Review of the Capital Outlay Process and Deferred Maintenance in the Commonwealth

1. Review of the Capital Outlay Process and Deferred Maintenance in the Commonwealth Implementation Committee April 18, 2005

2. APA Reports Review of the Commonwealth’s Capital Outlay Process November 2004 Review of Deferred Maintenance in the Commonwealth December 2004

3. Capital Outlay Review • The Auditor of Public Accounts initiated the Capital Outlay Review due to concerns raised by agencies and institutions of higher education about the capital outlay process. • Lengthy process • Too many change orders • Too many scope adjustments

4. Capital Project Life Cycle

5. Planning vs. Project Approval • Issue: Funding is committed to an entire project based on a conceptual design. Detailed planning, which provides more accurate cost estimates, occurs after approval and financing resulting in change orders and scope adjustments • Recommendation: Implement a two-phased approach to capital project approval to provide more accurate project cost estimates prior to granting construction approval and financing.

6. Project and Appropriation Monitoring • Issue: There is no comprehensive reporting of progress or funding status on approved projects. • Recommendation: Require the Appropriations Act to show unexpended appropriations for each project and require agencies to report whether capital projects are “On Time” and “On Budget”.

7. Total Life Cycle Costing • Issue: Total Life Cycle Costing occurs during preliminary planning making it less effective. • Recommendation: Require agencies and institutions to provide a Total Life Cycle Costing determination based on final approved designs for all capital construction.

8. BCOM’s Role Unclear • Issue: BCOM’s role in the capital outlay process is often confused with General Services’ role as the Capital Square area project manager. • Recommendation: General Services should work with BCOM to define its roles and duties. This should include consideration of whether BCOM should provide only limited oversight on projects, assume a traditional role of project manager, or have some other responsibilities.

9. Deferred Maintenance Review The 2004 Special Session of the General Assembly directed the Auditor of Public Accounts to conduct a review to determine the amount of deferred maintenance and the ongoing major maintenance needs of the Commonwealth. This review includes an interim report issued in December 2004 and a final report due in December 2005.

10. Interim Study Objectives • Establish a statewide definition of deferred maintenance. • Review statewide and agency specific maintenance practices. • Determine what maintenance systems exist in the Commonwealth and which agencies currently track deferred maintenance and perform facility condition assessments. • Determine the need for an RFP for a new system or whether the Commonwealth has an existing system that can be used. • Research and evaluate funding options and best management practices used by other governmental entities. • Recommend an interim and long-term plan for reducing the backlog of deferred maintenance and preventing the backlog from occurring in the future.

11. Final Study Objectives • Establish the data needed to determine the deferred maintenance backlog and develop an RFP for a Facility Condition Assessment System to collect this information. • Develop a methodology for phasing in the implementation of the Facility Condition Assessment System. • Develop policies and procedures for the initial and future collection and maintenance of information maintained in the Facility Condition Assessment System by agencies and institutions. • Audit the information agencies and institutions report in the Facility Condition Assessment system and determine the deferred maintenance backlog, prioritize problems, and propose deferred maintenance funding methods for the future.

12. Study Activities • Established a Task Force of agencies and institutions. • Surveyed 85 agencies and institutions about facility maintenance practices. • Visited Task Force member agencies to obtain an understanding of facility maintenance operations, budget, and systems used. • Researched and evaluated practices used by federal, state, and local governments to address deferred maintenance. • Developed a timeline and plan of action.

13. Commonwealth’s Buildings • Over 11,000 buildings valued at more than $12.6 billion • Buildings range in age from new to over 100 years old. • Buildings are in a constant state of deterioration. • Many buildings are at or past the time for major renovation or replacement.

14. Deferred Maintenance Definition: Facility owner leaves unperformed planned maintenance, repairs, replacement, and renewal projects due to a lack of resources or perceived low priority and deferral of the activity results in a progressive deterioration of the facility condition or performance.

15. Definitions • Operational maintenance is the day-to-day operations of a facility to maintain its functionality. • Continuous maintenance is the preserving of facilities and their components from failure or deterioration, which is necessary to realize its originally anticipated useful life. • Capital renewal is the planned repair and replacement of facility systems and components having a life less than the life of the facility so the systems and components will last as long as the anticipated life of the facility. • Capital improvement and renovation is the rebuilding or restoring of facilities through additions or alterations so they more efficiently and effectively meet programmatic needs.

16. Lack of Accountability The General Assembly and the Governor cannot adequately plan for future maintenance and capital needs because: • The Commonwealth does not have a complete inventory of all of its buildings and their condition. • The Commonwealth does not require agencies to have a master plan. • The Commonwealth does not consider total life cycle costs of a building in the final design process.

17. Lack of Accountability • The Commonwealth does not have an established condition level at which agencies must maintain their facilities. • The Commonwealth does not provide agencies policies or guidance on how to maintain facilities. • There is no accountability or consistency in the budgeting or accounting process for operating maintenance. • Budgets are not based on need. • Facility maintenance funding and expenses are not separately tracked and account for.

18. Maintenance Reserve Program • The program is not functioning as originally intended. • It should fund capital renewal projects. • Agencies are using maintenance reserve funds for operating and capital maintenance activities. • The project validation process focuses on individual projects and their dollar value rather than whether the project is worthwhile given the overall condition, age, and functionality of the entire facility .

19. Maintenance Reserve Program • Agencies use the maintenance reserve allocation on any validated project, not necessarily in priority order. • Agencies must obligate maintenance reserve allocations within the biennium appropriated and therefore cannot accumulate the allocations over time. • This results in agencies not repairing and replacing roofs and other priority projects first because they are more costly and time consuming to execute.

20. Determining Maintenance Needs • Agencies rarely perform facility condition assessments to determine needs. • Agencies determine needs and identify deficiencies through unstructured methods. • In the past, the Commonwealth has not adequately funded identified needs, so agencies often identify only the needs for which they believe they can get funding. • As a result, the Commonwealth does not know what all of its maintenance and renewal needs are.

21. Operating Maintenance Budget • The maintenance budget is not based on need; it is often based on prior year expenses plus an increase. • Because operating maintenance funding is relatively consistent, it does not provide agencies with a method to plan and fund continuous maintenance activities that experience fluctuations in timing. • Operating maintenance is not separately funded, except in higher education, therefore the funding is susceptible to management directing it to other activities.

22. General Services’ Rental Rates • These rates are insufficient to allow General Services to provide adequate maintenance for the buildings in Capital Square. • General Services, with JLARC approval, sets these rates to cover costs but not to provide funding to ensure maintenance of buildings at a satisfactory level.

23. Demolish or Sell • The Commonwealth appears to believe that buildings have an infinite life. • The Commonwealth does not require agencies to analyze the benefits of replacing old buildings with newer, more efficient buildings versus continuing to repair and renovate the building. • Factors to consider: • Cost of the construction and future operating costs • Economic impact of moving or operating more efficiently • Ability of the building to meet the current and future programmatic needs of the agency

24. Life Cycle Analysis • A structured approach or methodology to establish a facility’s anticipated expenses for each stage in its life. • The Commonwealth does not properly or adequately use life cycle analysis during the life of a building. • The Commonwealth currently only considers life cycle analysis during the initial design phase of a capital project. • Life cycle analysis should occur during the final design phase and once the building reaches the point when it is time to replace major systems but no later than when the cumulative cost of the needed repairs reach 60 percent of the current replacement value of the building.

25. Recommendations • Define and require Master Planning. • Implement a complete asset management system that integrates the financial aspect of purchasing an asset with the stewardship and custody responsibilities that come with ownership. • Require agencies to perform facility condition assessments periodically.

26. Recommendations • Require life cycle costing during the final design phase of a capital project and when a building’s major systems are ready for replacement. • Establish a facility condition level policy and maintenance standards for Commonwealth-owned buildings. • Require agencies to establish maintenance programs that comply with the facility condition level policy and maintenance standards in order to be eligible to receive maintenance funding.

27. Recommendations • Budget and account for maintenance funding separately and hold agency management accountable for the maintenance budget and condition of its buildings. • Revamp the budget process as it relates to facility maintenance, renewal, and renovation. • General Services should establish rental rates that will provide adequate funding for operating and continuous maintenance services and capital renewal activities. JLARC’s approval should ensure that this occurs.

28. Interim Solution • Provide for an increase in accountability for maintenance funding. • Provide a method to accumulate and protect funding and separate the cost of operational and continuous maintenance activities. • Acknowledge that operational and continuous maintenance activities are operating costs and will come from assessed fees or collected revenues where available. • Fund capital renewal maintenance with increased restrictions and monitoring.

29. Interim Solution • Establish the Operating and Continuous Maintenance Reserve Fund • A non-reverting, reserve fund established at each agency and institution to accumulate funds to carry out all operating and continuous maintenance activities. • Allows accumulation of funds to pay for more expensive continuous maintenance projects. • Funded through the operating budget, which could include assessed fees, collected revenues, or general fund appropriation.

30. Interim Solution • Capital Renewal Maintenance • Recommend directing funding for the maintenance reserve program towards capital renewal activities that meet the following criteria: • Projects that involve major building systems must have a useful life of at least ten years once completed. • The useful life of the project must not be more than the remaining life of the building to which it relates. • The total cost of all needed work on the building must be less than 60% of the building’s current replacement value . • Projects must be for buildings that have a facility condition assessment so that the effectiveness of the project can be evaluated against the overall condition of the building.

31. Long-Term Funding Options • Reserve Fund • A fund to set aside money for a specific use, such as capital maintenance. • Capital Reserve Fund • A reserve fund that ties the payments into the reserve fund to the timing of debt service payments that funded the original construction of the building. • Revolving Fund • A fund into which there is an initial large deposit. Then the fund makes loans for a specific purpose, such as capital maintenance, and users pay back the loan over a period of time.

32. Long-Term Recommendation • Establish the Operating and Continuous Maintenance Reserve Fund as described in the interim solution • Establish a Capital Preservation and Renewal Reserve Fund to replace the Maintenance Reserve Program • A non-reverting, reserve fund to retain funds to carry out all capital preservation and renewal activities. Deposits should occur annually at the same time as the debt service payments. The fund represents the present value of the anticipated capital renewal activities for the life of the facilities and its components. • The source of funding will be the same as the funding for the original construction of the building.

33. APA Project Status • We have contracted with Vanderweil Facility Advisors, Inc (VFA) to provide a hosted Facility Inventory and Condition Assessment System (VFA.facility). • Task Force agencies will perform a combination of detailed facility condition assessments and life cycle costing analysis to populate the new system. • APA will audit, analyze, and prioritize the collected information to determine the deferred maintenance needs for the Task Force agencies. • Issue Final Report by December 2005.