Capital Replacement Reserves
By: William I. Scrivens
A stewardship campaign may bring something new and exciting to your place of worship. Often, however, like Congress, there are added items, like the old roof that needs to be replaced or the heating and air conditioning system in the banquet hall, which has seen its last days. I know, as my church did just that several years ago. These add-ons were not so new and not so exciting, and are we really talking about stewardship?
The Merriam-Webster Dictionary defines stewardship as “the careful and responsible management of something entrusted to one's care.” In other words, stewardship is taking care of “resources” that are already owned and in place…and, in fact, has nothing to do with adding something new.
So where do we find this “Lost Side of Stewardship?”
Capital components or capital assets are typically items or components that are physical, accounted for, and have worth. For church facilities, we’re talking about the physical plant: the buildings and grounds, and all of the subcomponents like the parking lot and site lights, roofs and windows, audio equipment, hot water heaters, and so on.
If we go and count and measure these, we come up with an inventory of capital components that make up our facility. This “Component Inventory” can be as detailed and customized as we need.
If we think about these inventory items, many of them have a finite life. In other words, once we have maintained a component as long as we can, it will need to be replaced. A hot water heater may last 10 years. A front door will probably last more than 5 years, but it is likely to be worn out by 25.
This concept is known as the “Normal Economic Life” of a component. If we also consider the condition and age of each item and compare each one to their Normal Economic Life, we are considering the “Remaining Economic Life” of each component. The Normal Economic Life and Remaining Economic Life of the components in an inventory create cycles of replacement.
Notice the word “economic” comes into both terms, so we are talking about costs. Specifically, we are talking about a “Replacement Cost” for each item in the Component Inventory.
So, in a few words, we are considering the components of a facility and taking measurements, estimating replacement costs, and setting cycles of normal economic life and remaining economic life for each. This is the backbone of Capital Replacement Reserves. It is a systematic approach to understanding a facility’s long-term replacement needs based on the facility’s components, replacement costs, and replacement cycles.
Now, let us take all of these replacement cycles and costs and mathematically model them over time, accumulating these expenditures over, say, a 30-year period. What we have now is the long-term “Cumulative Expenditures” for all of the items making up our facility, a target that looks out into the future.
What is nice about looking at Cumulative Expenditures is that we can also consider the accumulation of Capital Replacement Reserve Funds. In other words, comparing apples to apples, cumulative to cumulative, we can budget for annual cumulative funding based on the projected cumulative expenditures. The accumulation of funds in this article is being modeled using the “Cash Flow Method.”
So, now we have to ask ourselves, with this approach to understanding our long-term funding needs, would we ever have to go back to our congregation and ask for the money to replace something we already understand and can anticipate? We cannot say, “No,” but, with a Capital Replacement Reserve strategy thoughtfully considered and implemented, it becomes a whole lot less likely.
Boiling this down, finding the “Lost Side of Stewardship” starts with having the funds already available in anticipation of the replacements we can reasonably predict.
Let’s jump back a bit for some additional thoughts about that Component Inventory. The key to a good useful Capital Replacement Reserve plan is, of course, the raw data. The rest is mathematics and standardized practices. To reiterate, the Component Inventory is comprised of measurements, replacement costs, and setting cycles of replacement for each item.
This can quickly turn into another article, so let’s just leave it with a few thoughts. Sidewalks get partially replaced as tripping hazards need to be repaired, and roofs get replaced when leaks become too persistent. These are easy.
Others, like the hymnals, take more consideration. Do you replace them when the pages are actually falling out of the books, or do you replace them when they start to look too beat up? What is too beat up? But, wait, maybe you replace them for other reasons, with memorials of loved ones on the inside cover. That is what my church did, and for just that reason, hymnals will be replaced with more of a missionary heart.
The finesse of the Component Inventory is the key to a useful and meaningful Reserve Study.
Wrapping this up, I would like to step back to “the careful and responsible management of something entrusted to one's care.” The Bible spends a great deal of time talking about “stewardship.” Since the early 90s, computers and other technologies have brought new ways of addressing old problems.
The old problem being considered is how to pay for the replacement of your roof, windows, boiler, playground equipment, or all of the above. The solution being presented finds “the Lost Side of Stewardship,” starting with a sound financial plan and this idea of “Capital Replacement Reserves.”
William I. Scrivens is a reserve specialist with Miller Dodson, a nationally recognized Capital Reserve Consulting Firm, www.mdareserves.com.