December 19, 2007

Some Thoughts on the State Capital Budget

By Randy Hodgins

We have talked about the challenges the University faces when it comes to dealing with a multi-million backlog of capital facilities projects and the difficulties faced by legislators in putting all the pieces together in the state capital budget.  The piece below is part of a regular communication which UW Foundation leaders Orin Smith, Dan Evans and Bill Gates Sr. send to members of the University’s community.  It is a pretty accurate summary of the current state of affairs in UW capital financing, at least from the state perspective.

For many years, Johnson Hall (home of earth and space sciences) was Exhibit A in the UW’s catalogue of worn-out buildings.  It was old, it was big, it was prominent, it was unsafe, it was dysfunctional, and it was depressing.  But as you know if you came to the Foundation Board meeting this past September, Johnson Hall has been reborn.  It looks terrific, and it now provides safe and first-class spaces for teaching and research.  For this wonderful renovation we have state capital funding to thank.

In romantic moments, we like to hark back to the image of Socrates on one end of a log, a student on the other, as the essence of learning.  That image reflects an enduring truth:  great teachers are the heart and soul of education.  But Socrates lived in a different climate, and he did not teach molecular engineering (for example), and he did not have forty thousand students to worry about.  Here and now, the UW requires a body—a campus—as well as heart and soul.  And that campus, as a physical plant, has been built and maintained primarily by years of state capital appropriations.

The trouble is, both state and higher-education officials have come to realize that the state’s capital budget now faces structural problems that raise serious doubts about its capacity to meet the future needs of Washington’s colleges and universities.

A short primer on budget policy is necessary here.  The state’s capital budget is largely financed by bonds.  By constitutional limit, the annual debt service on those bonds cannot exceed 9 percent of general state revenues, calculated as a running three-year average.  That is what puts the ceiling on capital spending.  And the state has now pretty much reached that constitutional ceiling, while demands on the capital budget are growing exponentially.  (Specifics:  When the 2007 legislature convened, the bonding capacity available for new capital projects was capped at $2.1 billion.) 

Randy Hodgins, who became the UW’s director of state relations after many years in Olympia, watched the problems develop.  “When I started out, 20 years ago,” he says, “higher education accounted for about half the state capital budget.  After all, campuses represent about two-thirds of the state’s capital assets.  But in the early 1990s things began to change.  When Initiative 601 put a limit on state operating expenditures, a lot of ‘local community projects’ moved over to the capital budget, which was not covered by I 601.  There were growing environmental pressures to buy lands for preservation.  The state has become a pretty significant player in low-income housing, which used to be built by the feds and local agencies.  Prisons expanded.  And the biggest change is that the state is now picking up a significant share of K-12 construction, since state timber funds have dried up.  So the ‘state’ part of the state capital budget is beginning to take a back seat to local projects.”  The budget has grown, but the claims on it have grown more.  As of the 2005-07 biennium, higher education’s share was a little over 25 percent.

Meanwhile, the capital demands on higher education have also grown.  Since 1990, the system has added seven community and technical colleges and five branch campuses (with another waiting in the wings).  Enrollments have risen dramatically. 

Not surprisingly, building maintenance and renewal have not fared well in this climate.  There are various formulas one can apply for calculating how much we ought to spend every year to keep the campus in good shape and modernize it for evolving uses.  By any of these measures, state funding has fallen far short.  Hence the plight of Johnson Hall and 14 other aging UW buildings that were judged, by a study concluded in June 2004, to be in critical decline.  

The good news is that we are now about halfway through the renovation of those buildings, which collectively became a phased project called Restore the Core.  The state stepped up to the plate, and we are so far on time and on budget.  Four buildings are done, four are now in construction, three more (including the iconic Denny Hall) are on deck for the next biennium, and the rest are due to follow in turn.  You can imagine the excitement of faculty and students who move back into these sparkling “new” facilities.

It is also true that the 2007 legislative session gave us our best capital budget since the late 1990s:  $143.6 million, including $94 million for Restore the Core.  “The state,” says Randy Hodgins, “is still a huge, huge part of our capital building support.”

But both he and Marilyn Cox, who heads up our capital planning office, look at the debt ceiling and the state’s multiplying capital demands and see trouble ahead for higher education.  Even the UW’s 2007-09 appropriation, says Marilyn, welcome as it is, remains “far below the level required for good and prudent facility management, plus growth.”  Over the next half-dozen years or so, the UW is looking to finish Restore the Core, construct a new molecular engineering building, continue development of the Bothell and Tacoma campuses (and the likely new one in Snohomish County), and expand Gould Hall to meet needs of the College of Architecture and Urban Planning.  Where will the dollars come from?

“We’ve got to come up with creative new ideas,” says Marilyn—“we” being the state and higher education working together.  Fortunately, there are legislators who are just as worried about this problem as Randy, Marilyn, and higher-education leaders across the state.  Among ideas on the table:  using state matching funds to attract private dollars; tapping state and local economic-development funds to help build out the new campuses; giving campuses more flexibility to raise and use local funds, such as the building-fee portion of tuition.  “This is one of those long-term problem-solving efforts,” says Marilyn.  

One immediate measure would be renewal of the Gardner-Evans Act (yes, that Evans), which expires at the end of this biennium.  In 2003, that act authorized issuance of state bonds, over three biennia, to provide dedicated funds for enlarging capacity and major preservation on campuses.  In the current biennium, more than a third of the UW’s capital funding comes from Gardner-Evans.  Higher-ed institutions are advocating renewal of the act, now called Gardner-Evans-Locke, for another three biennia.

And of course the UW has turned to non-state funding sources for some recent buildings.  The Foege Building (genome sciences and bioengineering) was built almost exclusively by gifts, and the Ben Hall Building (multi-disciplinary research) relies on bonds financed by federal indirect-cost recovery.

But these are special cases.  The larger quandary remains:  Under current arrangements, the state cannot provide adequate capital funds for higher education to do its job.  So we need to figure out some new arrangements.  There is a huge statewide backlog of campus preservation to attend to, and there are new facilities to build to accommodate growing demand for education and research.  “Not solving this problem,” says Marilyn, “is just not acceptable.  We can’t and won’t give up.”

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