Business Officers Discuss Deferred Maintenance as a Financial Threat

Colleges and universities are spending significantly less on capital projects, which may be a sign that deferred maintenance is mounting. (Graphic image courtesy Moody’s Investors Service. Photos below courtesy Stetson University)

Tampa, Fla. — Facilities managers at colleges and universities have been sounding the alarm about mounting concerns about deferred maintenance for some time—a problem that may be getting worse now, as colleges struggle with their finances.

A crowd here at the annual meeting of the National Association of College and University Business Officers was given something else to worry about regarding those crumbling buildings and leaky pipes: The rating agencies may pay more attention to deferred maintenance as they evaluate colleges. Budgeting for depreciation—in other words, having a financial plan for the deterioration of campus infrastructure—can be perceived through a site visit, said Dennis Gephardt, an analyst at Moody’s Investors Service who spoke at the session here.

Curb appeal—or lack thereof—is one part of a feedback loop that affects a college’s finances and can be an indicator financial health. “We want to see what your prospective customers see,” said Mr. Gephardt said. “A lot of this goes toward management and governance. Even asking a simple question like, How do you budget for depreciation across the hundreds of colleges that we rate?, will yield a range of responses that are telling.”

Moody’s is finding that colleges are spending less on infrastructure these days—in 2010, spending went into a sharp decline. (See the graph at top.) It’s an indication that colleges are hunkering down. “We are certainly watching this,” Mr. Gephardt said. “It could be an early warning sign of a wider trend, a period where deferred maintenance piles up.”

Mr. Gephardt was joined in the session by two college administrators: Roger Anderson, chief financial officer and chief operating officer at Centenary College, and George Herbst, vice president for business and chief financial officer at Stetson University.

Mr. Anderson said that because the short-term risks of deferred maintenance are low, it can be a tempting way to deal with financial pressures. In fact, he said, he has heard state officials in New Jersey say that colleges should defer maintenance as a way to deal with cuts in state aid.

One of the problems here, he emphasized, is that deferred maintenance is not explicitly part of the financial indexes used to measure colleges’ financial health. He cited a passage in a book on strategic financial analysis in higher education, which said that colleges that choose to spend money on maintenance might appear less wealthy than colleges that delay repairs, since deferred maintenance is not reported as a liability.

“If an institution seriously addresses deferred-maintenance issues, arguably it is trading one liability, deferred maintenance, for another, like increasing debt or reducing reserves,” he said. “But this doesn’t show up because deferred maintenance is not recognized on the balance sheet.”

His own college has invested in deferred maintenance, he said. The college had a $2-million surplus recently, and it plowed that money into deferred maintenance instead of faculty salaries or the endowment (which, in the current economic climate, might not have yielded attractive returns anyway). Centenary spent much of that money on life-safety improvements, boiler replacements, aesthetic upgrades (which would make the college more attractive to students), and lighting improvements (which had a return on investment through energy savings. (The speakers advocated using green revolving funds to deal with deferred maintenance. Through a lighting-replacement project, Stetson University is saving $375,000 a year.)

Mr. Herbst, of Stetson, offered a tale of caution and redemption that impressed the crowd. Stetson’s DeLand campus, he said, had been in decline over the years, and deferred maintenance had piled up. When Wendy Libby became president last summer, she pulled Mr. Herbst out of retirement (he had been at Rollins College) to help revive the university.

The new administrators determined that deferred maintenance had been hurting the campus’s curb appeal—enrollment had been in decline. The administrators joined prospective students on tours and paid attention when students pointed out unsightly parts of the campus.

The comeback plan involved recruiting talent on the admissions and marketing teams, but also addressing some of that deferred maintenance: The university refinanced its debt and used the savings for landscape issues and classroom renovations. The college hired a landscape architect from Boston, a woman in her 80′s who took on only the most interesting challenges, to revive the campus.

Some of the pictures on this page show before and after scenes of Stetson’s campus. Mr. Herbst emphasized one remarkable fact about this work: It was all done over 60 days in the summer.

Now enrollment numbers for the fall look very good, Mr. Herbst said. Stetson reached its new-student goal by the first week of May, with 192 more students than last fall and more than 100 over what the college predicted.