The State of Indiana has given the administration at Ball State University the go ahead to make a multi-million dollar mistake. The state has approved the construction of a parking garage on the campus at the intersection of McKinley and Ashland avenues; the structure is expected to cost $8.5 million. This will increase the number of parking spaces at Ball State University by 600.
To finance the structure, Ball State will borrow the funds required pledging ALL (not just the additional 600) parking revenues as surety. If financing is at (a low) 4 percent interest rate for 30 years, then approximately $491,300 (principal and interest at 4 percent) will have to be paid per year for each of the 30 years. At a more realistic interest rate of 5.5 percent, Ball State will have to pay approximately $584,845 per year. In order to make sense financially, each of the 600 spaces has to generate net revenues (revenues less the costs associated with maintenance and revenue collection) of between $819 per year ($491,300 divided by 600) and $975 per year ($584,845 divided by 600).
The additional parking spaces will not produce these revenues. Each of the additional parking spaces will be lucky to bring in another $500 per year net of operating costs. This means that Ball State is spending somewhere between $800 and $1,000 per year to acquire (at most) $500 per year. This is neither good economics nor good administration.
The administration at Ball State has deluded itself into believing that the parking structure will be self-financed because the structure will be financed by parking revenues. However these revenues include not only the revenues the new structure generates, but also the increased parking fees on all lots and increased fees for parking violations. Financial prudence forces us to recognize that the higher fees for parking and violations can be imposed without constructing a white elephant. If there is an excess demand for parking spaces at Ball State, prices should be increased. But the additional revenues do not have to be wasted; spending $800 to $1000 per year on parking spaces that generate (at most) $500 is wasting resources.
To make it clear what Ball State is doing, suppose you have a restaurant, and that it produces net revenues of $100,000 per year. With that $100,000 you can invest in another restaurant that will cause losses of $75,000 per year. Should you invest in the new restaurant? The answer is of course not; nobody in their right mind would waste $75,000 that way. Neither the excess revenues of $100,000, nor any fraction of it, has to be reinvested in the restaurant business. The funds should be spent on things that are worth the money they cost. So why is Ball State different, and why does it have to throw money away?
The hallmark of a good administration is recognizing that errors have been made and correcting them. Many thousands of dollars have been spent planning the parking structure. It is a mistake to waste millions of dollars because thousands of dollars were wasted. The administration of Ball State University should cancel the projected parking structure. It is a multi-million dollar waste.
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