The Cost of Ownership of New Mexico s Public School Facilities

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1 The Cost of Ownership of New Mexico s Public School Facilities Robert A. Gorrell Director Public School Facilities Authority 1312 Basehart SE, Suite 200 Albuquerque, NM rgorrell@nmpsfa.org Katie McEuen Research & Policy Analyst Public School Facilities Authority 1312 Basehart SE, Suite 200 Albuquerque, NM kmceuen@nmpsfa.org

2 Abstract Revenues for funding public school construction have continuously decreased and therefore the State of New Mexico Public School Facilities Authority (PSFA) has continued to study how a quality maintenance program can prolong the life expectancy of existing facilities. In November of 2015, the Center for Cities and Schools, University of California Berkeley published a study, Going it Alone, Can California s K-12 School Adequately and Equitably Fund School Facilities?, written by Jeffery Vincent and Liz Jain. This white paper analyzed how much districts were spending in two different categories, Maintenance and Operations (funded with the general operating budget) and Capital Outlay (funded with the capital budget). Using benchmarks brought forth by the National Research Council in 1990, Vincent and Jain calculated how many districts were meeting the benchmarks and came up with interesting results. Using the methodology of Center for Cities and Schools, PSFA replicated and expanded the analysis using district information for New Mexico schools. Introduction The PSFA was established by the State Legislature in 2002 as a result of the Zuni Lawsuit, in which three school districts challenged the equity of state capital outlay distribution. PSFA reports to the Public School Capital Outlay Council (PSCOC) and manages a funding model that distributes state capital outlay to schools according to the greatest needs, as determined by objective methods. The PSFA also assists the 89 school districts in New Mexico with facilities development and management. PSFA relies upon state severance tax revenues to fund projects, which are typically unstable in nature due to swings in market prices. Significant reductions in funding were seen in 2006, 2012 and most recently in PSFA has made great efforts toward improved school maintenance and accountability with the development of the Facility Maintenance Assessment Report (FMAR), which annually scores each individual school facility based on on-site observations of the school, preventive maintenance plans and maintenance management practices. An FMAR baseline was established in April of 2015, which indicated that only 22% of New Mexico schools will achieve their expected life because of early failure of major building systems. Due to the decrease in funds available, PSFA continues to study ways to improve maintenance and ensure that facilities meet their expected lives. Methodology As referenced in Table 1 below, according to the National Research Council and the Center for Cities and Schools, the industry standard annual average expenditure for capital outlay should be 1.5-2% of the district s current replacement value (CRV) and the M&O budget should be a total of 2.5% (Vincent & Jain, 2015) Table 1: Major Categories of K-12 School Facilities Annual Expenditure Needs (Vincent & Jain, 2015) General Category Specific Facility Expenditure Category Best Practice Annual Minimum Estimated Investment Funded with the general operating budget M&O Facility Operations 1% of CRV M&O Routine Maintenance 1.5-2% of CRV Funded with the capital budget Modernization Capital Outlay 1.5 2% of CRV Modernization Major Modernization Depends on building condition New Construction Obsolete Building Replacement Depends on building condition New Construction New Construction for Growth Depends on enrollment growth 1

3 Using the same methodology as the Center for Cities and Schools, each district s CRV was calculated at $320 per square foot basis (the NM average 2014 total project cost for new school facilities). Using the CRV, each district s benchmark for both M&O and Capital was determined. Each district s assessed value (AV) was gathered from the New Mexico Public Education Department (PED) and divided by the number of students reported as enrolled for the 40 th day count and was then used to determine the AV per student quintiles, as seen in Figure 2. To determine the funds spent by each district, data was extracted from PED s stat book, which contains self-reported budgets and expenditures from each district. This data includes proceeds from the Public School Buildings Act (HB 33), which pursuant to statue, NMSA 1978, (2007), if approved, revenue from the tax can be spent on capital improvements. The data also includes Public School Capital Improvements Act revenues, commonly known as SB9 dollars. These two streams of revenue were used to determine if New Mexico districts were meeting industry capital outlay standards. Each district annually reports a maintenance and operations budget to PED within uniform cost codes, however, due to a lack of specific detail, this information does not allow PSFA to understand what these budgets are actually being spent on. These self-reported, broadly defined budgets were used as the primary information in this analysis. To calculate the maximum gross square footage (GSF) that each district is able to afford, their bonding capacity (six percent of their assessed taxable value) was calculated to determine the maximum annualized available funding. The following assumptions were used: districts bonded to their maximum capacity, had a three percent interest rate, had no existing debt and received the full 45 years of life expectancy for their facilities. The annual amortization was calculated by using a $320 per square foot replacement cost, divided over a 45 year life span. Using the current indebtedness of the districts, we found that only eight districts were meeting the capital spending benchmarks, however, when we used the annualized available funding, an additional forty five districts would then have the capacity to meet the benchmarks. Findings When using the spending benchmarks set forth by the National Research Council, we find that eight of New Mexico s 89 districts meet the Capital Outlay spending standard (1.2-2% of the CRV) and two districts meet the annual gross M&O spending standards (2.5-3% of the CRV). There are not any districts that are able to meet both spending benchmarks. When funding is analyzed to determine the capacity districts would have if they were fully indebted, we find that 53 districts could then meet the Capital Outlay benchmark as seen in Figure 1. As seen in Figure 2, the wealthiest tier of districts are spending more per student on capital outlay than M&O while the poorer districts are the opposite. The lowest four quintiles are spending on average, $3 on M&O for every $1 spend on capital renewal, whereas the highest quintile is spending slightly more on capital. This result suggests that these districts are spending more time maintaining their systems than Figure 1. NM Ability to Meeting Capital Spending Benchmarks replacing them. To examine this result further, we incorporated the Facilities Maintenance Assessment Report (FMAR) average for each quintile to look at the quality of maintenance being performed. 8 Meeting Benchmark 53 With Capacity to Meet Benchmark 2

4 In 2011, PSFA developed the FMAR. This tool includes a comprehensive physical review of building systems and assets. receive a score based on five different categories: site survey, building exterior survey, building interior survey, building equipment and systems survey, and maintenance management. When using the FMAR to evaluate maintenance effectiveness by district s assessed value, we find that the highest quintile, districts with an assessed value of $313,900 per student or more, have the lowest average FMAR scores. These property wealthy districts, who have on average 58% more space than the Adequacy Planning Guide would allow, are spending more on both M&O and Capital Outlay, however, they have an FMAR average of 52.54%, signifying poor or run to failure maintenance. The districts that spend proportionately more per student on maintenance and operations have a better FMAR average, ranging from %, signifying a marginal maintenance level. It can be determined from this data, that the districts who spend proportionately more on M&O, perform Figure 2. Average Annual School District Expenditures on Capital Renewal and M&O by Assessed Value Quintiles, more effective maintenance. Lowest AV (less than $96,000) - 17 Second Lowest AV ($96,001 - $135,000) - 17 In the Middle ($135,001 - $197,000) - 18 Second Highest AV ($197,001 - $313,000) - 16 Highest AV (more than $313,001) - 21 Capital Renewal $396 $390 $577 $631 $1,892 Maintenance and Operations $1,165 $1,312 $1,664 $1,684 $1,776 FMAR Average 60.04% 66.39% 60.14% 64.12% 52.54% Average FCI 32% 36% 40% 34% 37% Percent of Receiving State Assistance 65% 76% 67% 50% 33% Average Percent of GSF Above Adequacy 36% 43% 47% 45% 58% Number of in Urban Areas 82% 76% 61% 44% 52% The APG was developed by the Public School Capital Outlay Council (PSCOC) to provide acceptable models for how statewide school sites should be selected and how facilities can be designed to adequately support educational programs and other needs. Using the APG as a minimum GSF size of a school to calculate maximum affordability, as seen in Figure 3, we find that excess space drastically 3

5 affects what districts are able to currently afford. If all New Mexico schools were right-sized, meaning that their schools were built according to the adequacy planning guide, we find that 54 districts would be able to meet the capital outlay standard in their current funding situation. Similarly, we find that 51 districts would be able to meet the spending benchmark for M&O. It appears that districts simply cannot afford to maintain the higher amounts of square footage. When we reduce the amount of square feet that districts are responsible for maintaining to adequacy guidelines, we more than double the number of districts that would be able to meet spending benchmarks. Figure 3. New Mexico Ability to Meeting Spending Benchmarks if Built to Adequacy Unlike Vincent and Jain s study, when income levels are factored into the analysis we see that districts are spending more on M&O 8 than Capital Outlay. Income levels are calculated by using the 2 percentage of students in each district that are eligible for the Free and Reduced Lunch Program. Unlike California, New Mexico has some of the highest poverty levels in the country with one third of Capital Renewal M&O all of the districts falling within the highest tier of poverty, meaning % of their students qualify for the Free and Reduced Lunch Program. As seen below in Figure 4, when separated into income quintiles, all districts are spending more on M&O than they are Capital Outlay. Using the Facilities Condition Index (FCI), produced by PSFA to measure the condition of each district s facilities, it appears that the wealthiest district s facilities are in worse condition, as they have an average FCI of 42%. The middle and poorest districts have an average FCI of 35%, suggesting that their facilities are in better condition. This data suggests that despite all of the districts spending more on M&O, the middle and highest poverty quintiles, who are on average, spending $3 on M&O for every $1 spent on capital renewal, are seeing a potential prolonging of their facilities lives by investing more in maintenance. 4

6 Average Annual School District Expenditures on M&O and Capital Renewal by Family Income Quintiles, Highest Poverty (81-100%) 29 Second Highest Poverty (66-81%) 30 In the Middle (51-66%) 18 Second Lowest Poverty (31-51%) 11 Lowest Poverty (0-31%) 1 District Capital Outlay $545 $761 $1,132 $1,264 $648 M&O $1,665 $1,392 $1,675 $1,344 $1,334 Average FCI 35% 36% 35% 39% 42% Percentage of in an Urban Area 48% 60% 72% 100% 100% Average Percent Above Adequacy 48% 47% 43% 47% 30% Conclusion As many states across the country look at how school districts fund and sustain their facilities, we see increasing importance placed on improving facility management. According to national standards, it should cost approximately $13 per square foot annually to own, operate, and maintain public school facilities, however New Mexico districts are far from meeting that standard. According to the FMAR baseline 78% of New Mexico school facilities will not achieve their expected life due to early failure of major building systems directly attributable to poor maintenance effectiveness. Therefore, it is critical that PSFA is able to understand how maintenance budgets are funded and expended. The creation of more precise cost codes within the self-reported budgets to PED is essential. With this information, PSFA can facilitate continuous improvement through measurement, creation, and implementation of facility maintenance best practices that will prolong the life expectancy of public school facilities. It will also remain important to continuously reduce the GSF of school facilities in order to achieve a sustainable metric where funding capacity is on par with required spending. 5

7 Works Cited National Research Council. (1990). Committing to the Cost of Ownership. Washington, D.C.: National Academy Press. State of New Mexico Public Education Department. ( ). New Mexico Public School Finance Statistics. Santa Fe. Vincent, J. M., & Jain, L. S. (2015). Going it Alone: Can California's K-12 School Adequately and Equitably Fund School Facilities? Berkeley: Center for Cities + Schools, Institute of Urban and Regional Development, UC Berkeley. 6