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Posted on Nov 1, 2012

Are You Prepared for Its Replacement?

Are You Prepared for Its Replacement?

by Tim Williams, SCSBC Director of Finance

Did you know that your school building will cost big bucks to replace in the future? How much will it cost? If you own a building that costs $1million to build today, and assuming building costs rise at 5% per annum, your school will need $11.5 million to replace it in fifty years’ time. Even if you put the cash aside equal to amortization you will still be $10.5 million short.

Some school boards seem to be avoiding this financial obligation. Such school boards may counter the obligation to prepare for replacement with the following:

1) Why put cash aside for a future building if it can be used for building the kingdom in the lives of kids today?

Replacement2) How do we even know that information technology won’t replace the need for buildings in education in fifty years?

3) Our alumni students and parents will donate the money we need for a new building in fifty years so we don’t need to save money now.

Some schools are in the middle of paying off large debts on new buildings. Some are struggling with declining enrollment. Those schools may find this article challenging, particularly those who are in charge of the school’s finances and are struggling to balance the budget.

So what is best practice in this area?

First, the board and finance committees need to wrestle with the issue, and have a budget policy and framework that sets aside funds for capital replacement. Second, at a minimum, put aside cash each year equal to amortization into a bank account or paying down of existing loans. Third, when your building loan is paid off, keep putting aside as a minimum the money you would be paying on a building loan each month. Fourth, ensure that your school’s director of development or fundraising committee understands the goal of how much money needs to be raised for this purpose.

Let’s avoid panicky capital campaigns at times when money is scarce and ability to borrow is weak. Wouldn’t it be wonderful if your school didn’t need to take out a loan to replace a building in the future and all that potential loan interest could be used for kingdom building!

 

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