A r c h i v e d  I n f o r m a t i o n

Investing in School Technology: Strategies to Meet the Funding Challenge - November 1997

Chapter 3:

Funding Strategies for the Technology Plan


At least three challenges must be met to fund technology in schools. First, ways must be found to fund the relatively high levels of capital expenditures needed to install school technology systems. Second, funds to sustain school technology's annual operating costs must be identified. Finally, funds must be secured to regularly retire and replenish portions of the system to keep it modern.

Irrespective of the availability of funding, the economics of school technology combined with schools' current budgeting frameworks and the realities of financing large capital investments can inhibit successful deployment of technology in schools. The usual method of financing school capital projects is through local government bonds, but bond issues are not feasible in many school districts. Voters in expanding school districts are probably well accustomed to bond issues, but elsewhere it may be more difficult to ensure their acceptance. Even when bond issues are passed, the money raised traditionally pays for only capital items.

Using schools; existing budgeting framework, there is a real danger that staff development and training costs, a significant part of the initial investment and a large component of ongoing costs, will not be funded adequately simply because the framework provides no easy way to cover these expenditures. For a district, one of the worst possible outcomes would be to have technology deployed in all of its schools only to find that it is not used to its full potential. There is a distinct possibility this situation will prevail if the schools' existing funding mechanism facilitates the deployment of physical capital while constraining the formation of the human capital needed to exploit technology's potential contribution to education. To prevent these problems, school districts will require strong support and assistance from federal and state governments and will need to reform existing school management and budgeting practices.

Strategies that federal and state governments can use to meet the funding challenge are broader than those of local governments. For example, federal and state governments could develop and issue standards and guidance for the large-scale investment required and could strengthen the technology credentials of pre-service teachers. Such measures would reduce the long-run cost of deploying school-based technology and would help minimize future funding outlays at the school district level. The following sections examine the potential contribution of the federal and state governments and local school districts.

Federal Contribution

A role for the federal government is the use of its limited resources to leverage additional funds for technology in schools. One of the most productive uses for limited federal funds, particularly at the state level, is in planning for the deployment of technology in schools and the schools' connectivity to the information superhighway. Goals 2000 funds have already been used in most states to develop detailed state plans for school technology, with significant results. In several cases, detailed planning documents were developed and facilitated the procurement of state funds to establish structures of governance, such as public commissions or boards to guide implementation of the states' technology plans. In some states, Texas and California are examples, these bodies have been instrumental in procuring additional funds that were subsequently distributed to schools in the form of grants and in forging business partnerships to promote educational technology.

Also, the federal government could provide tax incentives to help fund school technology. Although tax incentives are not necessarily limited to federal taxes, such incentives probably work best at the federal level. These proposals usually fall into three main categories: depreciation credits, income tax credits, and voucher tax credits. 22 Depreciation benefits might encourage appropriate acquisition of school technology by allowing companies that donate equipment to schools before the equipment is fully depreciated to accelerate the remaining depreciation of the asset. Instead of allowances, income tax credits could be given to individuals or corporations that donate equipment or software to, or conduct technology training in, local schools. Also, income tax credits could be extended to teachers or administrators who take technology training courses or meet state certification guidelines for proficiency in the use of school technology.

Tax incentives given directly to businesses for donations of used computers, as provided for in the Taxpayer Relief Act of 1997 (H.R. 2014), may prove costly to the government and could result in donations of equipment that is not needed. To avoid those problems, a voucher tax credit scheme could be used in which the value of the income tax credit is given to the states (instead of directly to companies) in the form of vouchers (which could be capped to limit the cost of the scheme, if necessary). These vouchers could then be used by the states to purchase additional school technology.

State Contribution

This section explores the contribution states can make to the funding challenge and outlines several strategies that state governments may want to use, and in some cases, are already using, to guide and assist school districts in the efficient and effective implementation of their school technology plans. States have a major contribution to make to the funding challenge in at least five areas: helping to raise the necessary funds; dispersing funds in ways that promote prudent investment; redressing any inequities between school districts; promoting ways to reduce the cost of technology; and monitoring progress toward the state's technology goals.

Although the federal government will have important roles to play in implementing the national educational technology plan, the responsibility for adopting coherent, coordinated funding strategies lies with state governments. They are best equipped to ensure both equitable access to high-quality educational technology for all students within the state and the efficient allocation of resources for the purchase of educational technology. For example, beginning in fiscal year 1996, Georgia appropriated state funds to provide technology specialist positions in each school system in the state. One technology specialist position is being provided for every four schools.

Not all states offer financial assistance with capital projects in school districts. From the school district's perspective, the most complete answer to the challenge of financing technology in schools would be for the state to assume the financial responsibility, at least for the initial capital outlay, as some states do with regard to new school construction and for certain aspects of telecommunications access. A similar option consists of the state providing funds on a percentage-equalizing basis. In this scenario, the school district would decide locally what technology it wants to deploy and the state would share the cost, with the percentage share depending on the district's wealth, perhaps subject to a maximum reimbursement rate.

Although this system allows much more local discretion in the deployment of technology, it provides little comfort to school districts that need additional funds to cover their share and are unable to pass a bond election or have reached their legal bonding limit.

At the far end of the local discretion scale is state provision of a fixed sum of dollars per student each year to the school district whether or not the money is needed. School districts that do not use the money immediately for technology could be given one of two options. Either they could put the funds into an interest-bearing account to be spent at some future time on technology, or they could be allowed to spend the allocation on other things. There is little to be said in favor of this dispersal mechanism except that it preserves local discretion. In between these mechanisms is a variety of arrangements, some based on a foundation program, others based simply on loans from the state fund.

Raising Funds

State governments have a critical role in securing additional resources for school technology. They have three general approaches to raising additional funds: mandates, incentives, and set-asides.

Mandates. Recent actions taken by the Maine legislature can be used to illustrate one funding approach based on mandates. To advance state policy, which aims to increase the sharing of knowledge and information by communities within the state, the Maine Public Utilities Commission recently ordered NYNEX (the state-regulated telephone company) to provide a statewide network and ensure that all libraries and schools in the state are provided access to network services using an account managed by NYNEX that obtains funds from rate over charges. 23 Funding is to come from previous NYNEX allowable rate over charges.

Another funding approach based on mandates might require that third parties who are likely to benefit from technology in schools should share some of the funding responsibility. Vendors of communications and information processing equipment and services are one such group. A special sales tax, levied perhaps for a limited period of time, on the services or products of these vendors would provide one method of ensuring that third parties who benefit from the proposed investment also help to pay for it.

Incentives. An incentive-based approach can also be used to raise additional funds. Traditionally in the U.S., generous capital consumption allowances have been used to stimulate investment. Similar devices could stimulate investment in school technology. For example, investment tax credits typically allow firms to deduct against their tax liability a certain percentage of the amount of any new investment. Even a small credit (such as 10 percent) provides a strong incentive to invest because it reduces the cost of the investment and commensurately increases the rate of return on the investment.

As public institutions, school districts do not follow the same accounting standards and tax rules as do for-profit institutions. But the funding potential of school districts selling depreciation credits to businesses in exchange for business investments in new technologies deserves some investigation. Public-private trusts to fund and promote technology in schools could be established and, acting under commercial principles, might use these credits directly if they purchased technology assets and leased them to school districts. Education trust funds already exist, such as the Texas Learning Technology Group, but they operate mainly on a quasi-public basis and tend to limit themselves to instructional computing. If they are to assume part of the task of funding school technology and professional development, these trusts must be encouraged to accept a much broader role, including the provision of venture capital and seed money.

State technology trusts could also take a wide view of technology and society and get involved in promoting the installation of learning technologies in the homes of school children by, for example, offering low-interest loans to parents. These, or similar vehicles, could be used not only to manage, leverage, and distribute public-private partnership funds, but also to grow those funds through related entrepreneurial activities. These trusts could also be used to ensure that the funds available were distributed to their highest valued use through a competitive grants process.

Set-asides. Set-asides provide a third revenue-raising mechanism at the state level. State lotteries are an example and can supply large sums of money for educational technology. For example, $86.4 million was allocated in 1994 from Georgia's Lottery for Education. 24Using funds obtained from the state lottery, the Florida Instructional Technology Grant Program has distributed $65 million to schools in Florida. In the first year of this program, 21 percent of the funds distributed were obtained from lottery proceeds and 27 percent in the second year. However, competing interests also look to these funds, so supporters must work to ensure that some proportion of these funds are dedicated to technology, not simply general infrastructure. Funds obtained from this source are best applied to the initial costs of technology, as this revenue may vary over time and be unpredictable.

Dispersing Funds

States should consider carefully how the mechanism through which funds earmarked for school technology are distributed, because the way funds are dispersed by the state to individual school districts may be just as essential to the success of technology in schools as the way funds are generated. Non-rigorous methods of disseminating funds (e.g., per capita allotments) to stimulate investment in school technology could produce imprudent investments. For example, student-based allocation formulas may hinder states from exercising proper oversight of technology plans. Greater oversight could be exercised, however, by attaching conditions to the money dispersed. For example, the state could specify that a certain percentage of the total allocation must be spent on staff development. Other methods of disseminating funds (e.g., competitive grants) may be unintentionally biased against certain types of schools, such as those in rural areas.

Addressing Equity

Within school districts, equity in learning environments seems to be an explicit goal. Similarly, state governments have a responsibility for ensuring equitable access to high-quality educational technology for all the school children they serve. Both federal and state governments support this goal principally through grant programs. State grant programs that support the acquisition of educational technology, if they are truly to support equitable distribution of technology resources across school districts, will be written so as to factor into the funding formula the extra expenses borne by districts in rural areas or those with large numbers of school buildings in poor condition.

Ohio has two related school technology initiatives, SchoolNet and SchoolNet Plus, that specifically address school technology equity. Under these programs, "equity grants" are provided to school districts in the lowest wealth quartile in the state. Funds are provided by the state for wiring the schools in these districts and also for computer hardware, software, and professional development.25

Low-income school districts are likely to face the greatest funding challenge, not only because their sources of funding may be limited but also because the cost of deploying technology in their schools may be high for various reasons, including having more older buildings and greater security problems. One potential mechanism that states could use to address differences in the cost of technology between districts is cost equalization. Cost equalization may be needed to balance differences between districts in the costs of deploying technology to reach similar goals. In general, technology costs tend to be higher in rural and highly urbanized areas, and lower in suburban areas. For example, rural districts may require more expensive wireless technology. In urban districts, which have a greater number of older school buildings, building modifications may be expensive. Unfortunately, it is easier to recognize cost differences than it is to measure them and compensate districts for them. The usual methods of compensation are funding some proportion of these costs or providing the district the difference between its costs and the estimated costs in an "average" district.

To address the funding limitations of low-income school districts, states could establish a school technology loan program, similar to the affordable housing programs established by many state and local governments for moderate-income home buyers. To fund the program, a dedicated tax could be earmarked. States could define the eligibility requirements for borrowing from the loan pool and set the borrowing terms for the loan (e.g., a term of five to seven years, commensurate with the expected life of the proposed technology, and an interest rate competitive with local government bond issues). The strategy would obviate the need for low-income districts to pass bond referendums to get their technology plans funded. An example of this type of scheme is found in Wisconsin. The Wisconsin Educational Technology Board (ETB) is a state organization that makes available to public school districts and municipal or county library boards low-interest loans for educational technology and distance-education projects. This new program offers a 2 percent buydown on total interest costs for Public Lands Trust Fund loans. For the fiscal years 1996-97 through 1999-2000, the Board of the Commissioners of Public Lands must reserve $15 million annually under its State Trust Fund loan program for this purpose. Recent interest rates (without the subsidy) have been around 5.25 percent for loans with repayment periods of between 1 and 5 years and about 4.75 percent for loans with repayment periods of between 10 and 20 years.

Reducing the Cost of Technology

State governments can reduce the cost of technology in all school districts using strategies such as:

Negotiating preferential rates. Corporations that provide goods and services to educational organizations reap benefits from those transactions beyond the original purchase price. These benefits arise from the fact that the corporations are institutionalizing their products: the students of today are the consumers of tomorrow, and students are a captive audience to the technology suppliers chosen by their schools. Because they are familiar with those suppliers' products, they are presumably more likely to buy them in the future. A similar effect occurs with parents. Thus, since suppliers reap benefits in terms of future business when they sell their products to schools, the state may negotiate or mandate that those benefits be reflected in the suppliers' charges. The potential for obtaining favorable rates may be considerable. In Delaware, the state's Public Service Commission has ruled that Bell Atlantic Corporation can charge no more that $28.02 per month for unlimited use of an ISDN line at a home, even though Bell Atlantic has told states that unlimited residential ISDN service should cost $249 per month. 26

Establishing purchasing collectives. This strategy builds on the fact that it is more cost effective to make purchases (e.g., of computers) in large numbers. By establishing purchasing collectives, comprising multiple, or even all, districts in a state, the state is supporting local districts' abilities to capitalize on this purchasing strength by negotiating lower rates. This strategy has an additional advantage in that it will foster the development of relatively similar educational technology programs across different districts in the state. Over 20 states already have either informal consortia or formal cooperatives for buying school technology. 27 These arrangements are particularly useful for small, rural, or low-wealth districts, but even large, high-wealth districts that think they have enough buying power to "go it alone" should not overlook the potential benefits of joining a purchasing cooperative or consortium. The muscle power of purchasing cooperatives can be used to negotiate not only favorable pricing terms but also non-price terms as well.

For example, when the Plano Independent School District in Texas planned to buy 7,500 new personal computers, it expected to use that equipment for five years before rolling it over into less sophisticated applications. In previous transactions, new computers had been procured with a three-year warranty. Using the buying power of this large new procurement, the district negotiated an extended five-year warranty specifically to minimize system maintenance costs. (A fuller description of Plano’s approach is included later in this chapter.)

Mandating service provision. States can simultaneously lower the cost of access to technology services (particularly access to the information superhighway) and further their objective of ensuring equitable access to educational technology to all districts in the state through mandates of service provision. States could require that schools and their communities be wired to access the Internet. This strategy is being pursued actively by Maine, for example. It is more expensive, sometimes prohibitively so, to wire rural areas for Internet access than it is to wire urban and suburban areas. Similarly, it is more expensive to retrofit older school buildings for Internet access than it is to wire newer buildings. Alternatively, the state can negotiate with suppliers that, as part of a contract, the supplier wire rural regions or retrofit older school buildings.

This strategy can also be applied to other components of educational technology systems as well, such as provision of professional development for teachers and maintenance of computer systems. State governments can support rural districts and districts with older buildings or lower tax bases by mandating that corporations that do business with the state provide the same services to school districts in disadvantaged areas at the same prices as those offered to other buyers.

District Contribution

State and local governments provide 84 percent of the total funding for K-12 education. This burden is shared almost equally. Clearly, these parties will be substantially involved in funding technology in schools, but currently they contribute only 60 percent of total spending on educational technology. 28 Also, while state and local government share almost equally the funding of K-12 education, currently most technology expenditures are funded by local governments. For example, in fiscal year 1994, local governments contributed 40 percent of expenditures on educational technology, the federal government contributed 25 percent, state governments 20 percent, and businesses and other sources 15 percent. These shares of expenditures compare to shares of 41, 6, 43, and 10 percent respectively for total K-12 education expenditures in 1994. 29 Even though in the next few years proportionally more will probably be spent by the states, and proportionally less by the federal government, it seems likely that most responsibility for financing technology in schools will continue to belong to individual school districts.

The piecemeal approach to funding technology prevalent in most schools cannot sustain widespread, substantial use of technology throughout the nation's schools. Based on the economic characteristics of the "Classroom Model" discussed earlier, the average annualized cost of technology systems in schools is about $400 to $600 per student if a reasonable amount of staff training and development is provided. However, in fiscal year 1994, state expenditures on educational technology averaged only $21 per student, 30 and a similar amount of funding, based on fiscal year 1995, was provided by federal funds. 31 Investing in school technology requires large initial capital outlays, particularly if staff development is funded appropriately. Although annual ongoing costs are considerably lower than the initial capital outlays, the Classroom Model's initial investment alone is about $800 per student and actual costs vary tremendously, depending on circumstances in the district. For example, even though staff development costs were excluded, Loudoun County (VA) Public Schools’ technology plan involved an initial cost of $1,000 per student (for hardware, network, and building modifications), representing 20 percent of the district's current expenditure per student. 32

Most schools that have made significant investments in technology to date have used exceptional methods to finance their efforts (e.g., special grants, partnerships with businesses to use the school as a demonstration site, local fundraising by parents, and categorical funding from state or federal programs). Most telling of all, the critical aspect of training and staff development in these schools has been supported by a dedicated and committed teaching staff. Other factors common to many school districts that have succeeded in funding high levels of technology include: 33

If the above factors enable school technology acquisition, many of the nation's schools will be unable to replicate these technology initiatives because these factors are absent or weak in their districts. This being so, it becomes especially important to devise funding methods that can be applied in all districts regardless of their circumstances.

The remaining pages of this report propose ways to fund initial technology-related costs and annual operating costs; suggest financing mechanisms that can ensure the district's technology system is regularly retired and replenished; and outline a revenue model that districts could use to assess, in conjunction with the analysis of technology costs, whether any funding gap exists and, if so, to what extent local taxes or other revenue sources must be raised to bridge the gap.

22 The Aspen Institute, Forum on Communications and Society, March 10, 1995.

23 Further details of this funding strategy are provided in the final section of this chapter.

24 American Association of School Administrators (1995). From Here to Technology . Alexandria, Virginia.

25 Further details of this funding strategy are provided in the final section of this chapter.

26 American Association of School Administrators (1995).

27 American Association of School Administrators (1995).

28 McKinsey & Company (1995).

29 McKinsey & Company (1995), Appendix 13.

30 Based on survey responses by 33 states conducted at Far West Laboratories by John Cradler and Elizabeth Bridgforth.

31 U.S. Department of Education, (1995). Connecting Classrooms, Computers, and Communities: Teaching and Learning in the Digital Age . Washington, DC

32 32 Loudoun County Public Schools, Instructional Technology Implementation Plan for Loudoun County Public Schools . Leesburg, VA, January 16, 1996.

33 Keltner, B. & Ross, R. The Cost of High Technology Schools . MR-634-CTI/U.S. Department of Education, RAND, Santa Monica, CA, 1995.

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