and rehabilitation. This introductory section of the report reviews the project background and purpose and defines key terminology.

1.1 Project Objective
The Georgia House of Representatives is active throughout the year in addressing issues of importance to the state. In addition to their 40-day regular session that is held between January and March each year, the leadership of the House appoints interim study committees to review topics of special interest during the remainder of the year. The results of the work of these study committees often form the basis for legislation during the following legislative session.
To prepare for the 2008 session, Speaker Glenn Richardson appointed the HR 1082 House Higher Education Finance and Formula Study Committee. Under the leadership of Chairman Bob Smith, the committee is reviewing a number of topics related to the state's approaches for appropriating state revenues to institutions of higher education. One of these topics concerns the methods used by the state to determine funding requirements for major repair and rehabilitation (MRR) of facilities used by the institutions of the University System of Georgia and the Technical College System of Georgia.
To assist the Study Committee in its deliberations, the House Fiscal Office sought the services of an external consultant to provide information and analysis on alternative approaches for funding MRR. MGT of America, Inc., was retained for this assignment.

1.2 An Understanding of MRR Projects

State-supported higher education institutions in Georgia have access to several categories of funds for facilities maintenance and renovation. When viewed along a continuum, MRR funding is the middle category between "capital projects" and "maintenance and operations" (M&O) funds as follows:

Capital Projects

Major Repairs

* Major

>

and

>

* Minor

Rehabilitation

Maintenance and
Operations

Major capital projects funding is intended for projects of $5 million or more, such as the construction of a new facility or the renovation of an existing structure in order to add space or modify the functional capacity of existing space. A separate pool of funding is available for minor capital projects, or those costing between $1 million and $5 million.

MGT of America, Inc.

Page 1

Introduction
M&O funds for the University System are appropriated through the funding formula on the basis of a predetermined rate per square foot. In addition to providing for utilities, custodial and grounds keeping services, M&O funds are used for routine, regular preventive maintenance and upkeep of facilities and infrastructure.
The MRR category is intended for maintenance efforts that go beyond the routine maintenance work funded by M&O appropriations. MRR projects are often undertaken to enable facilities to comply with current building standards or to address life-safety issues. Unlike capital projects, MRR projects are not intended to increase the size or to change the functional use of existing facilities.
1.3 Importance of MRR Funding
MRR projects are not as glamorous as major renovation efforts supported by capital projects funds, which often bring modern, additional space to an institution. Further, the impact of MRR projects is not as directly observable on a daily basis as replacing broken windows or repairing leaky plumbing fixtures with support from M&O funds. Nonetheless, MRR projects address the critical need of the state to protect its investment in facilities. If the types of projects funded through the MRR program were not addressed, even greater outlays for maintenance would soon be needed. In the words of the Fram oil filter commercial from the 1970s: "You can pay me now or pay me later."
When the need for a formal MRR funding mechanism in the University System formula was first being considered during the early 1980s, a newly installed president of a private college in the state provided graphic testimony of the value of a stream of funds that is dedicated to maintenance. That college had just incurred a major expense for the emergency replacement of its gym floor due to water damage because the previous administration had failed to reallocate a much smaller amount of funds to maintain the gym roof. While maintenance projects can sometimes be deferred for short periods, sound fiscal management requires that sufficient funds be set aside on an ongoing basis for facilities maintenance.

MGT of America, Inc.

Page 2

2.0 PUBLIC POSTSECONDARY EDUCATION FACILITIES IN GEORGIA

The need for MRR funding relates directly to the inventory of current facilities at colleges and universities in the state. This section provides basic information about the amount of space in current facilities, including analyses of space by type of use, funding sources, age, and replacement value.

2.1 Overview of Space by Type in Georgia Postsecondary Education

The amount of space available for any type of facility is measured in two major ways. The gross square feet measure is based on the exterior dimensions of a building. Assignable square feet, on the other hand, is based on the interior dimensions of individual rooms within a facility that are suitable for assignment for a particular use (e.g., as a classroom, an office, etc.). A common rule of thumb is that the assignable square feet in a building is approximately two-thirds of its gross square feet with the balance of space consumed by walls, corridors and similar unassigned areas.

Exhibit 1 provides basic information about the number of gross and assignable square feet of facilities in the University System.1 The exhibit also shows how that space is
distributed by type of institution. Over half of the space is found at the four research
universities. The overall building efficiency ratio (ASF/GSF) of 68.2 percent compares
favorably to the standard of 67 percent.

EXHIBIT 1 AMOUNT OF SPACE IN THE UNIVERSITY SYSTEM OF GEORGIA GROSS AND ASSIGNABLE SQUARE FEET BY INSTITUTIONAL TYPE

GROSS PERCENT ASSIGNABLE PERCENT ASSIGNABLE

SQUARE

OF

SQUARE

OF AS PERCENT

INSTITUTIONAL TYPE

FEET

TOTAL

Research Universities1

43,567,032

57.2%

FEET

TOTAL OF GROSS

29,880,140

57.5%

68.6%

Regional Universities

6,191,071

8.1% 4,112,343

7.9%

66.4%

State Universities

19,285,181

25.3% 13,323,607

25.6%

69.1%

State Colleges

1,325,542

1.7%

922,459

1.8%

69.6%

Two-Year Colleges

5,817,546

7.6% 3,745,193

7.2%

64.4%

University System Total 76,186,372 100.0% 51,983,742 100.0%

68.2%

Source: Office of the Vice Chancelllor - Facilities, University System of Georgia 1The "Other" category is combined with Research Universities for illustrative purposes.

Colleges and universities need many different types of space to fulfill their missions. Although classroom utilization is often a very visible source of concern for facility planners, classrooms comprise only about five percent of the assignable space on most campuses. The largest category of space is usually faculty and administrative offices and large special purpose facilities.

1 Information about the amount of assignable space by type of room is not reported for the Technical College System. However, summary information indicates that the technical colleges collectively occupy nearly nine million gross square feet.

MGT of America, Inc.

Page 3

Public Postsecondary Education Facilities in Georgia
The University System had nearly 52 million assignable square feet of space in Fall 2006. Across the 34 campuses of the System,2 this space inventory averaged 221 assignable square feet per student (full-time-equivalent). As seen in Exhibit 2, the space type categories with the most space were offices (20 percent of total assignable space), residential (19 percent), and support (18 percent).
EXHIBIT 2 DISTRIBUTION OF ASSIGNABLE SQUARE FEET
BY TYPE OF ROOM

Type of Space

Classroom Laboratory
Office Library Special Use General Use Supporting Health Care Residential
0%

5%

10% 15% 20%

Percent of Assignable Space

25%

Source: Office of the Vice Chancellor - Facilities, University System of Georgia

2.2 Funding Sources for Facilities on University System Campuses
Although all facilities on University System campuses are considered to be state-owned property, a useful distinction in the development of state funding policies concerns the sources of funds used to construct and maintain the property. The three major funding source categories used by the University System are (1) Resident Instruction, (2) Auxiliary Enterprises and (3) Other. Buildings that were constructed with state appropriations are considered resident instruction and include facilities that house classrooms, teaching laboratories, faculty and administrative offices and similar space. The other two categories are for buildings that were constructed with special non-state funding sources. Student residence halls are an example of the facilities found in the auxiliary enterprises category and specialized labs for ongoing sponsored research programs are typical of the facilities in the other category.
About 58 percent of the overall space in the University System falls in the resident instruction category. As seen in Exhibit 3, the proportion varies by type of institution, with the proportion of resident instruction space at research universities being 51 percent
2 Facilities for the new Georgia Gwinnett College were not included in the Fall 2006 space inventory reported that was provided by the University System.

MGT of America, Inc.

Page 4

Public Postsecondary Education Facilities in Georgia
due, in part, to extensive amount of space for residence life and sponsored research programs. By comparison, 98 percent of space at the state colleges and 84 percent at the two-year colleges is considered as resident instruction space. Data related to funding sources of the facilities of the technical colleges are not routinely reported, but virtually all space is assumed to be resident instruction due to the relatively small auxiliary enterprises programs found on those campuses.
EXHIBIT 3 DISTRIBUTION OF GROSS SQUARE FEET
BY FUNDING SOURCE

45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000
5,000,000 0

Research Universities

Other Four Year

Two Year

Other Auxiliary Enterprises Resident Instruction

Source: Office of the Vice Chancellor - Facilities, University System of Georgia

2.3 Age of Facilities in Georgia Postsecondary Education
Despite the significant expansion of facilities for higher education in Georgia in recent years, a significant portion of space in both the University System and the Technical College System has reached the age where MRR funding is becoming critical. Once a building reaches ten years of age, maintenance requirements begin to increase. When buildings exceed twenty or thirty years of age, major building systems (e.g., roofing, electrical) need upgrading to enable the facilities to continue to fulfill their intended purposes.
Over one-third of the space in the University System is over thirty years old and nearly half of all space is at least twenty years of age. As seen in Exhibit 4, the fast-growing regional and state universities tend to have the newest space while the research universities and two-year colleges have the greatest proportions of space that is 30 years old or older. (Note: data in this analysis are based on "effective age" of a facility, where the year of the most recent significant renovation, if any, is used to determine age instead of the year of construction.)

MGT of America, Inc.

Page 5

Public Postsecondary Education Facilities in Georgia

EXHIBIT 4 DISTRIBUTION OF GROSS SQUARE FEET BY YEAR BUILD
UNIVERSITY SYSTEM OF GEORGIA

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%

Research Regional

State

Universities Universities Universities

State Colleges

Two-Year Colleges

Source: Office of the Vice Chancellor - Facilities, University System of Georgia

Pre-1978 1978-1987 1988-1997 1998-2007

The Technical College System has a similar distribution of space by effective age as the University System as shown in Exhibit 5. The Technical College System has slightly less of its space older than thirty years or under ten years than the University System, but more in the 10-20 year and 20-30 year old categories. Overall, the Technical Colleges also face a significant need for funds to maintain existing facilities.

MGT of America, Inc.

Page 6

Public Postsecondary Education Facilities in Georgia
EXHIBIT 5 DISTRIBUTION OF GROSS SQUARE FEET BY YEAR BUILT
TECHNICAL COLLEGE SYSTEM OF GEORGIA

1998-2007 29%

Pre-1978 30%

1988-1997 25%

1978-1987 16%

Source: BLLIP database, Georgia Building Authority

2.4 Building Replacement Value
The facilities of the two postsecondary education systems represent a considerable investment in real estate by the people of Georgia. A conservative estimate is that the 35 University System institutions and the 33 technical colleges manage over $7 billion of facilities.
The state has recently undertaken the development of a consolidated database of stateowned facilities. Based on recommendations from the Commission for a New Georgia through its Space Management and Capital Construction Task Forces as well as directives from an Executive Order restructuring capital asset management in the State of Georgia, the effort is known as BLLIP, an acronym for Building, Land and Lease Inventory of Property. The BLLIP database has been compiled by the Georgia State Financing and Investment Commission, the State Properties Commission, and the Georgia Building Authority. The BLLIP database provides a common set of facilities data for the University System and the Technical College System. As seen in Exhibit 6, the two systems reported a combined 71 million gross square feet of space in BLLIP, with an estimated $7.2 billion in replacement value.

MGT of America, Inc.

Page 7

Public Postsecondary Education Facilities in Georgia

EXHIBIT 6 BUILDING REPLACEMENT VALUE OF CURRENT FACILITIES
GEORGIA PUBLIC POSTSECONDARY EDUCATION

GROSS

ESTIMATED VALUE

SQUARE REPLACEMENT PER

SYSTEMS

FEET

VALUE

SQUARE

University System

62,127,653 $ 6,029,772,685 $ 97

Technical College System

8,997,038 1,177,259,892

131

Combined Systems

71,124,691 $ 7,207,032,577 $ 101

Source: BLLIP database, Georgia Building Authority

The total estimated replacement value for the University System is probably understated for two reasons. First, BLLIP records show 62.1 million gross square feet in the facilities inventory for the University System, compared to the System's own records that list 74.2 million gross square feet. Second, the average value per square foot for University System facilities is calculated at only $97 using BLLIP information compared to the Technical College System rate of $131. The replacement values for University System facilities have not been updated for several years, but an effort is underway to develop more current estimates with specific cost factors for different types of buildings. Currently, two valuation methods are under review and result in an "upper value" and a "lower value" estimate. Exhibit 7 shows that the "lower value" estimate under consideration by the University System results in a very similar blended rate per square foot to the rate currently reported for the Technical Colleges.

EXHIBIT 7 COMPARISON OF ESTIMATES OF BUILDING REPLACEMENT VALUE

CALCULATIONS

UNIVERSITY SYSTEMS

TECH COLL SYSTEM

Upper Value Estimate for Replacement

Lower Value Estimate for Replacement

BLLIP Greater of BLLIP Greater of

Insured or Insured or Estimated

Estimated Value

Value

Estimated Value

$ 12,980,724,930 $ 9,551,471,350 $ 6,029,772,685 $

Gross Square Feet

74,224,344

74,224,344

62,127,653

Value per Square Foot $

175 $

129 $

97 $

1,177,259,892 8,997,038 131

Sources: BLLIP database, Georgia Building Authority and Office of Vice Chancellor - Facilities,
University System of Georgia
T he funding policies implemented for MRR after the report of the Study Committee on Public Higher Education Finance restricted MRR appropriations to resident instruction space. As discussed in section 2.2 above, this is because auxiliary enterprises are intended to be self-supporting for both their operating and capital budget needs. In Exhibit 8, the estimated replacement value of resident instruction space is illustrated using both the "upper value" and "lower value" methods. Not surprisingly, the value per square foot rate is higher for specialized academic buildings found in the resident instruction category than for the overall average which includes less costly space in residence halls.

MGT of America, Inc.

Page 8

Public Postsecondary Education Facilities in Georgia

EXHIBIT 8 ESTIMATED BUILDING REPLACEMENT VALUE OF UNIVERSITY SYSTEM RESIDENT INSTRUCTION SPACE

CALCULATIONS

UPPER VALUE LOWER VALUE CURRENT ESTIMATE FOR ESTIMATE FOR APPROPRIATED REPLACEMENT REPLACEMENT AMOUNT

Space from All Funding Sources Value Gross Square Feet Value per Square Foot

$ 12,980,724,930 $ 9,551,471,350

74,224,344

74,224,344

$

175 $

129

Resident Instruction Space Value Gross Square Feet Value per Square Foot

$ 8,887,308,740 $ 6,815,751,278

43,604,649

43,604,649

$

204 $

156

Calculated MRR Requirement @ 1%

All Space

$ 129,807,249 $ 95,514,714

Resident Instruction

$ 88,873,087 $ 68,157,513 $ 60,000,000

Sources: BLLIP database, Georgia Building Authority and Office of Vice Chancellor - Facilities,

University System of Georgia

MGT of America, Inc.

Page 9

3.0 CURRENT MRR FUNDING APPROACHES IN GEORGIA

To place the consideration of alternative funding models in context, this section of the report provides details of the trend in MRR funding for the two systems of postsecondary education. It also outlines how each system allocates its MRR appropriation among member institutions.

3.1 History of State Funding for MRR Over Past Decade

For the 2007-08 fiscal year, the General Assembly appropriated $60 million for the MRR program of the University System and $7 million for the technical colleges. The combined $67 million matches the amount appropriated in the previous year, which was the highest level of funding for MRR over the past ten years.

The amount appropriated to MRR has fluctuated significantly over recent years. As seen in Exhibit 9, the appropriation for this purpose to the University System reached nearly $54.3 million in 2001-02 but then dropped to $31.1 million in 2002-03 before increasing to $60 million in 2007-08. As a percent of the total appropriation of tax funds to the University System, MRR funding has fluctuated from 2.4 percent (2002-03) to 4.4 percent (2001-02).

EXHIBIT 9 TRENDS IN STATE APPROPRIATIONS FOR
MAJOR REPAIR AND REHABILITATION 1998-99 TO 2007-08

UNIVERSITY SYSTEM

TECHNICAL COLLEGE SYSTEM

MRR as

MRR as

FISCAL

MRR

Total State Percent of MRR

Total State Percent of

YEAR

Funding Appropriations Total

Funding Appropriations Total

1998-1999 $ 46,730,826 $1,157,131,984

4.0% $

- $ 181,908,416

0.0%

1999-2000 50,530,286 1,201,067,817

4.2% 330,000 187,398,239

0.2%

2000-2001 52,106,610 1,212,818,995

4.3% 5,453,907 195,693,368

2.8%

2001-2002 54,290,521 1,241,110,946

4.4% 6,016,543 226,225,411

2.7%

2002-2003 31,075,000 1,281,350,967

2.4% 5,345,000 236,352,728

2.3%

2003-2004 45,000,000 1,259,564,949

3.6% 7,250,000 257,331,184

2.8%

2004-2005 55,000,000 1,300,539,094

4.2% 7,500,000 256,962,999

2.9%

2005-2006 50,630,000 1,409,743,354

3.6% 7,500,000 278,857,679

2.7%

2006-2007 60,000,000 1,484,606,187

4.0% 7,000,000 285,759,697

2.4%

2007-2008 60,000,000 1,620,676,000

3.7% 7,000,000 312,700,000

2.2%

Sources: House Budget Office for MRR funding; SREB and Grapevine for appropriations

Exhibit 9 also shows the history of MRR funding for the Technical College System. As seen, appropriations for MRR needs at the technical colleges began in 1999. Amounts increased from $330 thousand in the first year of funding up to high of $7.5 million in 2004-05 and 2005-06 before dropping back to $7 million in the past two years. MRR funding as a percent of the total state appropriation to the technical colleges has been in the two-three percent range.

MGT of America, Inc.

Page 10

Current MRR Funding Approaches in Georgia
3.2 University System of Georgia Funding Model for MRR
The current formula treatment for MRR for the University System dates back to "Formula for Excellence," the report of the Study Committee on Public Higher Education Finance in 1982. The Study Committee, comprised of 16 distinguished members, was a joint endeavor of the Office of the Governor, the General Assembly and the Board of Regents.
Prior to the work of the Study Committee, MRR was funded as a fixed amount that had not been increased for a number of years. The Committee recognized the value of a recurring, predictable stream of maintenance funding for the campuses that was responsive to changing conditions, similar to how private corporations provide for upkeep of their productive facilities. The Study Committee recommended a relatively simple model, calculated as of one percent of building replacement value. The rate was based, in part, on the then-current funding amounts.
In recent years, the University System's request for MRR funding has been calculated as one percent of the current replacement value of resident instruction facilities. In actuality, however, the requests have amounted to less than one percent due to the use of outdated building replacement values which have become grossly understated.
The Board of Regents receives the MRR appropriation as a lump sum and then allocates it among the System's colleges and universities according to a much more complex procedure than is used to set the appropriation request. In addition to establishing reserves for emergency and contingency needs and regulatory projects, the internal allocation model takes into account the age of facilities. As previously discussed in section 2.3, the need for major repairs and rehabilitation increases dramatically as a facility grows older.
3.3 Technical College System Funding Model for MRR
The recommendations of the Study Committee on Public Higher Education Finance dealt only with the University System. At the time, the technical colleges were called area votech centers and were not considered as part of the state's postsecondary education enterprise. In recent years, however, the Technical College System's funding request for MRR appropriations has followed the model used by the University System and is calculated at one percent of building replacement value.
In developing the request for the Technical Colleges, DTAE staff compile records of state-owned facilities used by the technical colleges and adjust the square footage amounts for known additions and deletions. The resulting sum is multiplied by the rate of $150 per square foot to estimate building replacement value. Finally, the requested amount is determined by applying the 1% of replacement value rate.
The allocation of the appropriated MRR amount starts with the establishment of a contingency reserve, calculated as seven percent of the appropriated amount. Then a base allocation for each college of approximately $50 thousand is provided, requiring about 23 percent of available funds. Next, another ten percent is distributed in proportion to each college's student credit hour enrollment. Finally, the remaining 60 percent is shared in proportion to the square feet of state-owned space occupied by each college.

MGT of America, Inc.

Page 11

4.0 APPROACHES FOR FUNDING MRR IN OTHER SETTINGS
A primary objective of the current project was to identify and consider alternative models for funding MRR based on best practices in other states. This section shares details from our ongoing analyses of state funding models for higher education. Additionally, we introduce information on funding approaches for major repair and rehabilitation in nonhigher education settings.
4.1 MRR Funding Practices in State Systems of Higher Education
Higher education institutions historically have grappled with the issue of how to provide funding for building deferred maintenance and renewal. As institutional facilities age, and pedagogy changes, there continues to be a need to fund the maintenance, modernization and re-investment in facilities.
Only a limited number of states provide formula funding to maintain their investments in buildings and the infrastructure of campuses. Thirteen states have developed formulabased approaches to determine repair and rehabilitation allocations and two other states routinely appropriate funds for this purpose on a lump sum basis when budget conditions permit. Exhibit 10 displays information on the methods used by the 15 states that do have a formal method to fund MRR.
Eight states (Alabama, Arizona, Georgia, Indiana, Massachusetts, North Dakota, South Carolina and Texas) calculate funding requirements of the basis of current replacement value (CRV). Five states (Arkansas, Connecticut, Kansas, Mississippi and Tennessee) use a funding rate per gross square feet of building space.
For determining current replacement value, Alabama's methodology is the most complex, and differentiates need based on the age of specific building elements (such as foundation, plumbing, lighting) and type of building. South Carolina and Texas factor in construction type and age. Similarly, Connecticut provides a differential funding rate per square foot based on construction type and age of facilities.
Rather than determine their appropriations on the basis of an annual formula, California and Illinois provide funds for facilities renewal in years when funds are available.

MGT of America, Inc.

Page 12

Approaches For Funding MRR in Other Settings

EXHIBIT 10 FUNDING APPROACHES FOR MAJOR REPAIR AND REHABILITATION
USED FOR HIGHER EDUCATION BY OTHER STATES

STATE Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming
Total

Annual One-time

Formula Basis

X

Complex formula based on age and current replacement value

X

Percentage of value

X

Value per gross square foot

X One-time funds based on estimated backlog

X

Square footage times maintenance factor by building age

X

1% of current replacement value

X

X

Percentage of value

X

E&G square footage percentage share of appropriation

1

Dollar amount times current replacement value

X

$2/GSF of predicted space

X

Age of facility, replacement value, and backlog

X

CRV x $ based on construction of building

X

$1.48 x GSF > 20 yrs. Old.

X

CRV x $ based on construction of building and age

x

13

2

MGT of America, Inc.

Page 13

Approaches For Funding MRR in Other Settings
4.2 MRR Funding Practices in Private Industry and Government
In addition to considering how other states provide funds for major repairs and rehabilitation of postsecondary education facilities, we also examined how other types of entities with large investments in real estate address this need. In particular, we reviewed information on funding approaches used by the federal government and in private industry.
Not surprisingly, federal agencies also face a growing backlog of deferred maintenance due in part to inadequate funding for major repairs and rehabilitation. Similar to the experience of state legislatures and state colleges and universities, maintenance funding is often an easy target when budget cutbacks are necessary. Nonetheless, the need for a more structured approach for MRR funding in the federal budget has received considerable attention.
The most widely cited federal reference on MRR funding needs is the report Committing to the Cost of Ownership--Maintenance and Repair of Public Buildings. Prepared by the Building Research Board, the report includes the often quoted recommendation:
An appropriate budget allocation for routine M&R (maintenance and repair) for a substantial inventory of facilities will typically be in the range of two to four percent of the aggregate current replacement value of those facilities (excluding land and major associated infrastructure). In the absence of specific information upon which to base the M&R budget, this funding level should be used as the absolute minimum value. Where neglect of maintenance has caused a backlog of needed repairs to accumulate, spending must exceed this minimum level until the backlog has been eliminated.3
Similar findings come from the analysis of maintenance and repair costs in the private sector. Over the years, relevant data have been reported in The Whitestone Building Maintenance and Repair Cost Reference. The analyses in that report list annual M&R cost as a percent of replacement value for a variety of building types. With the exception of "county jail" facilities, where M&R costs are often listed below one percent of replacement value, the range of values is from two percent to six percent. University classroom and labs are not reported categories of space, but office buildings are typically reported in the three percent range and light manufacturing facilities are in the four to five percent range. The Whitestone data for private sector space, while not specific to college facilities, does provide further evidence that the one percent rate currently used in the MRR formula is inadequate.

3 Quoted from Budgeting for Facilities Management and Repair Activities: Report Number 131 (1996), The National Academy of Sciences.

MGT of America, Inc.

Page 14

5.0 ASSESSMENT OF CURRENT GEORGIA MRR FUNDING PRACTICES
In considering whether and how to redesign the current model for funding the MRR needs of Georgia's colleges and universities, an assessment of the strengths and weaknesses of current practices provides a starting point. This section of the report introduces criteria for assessing the current model and then offers our observations on how the current MRR funding formula compares with each.
5.1 Assessment Criteria
In our work in the development of state-level funding models for higher education, we try to design approaches that meet specific needs in specific environments. We identify criteria related to each of the needs and then assess alternatives for how the needs are met. For the current assignment to review the MRR funding model in Georgia, we believe five criteria are important.
Adequacy. The protection of the state's investment in campus facilities requires the annual appropriation of a sufficient amount of funds to address critical needs for repairs and to stem the growing backlog of deferred maintenance requirements.
Equity. The General Assembly recognizes that both systems of postsecondary education have significant funding requirements for MRR. The funding model should be perceived as not favoring one system over the other, and should provide similar treatment for similar needs in both systems.
Simplicity. The MRR appropriation is just one of many components in the higher education budget and the overall state budget. State leaders benefit from funding models that can be clearly presented without undue attention to technical details.
Responsiveness. The required funding level for MRR is based on several factors, and the amount needed changes in proportion to the amount of space, the age of facilities, and current construction costs. The MRR funding model should be capable of responding to changing conditions for the factors contributing to need.
Data Validity and Accuracy. A formula-based approach for determining funding requirements relies on detailed data to perform the supporting calculations. To provide confidence in the computed need and to avoid debate, data used in formula calculations should be perceived as valid and should be subject to audit by external parties.
In the following sections, we address how the current MRR model measures against these criteria.

MGT of America, Inc.

Page 15

Assessment of Current Georgia MRR Funding Practices
5.2 Assessment of Funding Adequacy
Based on various sources, it appears that the current funding approach does not provide sufficient funding for the colleges and universities to address their requirements for major repairs and rehabilitation. Not only do recent appropriation levels fall short of meeting the long-established one percent of replacement value standard, but institutions report a growing backlog of deferred maintenance. Further, the current one percent standard appears inadequate in comparison to the 2-4 percent range recommended in federal studies and even higher rates in private industry, especially in light of the aging inventory of facilities in both systems of Georgia postsecondary education. Regardless of the formulaic approach used for determining MRR funding requirements, increased funding levels are indicated.
5.3 Assessment of Equity
The current model that is generally applied to both systems calculates need as being equal to one percent of building replacement value. When applied consistently, the model should lead to an equitable outcome. Although the one percent standard is known to be relatively generous for newer facilities and grossly inadequate for older structures, each system has a similar distribution of facilities by age so the lack of specific recognition of building age in the model does not create any inequities. Also, each system contracts for maintenance projects within the same markets so price differentials are not a factor in equity. Minor equity-related issues associated with the application of the model include the use of differential rates for replacement cost per square foot and the inclusion of modest amounts of auxiliary-type space in the technical colleges' calculations instead of only using resident instruction space.
5.4 Assessment of Simplicity
The current model is conceptually easy to understand. Although issues exist over whether the one percent rate is adequate and whether the replacement value is calculated consistently across the two systems, the MRR model has strong face validity. The more complex details of the calculations are appropriately handled through supporting calculations at a background level of detail.
5.5 Assessment of Responsiveness
The current model responds well to some changes in conditions but not others. The model is capable of responding to the increased amounts of space in each system and to increased costs of construction and maintenance. However, unlike the internal allocation model used by the University System, the current appropriations model does not respond well to the increased incidence of need for repair and renovation as a building gets older. Although the one percent of replacement value rate may have been realistic as a blended average across buildings of all ages when the current model was last revised, the fixed rate applied to space of all ages has not been responsive to an aging inventory of facilities with increased maintenance requirements.

MGT of America, Inc.

Page 16

Assessment of Current Georgia MRR Funding Practices
5.6 Assessment of Data Validity and Accuracy
Two concerns exist about the validity and accuracy of data being used to administer the MRR funding model. First, there does not appear to be consistent interpretation of what constitutes eligible space for MRR funding across the two systems. Perhaps due to the less sophisticated procedures for maintaining the facilities inventory for the technical colleges, the DTAE does not distinguish between resident instruction and auxiliary enterprise space and, thus, all space is considered eligible for MRR funding. Second, the current values for replacement cost per square foot of space between the two systems differ beyond reasonable expectations. Given the inability of the General Assembly to fully fund the current model, we do not believe either of these concerns has led to major problems. However, we do believe that more specific guidelines should be implemented regarding types of space to be included in the funding model and how replacement values are to be calculated.
5.7 Overall Assessment
When considering all five criteria, the current model performs reasonably well. It scores high with respect to the equity and simplicity criteria, and is adequate on the responsiveness and data validity criteria. The greatest shortcoming is found when applying the funding adequacy criterion.

MGT of America, Inc.

Page 17

6.0 RECOMMENDATIONS
This final section of the report focuses on our recommendations for a refined MRR funding model. It not only describes a potential quantitative model, but also offers guidance on the administration of the funding process once the model is adopted.
6.1 Employ a Common Model for Both Systems
While the missions and resultant funding requirements for Georgia's two systems of postsecondary education differ in many important regards, the need to protect the state's investment in campus facilities is the same. We believe that a common model for determining MRR funding requirements should be applied to both the University System and the Technical College System.
6.2 Restrict Funding Eligibility to Resident Instruction Space
Colleges and universities have a variety of funding sources, and some programs are intended to be self-supporting and not dependent on state appropriations. In particular, revenues from auxiliary enterprise activities such as bookstores, food service and student housing are supposed to cover related operating and capital costs. We believe that state policy related to eligibility of types of space for MRR funding should be clearly articulated and administered consistently.
6.3 Endorse a Simple Model Similar in Structure to Current Model
The current model for determination of MRR funding requirements captures the major drivers of need and is presented in an easy to understand format. While other recommendations address our concerns about the adequacy of recent funding levels, we believe that the current generic structure of the model should be retained.
6.4 Incorporate More Current Building Replacement Values
The current calculation of building replacement value for many higher education facilities in the state, particularly in the University System, appears to be based on outdated cost data. We believe that the two systems, working with the Office of the Governor and the General Assembly, should develop a common approach for determining how building replacement value is to be calculated and periodically updated.
6.5 Adopt Higher Percentage Rate for Funding
Our major concern about the recent experience with the current MRR funding model is that the amount appropriated is no longer sufficient. While part of the shortcoming can be explained by state revenue limitations, we believe that the target funding rate is simply too low. We believe that a rate in the range of two to three percent of building

MGT of America, Inc.

Page 18

Recommendations
replacement value instead of one percent is more appropriate given funding practices elsewhere. The need for a higher rate is reinforced by the size of the current backlog of deferred maintenance and the aging of facilities.
6.6 Commit to Long-Term Implementation
We recognize that the combination of using more current building replacement values and the establishment of a higher percentage rate will lead to the calculation of a significantly greater amount of funds needed for MRR for postsecondary institutions. Although the General Assembly may find that it is not able to fully implement these recommendations immediately, we do believe that commitment to the long term phase-in (as needed) of a revised model would lead to a more stable funding process for MRR.

MGT of America, Inc.

Page 19