Business Office Basics: The Annual Capital Budget & The Multi-Year Plant Renewals Schedule
Former long-time business officer, recent interim CFO, and founding member of NBOA Jim Pugh shares wisdom he has collected in his decades of service to independent schools.
This is the seventh article in the series. There is an old saying that “Every student carries away a brick.” In other words, a school’s buildings, grounds and equipment are inevitably in a state of decline. The cause can be wear and tear, weathering or obsolescence. It is important to chip away at physical plant needs regularly so they don’t build up into an overwhelming problem.
Schools have different ways of providing for their major capital replacement (MCR). Some schools budget for a surplus and apply it to capital projects during the next fiscal year. Some schools have a budget line for major capital replacement. This budget line is either spent on approved projects during the current year or it is transferred to a “plant reserve.” This is also called a “facilities renewal fund.” Some schools use the term “PPRRSM” for the transfer, which stands for Provision for Plant Replacement, Renewal and Special Maintenance (the full name is a mouthful, and the acronym is pronounced like the word “prism”). Whatever it is called, the reserve is used to tackle capital projects as needed.
Including an MCR line in the operating budget is a way of including capital expenditures in each student’s tuition. This is appropriate. The target amount of the annual MCR expenditure or transfer may be pegged to a percentage of annual depreciation. It may be based on an assessment of existing deferred maintenance. Or it may be based on a facilities audit to project future capital replacement needs.
Some big capital projects do not lend themselves to fundraising. Replacement of infrastructure often falls into this category. When a school foresees such a need that is years down the road, it may allow its plant reserve (if it has one) to grow every year in anticipation of the work.
The capital budget is for both the known and the unknown. Ideally, it includes an extra sum to cover the cost of a project arising mid-year that is not anticipated. Such a project might be a major repair (e.g., replace a failed building controls system), or it might be a needed enhancement (e.g., upgrade a playground which had been the focus of parent complaints).
Next year’s capital budget and the plant renewals schedule are typically developed by the administration, then reviewed by the trustee Buildings & Grounds Committee. Just as the Board of Trustees approves the annual operating budget for the year ahead, the Board should also approve the projects in next year’s capital budget.
Excel file #1 is a multi-year capital schedule which emphasizes the current year. There are columns for original budget, spending to date, and projected (or final) cost. These three columns allow the administration and the Board to monitor capital spending during the year, and to consider midstream adjustments if needed. This particular file is for a school which makes an annual transfer to a facilities reserve fund. The projected FYE balance of the reserve is shown at the bottom of the spreadsheet.
The far-right column of this spreadsheet shows a list of deferred projects. Some schools call this a “parking lot”. These are projects that are on the horizon and which will be scheduled as funding becomes available. This column is helpful to educate and remind the school leaders about the looming needs of the physical plant and equipment.
Excel file #2 is a 10-year forecast of plant renewals needs. It goes out far into the future in order to give the school time to plan for the renovation of “Jones Hall.” This renovation is a $200,000 project, and the school plans to tackle it using the facilities reserve fund. (This file is provided by Robert Sedivy, the former long-time CFO of Collegiate School in Richmond, Virginia.)
The beauty of the multi-year plant renewals plan is that it allows a school to spread out and coordinate projects. The priority of projects is reviewed each year. Individual projects may be moved forward or backward a year because of changing priorities. Whether or not a school uses a plant reserve, continual re-investment in the facilities, grounds and equipment is imperative. The annual capital budget and the multi-year plant renewals schedule are important pieces of a school’s financial sustainability.
This article originally appeared in NBOA's Net Assets magazine as part of Jim Pugh's Business Office Basics series, we have made minor alterations for an international school context. Sage Consultancy strongly recommends membership of NBOA for international schools as a great resource for school leadership.