In this situation you must allocate a limited capital budget among seven competing projects. Three parties are involved in the negotiation: the Head of School, the faculty budget committee, and the board of trustees. While the issues in this exercise appear straightforward, the parties do not necessarily perceive the budget process in the same manner. Read the background information for the Connecticut Valley School, and decide which role (faculty budget committee, board of trustees, headmaster) you would like to take. The different parties will meet together to negotiate an agreement about the capital projects that will be funded. The chairperson of the board of trustees will chair this meeting. Participants will leave this meeting with an agreement about the priority of the capital spending projects. If no agreement is reached, each team should have a record of their final rankings and where they are willing to make further concessions.

Background Information

The Connecticut Valley School (CVS) is a private boarding school in Massachusetts. The Head of School, J. C. Loring has just submitted annual recommendations for capital spending to the board of trustees. Capital spending will be funded from two sources: new debt and the accumulated interest on the school's endowment. Since the school is approaching its debt capacity and trustees are committed not to draw on the principal of the endowment, the school can afford to spend only $900,000 to $1,000,000 on capital improvements over the next year.

The seven major projects under consideration are described briefly here:

1. Swimming pool a. Cost: $640,000 b. Expected life: 15 years c. Currently the school rents a local facility for $60,000 per year. In addition, the school pays $10,000 per year to bus students to the facility. If the school owned a pool, it could rent out pool time to local organizations for $30,000 per year. Loring feels that more students would use the pool if it were located on campus.

2. Buses a. Cost: $270,000 (3 buses) b. Expected life: 6 years c. CVS owns two campuses several miles apart. A private bus company transports students between campuses at a cost of $180,000 per year. If the school owns and operates its buses, it will incur $80,000 in operating expenses each year.

3. New roof for hockey rink a. Cost: $60,000 b. A new roof is essential to prevent further damage to the rink and to the arena's infra- structure. The project could be delayed one year; but due to the additional damage that would result, total repair costs would jump to $120,000.

4. Wood chip heating system a. Cost: $800,000 b. Expected life: 15 years c. Cold New England winters and the high cost of fuel oil have been draining the school's operating funds. This new heating system could save the school between $140,000 and $160,000 per year over the next 15 years.

5. Renovation of fine arts building a. Cost: $300,000 b. The faculty and trustees agree that an improved fine arts program is critical to the school's liberal arts mission. The renovated fine arts building would include a photography lab, a pottery shop, and art studios, as well as a small gallery. The building would not generate any incremental revenues or cost savings. However, a wealthy benefactor (after whom the building would be named) has offered to contribute $150,000 to subsidize the project. In addition, the facility would provide some marketing benefits, as a strong arts program attracts quality students.

6. Renovations to women's locker room a. Cost: $40,000 b. The women's locker room has not been renovated since it was built 33 years ago for visiting men's teams. Many of the women have complained that the facility is dirty, depressing, and overcrowded. Some women refuse to use the facility. The Head of School insists that these complaints are unfounded. The renovations would generate no incremental revenues or cost savings.

7. Upgrading the computer lab a. Cost: $120,000 b. Over the past eight years computer equipment has been purchased on a piecemeal basis with surplus operating funds. To support curricular goals, the school needs state- of-the-art computers and more workstations. The director of computing has proposed that the equipment be upgraded over three years. The first stage of this plan would require spending $120,000 on personal computers in the coming year. An additional $160,000 would be spent over the following two years.

The school uses a 12 percent annual discount rate to evaluate all cost-saving investment projects.

Since not all of these projects can be undertaken, they must be prioritized. In his report to the trustees, the Head of School ranked the seven projects as follows:

1. Swimming pool $640,000

2. Hockey rink roof $60,000

3. Buses $270,000

4. Heating system $800,000

5. Fine art building $300,000

6. Women's locker room $40,000

7. Computer lab $120,000

Loring recommended that this year's capital funds be spent on the construction of a swimming pool, repairs to the roof of the hockey rink, and the purchase of three buses. These projects would require a total expenditure of $970,000. Loring's rankings were based on a subjective evaluation of cost-benefit trade-offs.

While the trustees must make the final decision, they have solicited advice from the faculty. The faculty is in touch with the day-to-day operations of the school and with the needs of the students. In addition, many faculty members feel that they were closed out of the decision process last year and that the ultimate allocation of funds was inconsistent with the school's objectives. In an attempt to improve the decision process, the trustees appointed a faculty budget committee to advise them on capital spending priorities. A meeting of the trustees, the budget committee, and the Head of School has been scheduled. The purpose of this meeting is to prioritize capital spending projects. It is expected to be a lively and productive session.

(Source: Written by Peter Nye, University of Washington at Bothell.)

Answer these questions:

1. 1. Your role in the negotiation. (I should either be Head of school or Chairman of the Faculty budget committee)
2. 2. Your ranking of the seven projects
3. 3. Your recommendation on what projects to use this year's capital funds
4. 4. The total expenditure based on your recommendation
5. 5. Your alternatives if impasse
6. 6. Do you have any agenda in mind?
7. 7. Do you have any decision rule in mind?
8. 8. What kinds of roles do you want to play in the group?
9. 9. Do you want to form any coalition to support or block anything?