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Financial Services
401 Golden Shore, 5th Floor
Long Beach, CA 90802-4210

www.calstate.edu

Date:
December 12, 2011
Code: FS 2011-05
To:

FOA Delegates

 
From:
George V. Ashkar
Assistant Vice Chancellor, Controller
Financial Services
Subject:
Definition of Major Maintenance & Repair Costs as Used in Executive Order 994 for Auxiliary Enterprise Funds in the SRB Program

Guidance has been requested in connection with the definition of “major” maintenance and repair costs as used in Executive Order (EO) 994 since the term “major” can be subject to varying interpretations throughout the CSU.  This memo is intended to provide information that will assist in achieving consistency in the recording of these costs.  The definition will affect the selection of CSU fund for posting these costs and may also affect the calculation of the debt service coverage ratio (DSCR). 

A DSCR is a standard financial analysis calculation used to evaluate the ongoing cashflow strength of a program or entity with debt service obligations. As the financing market prescribes, the calculation is based on current period revenue and expenditures, and not based on reserves, in order to measure an entity’s ability to generate cash from operations on a consistent basis. The higher the DSCR, the more favorably an entity, such as the CSU, is viewed by investors and rating agencies.

In order to improve consistency in financial data being submitted, we first need to distinguish between a “routine” repair and a “major” repair.  A “routine” repair is one which occurs in the normal course of operations.  Examples of “routine” repairs would include painting an office or fixing a leaking pipe.

A “major” repair is one which is either infrequent in nature or which is scheduled on a non-routine basis and may require setting aside funds over a period of time or issuing additional debt to fund it.  Examples of “major” repairs include re-roofing an entire building, replacing the carpeting throughout a building or replacing a ventilation system.

The distinction between a “routine” and a “major” repair is important because “routine” repair costs are included in the calculation of the DSCR to evaluate financial viability of capital projects by CSU management, whereas “major” repair costs are excluded from such calculation. 

“Major” repairs are not synonymous with capital expenditures.  Capital expenditures are costs incurred to acquire or construct a capital asset, defined in Chapter 13 of the GAAP Reporting Manual as “. . . real or personal property that has a unit acquisition cost equal to or greater than $5,000 and an estimated life greater than one year.”

The cost of “routine” repairs should be recorded in auxiliary enterprise operating funds.  The cost of “major” repairs should be recorded in auxiliary enterprise repair and maintenance/internally designated capital project funds. The choice of an appropriate CSU fund is important since it is used as the identifier to distinguish between “routine” repairs and “major” repairs.

For your reference, below is a listing of auxiliary enterprise operating funds and repair and maintenance/internally designated capital project funds in state fund 0948 that are used in the calculation of the DSCR:

Auxiliary Enterprise Operating Funds (to record "routine" repair and maintenance)
Program
SCO Fund
CSU Fund
Description
Housing 948 531 TF Housing-Operations and Revenue
Student Union 948 534 TF Campus Union-Operations and Revenue
Parking 948 472 TF Parking Revenue Fund-Parking Fees
Health Center 948 452 TF Facility Revenue Fund-Health Facilities Fee
Continuing Education 948 441 TF CERF Extended Education

 

Maintenance and Repair/Internally Designated Capital Project Funds (to record "major" repair and maintenance)
Program
SCO Fund
CSU Fund
Description
Housing 948 532 TF-Housing-Main&Repair/Internally Designated Capital Proj
Student Union 948 535 TF-Camp Union-Main&Repair/Internally Designated Capital Proj
Parking 948 474 TF-Parking-Main&Repair/Internally Designated Capital Proj
Health Center 948 454 TF-Facility-Main&Repair/Internally Designated Capital Proj
Continuing Education 948 443 TF-CERF-Main&Repair/Internally Designated Capital Proj

Note: Some campuses are still recording repair and maintenance transactions in state funds 0575, 0580 and 0581.  The same definitions for “routine” and  “major” apply to these state funds as well.

Additionally, below is a listing of auxiliary enterprise construction funds restricted by outside donors for capital outlay purposes.  Only capital outlay expenditures should be recorded in these funds.

Externally Restricted Capital Project Funds (to record capital expenditures from outside donations)
Program
SCO Fund
CSU Fund
Description
Housing 948 533 TF-Housing-Construction, Externally Restricted
Student Union 948 536 TF-Camp Union-Construction, Externally Restricted
Parking 948 473 TF-Parking-Construction, Externally Restricted
Health Center 948 453 TF-Facility-Construction, Externally Restricted
Continuing Education 948 442 TF-CERF-Construction, Externally Restricted

Regarding the choice of object codes, object code 660021, Repairs & Maintenance, is available to record both “routine” and “major” repairs.  However, other object codes for non-capital expenditures may also be used if they appropriately describe the nature of the expenditures (e.g., 613001, etc.).  Capital project expenditures should be recorded in the object code series 607XXX in either externally restricted construction funds, or repair and maintenance/internally designated capital project funds when appropriate.

Ultimately, the classification of a repair and maintenance item as either “routine” or “major” is a matter of judgment and will vary depending on the campus size and the nature of the repair.  It is critical that a careful evaluation of the classification of each repair expenditure be made to ensure the accuracy of the DSCR.  EO 994 establishes minimum values that must be met for the campus’s debt program.  Falling below these benchmarks could jeopardize the campus’s ability to finance future projects.

The attachment to this memo provides an example of inappropriate recording of major maintenance and repair expenses and appropriate recording of these costs, with a demonstration of the impact of each on calculation of the DSCR.

The guidance provided herein is recommended to be effective July 1, 2011 and will be required on July 1, 2012.  Early adoption is encouraged for the benefit of the campuses as explained above.

Should you have any questions, please feel free to contact Roberta McNiel at 562-951-4668 or Sedong John at 562-951-4577.

Attachment

Cc:      
Financing and Treasury
FSAC
CPDC