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 (continued)

Funding the Initial Capital Outlay

School districts have five basic ways to fund their initial capital outlays for technology:

Issuing bonds

The deployment of technology in schools requires a substantial investment. The initial capital outlay can be large, typically between $600 and $1,000 per student. Because taxing property owners to pay for large capital expenditures in the year they are incurred would produce large hikes in tax rates and wide fluctuations in tax bills from year to year, local government long-term bonds are the traditional mechanism for funding large capital expenditures in the school system. But this mechanism has several problems. First, the period over which bonds are repaid usually is longer than the relatively short life of most technology assets. Second, in today's climate, perhaps the biggest problem impeding the ability of school districts to fund their technology plans is the difficulty they may face in passing bond elections, particularly in economically depressed districts or those with falling enrollments. Moreover, school district staff must be prepared to mount a concerted and well-planned campaign to secure passage of bonds intended for technology initiatives. Third, this traditional method of financing capital projects has limits set by states on the amounts school districts borrow. These limits usually are expressed as a percentage of the district's assessed property valuation.

There are two basic types of bonds: term bonds and serial bonds. Using long-term bonds that have a maturity of 20 years, for example, a school district might borrow $25 million for new school construction projects. Interest on the bond may be payable twice annually, with all the principal falling due only at the end of the 20 years. Typically, using this vehicle, the district would establish a sinking fund into which annual contributions would be made so that at the end of 20 years the original $25 million in principal will be available for repayment. A new school building that will last 30 to 50 years is an excellent candidate for this type of borrowing because many generations of school children will stand to benefit from the investment (and their parents will bear part of the costs through the bond issue). Sometimes, however, a portion of the money raised by bonds for new schools is earmarked for relatively short-lived technology items for those schools. For example, a $131 million 20-year bond passed recently in the Plano Independent School District in Texas for the construction of seven schools included almost $8 million for the purchase of educational technology. The technology installed under this initiative will be paid for long after it has become obsolete. Thus, although the technology will be used by only one or two generations of school children, the parents of several generations will pay for it.

Most school districts borrow using the second type of bond, serial bonds, which have varying maturity dates that are arranged so that the sum of interest and principal paid each year is about the same. Because these bonds are issued with different maturities, they seem more appropriate than long-term bonds for acquiring technology or other relatively short-lived capital improvement projects. For short-lived technology projects, it makes more sense to ask the current generation of users to pay for the system.

Long-term bonds may be appropriate for one aspect of the technology plan that is often difficult to fund from other sources, i.e., staff development. To produce effective results, staff development and training must be properly funded. Typically, that means at 30 percent of total technology-related expenditures. With adequate staff training and support in the school district, technology can be imbued into the curriculum of its schools. In these circumstances, future residents and parents of children in the school district contribute to the costs needed to effect this substantial shift in teaching methods and practices through the issuance of local government long-term bonds.

Staff in the school districts of Vancouver, Washington, and West Bloomfield, Michigan, campaigned to help pass bond referendums for school technology initiatives. In Vancouver, two separate bonds were passed, one for $45 million in 1990 and another for $135 million in 1994. The bond that was passed in 1990 funded the remodeling of five schools, the building of three new ones, and the creation of 25 computer laboratories. The bond that was passed in 1994 funded, in addition to a new high school, the implementation of technology in existing high schools and the completion of the district's wide area network. District administrators embarked on a three-month campaign, visiting local groups to explain the need for, and the planned use of, the technology proposed for the district's schools. The district now keeps the community involved and informed in its technology initiatives by offering a "patron tour" once a month for any interested party.

Residents of West Bloomfield passed a $25 million bond referendum in 1993 that contained $10 million earmarked for educational technology. A substantial amount of effort went into securing the bond passage. For example, well before the referendum, the school district negotiated with organizations, such as the Computer Curriculum Corporation and Jostens Learning Corporation, to procure equipment and software at no cost for pilot programs in the school district. These pilot programs enabled the district staff to respond with firsthand knowledge to questions or requests for additional information from residents and teachers in the district. A committee composed of community members and parents who were involved professionally with technology and school staff and administrators was formed and met for over a year to develop a vision for the district's educational technology program. Considerable time was devoted to speaking and communicating with local groups and giving tours of the pilot programs. The funds raised by the bond provided the district's elementary schools with five computers per classroom and mini-labs. Each middle school received 70 computers on carts. Each high school also received computers on carts and a computer laboratory. In addition, two technicians were employed to maintain the acquired equipment.

Scheduling Replacement

One type of capital expenditure that is not usually financed from bonds and that has some economic characteristics in common with school technology is the purchase of school buses. Because buses have shorter lives than do school buildings, it is usually considered inappropriate to finance them using bonds. The usual mechanism that is applied to keep the fleet operating is a schedule for replacement. A percentage of the system is retired and replaced each year, smoothing out the needed capital expenditures. This mechanism works reasonably well if districts do not have to buy a large number of buses at any one time. A similar schedule could be an appropriate mechanism for regularly retiring and replacing schools' technology systems.

Leasing

Leasing is a mechanism gaining general acceptance as an ongoing way to fund technology and keep it current. Not only does it save school leaders from spending the significant time and effort usually required to reach closure on grants and bonds; it also links expenditures more closely to the implementation timetable and provides flexibility for the possibility that the useful life of equipment may be shortened or extended.

The lease agreement can be made through a vendor, a finance company, or another agency. Leasing through a third-party organization instead of a particular vendor can free the lessor from committing to an organization that may lag behind others in technological development and service over the course of the lease. Agreements can cover arrangements with multiple vendors simultaneously

Lease purchase financing is one of the most flexible vehicles for supporting technology funding strategies. It is essentially a purchase agreement with the initial purchase costs spread over several years. It provides competitive interest rates often associated with bond issues, but with the ability to flex payments and terms to fit the school’s timetable, the product’s expected useful life, and budget constraints. These are substantial advantages over both capital expenditures and bond issues.

Lease purchase agreements are also generally quicker to approve and easier to administer than bond issues. They can be structured to include soft costs such as prepaid maintenance, installation, software, and other professional services in a "bundle" that fits the proposed technology solution. This is an important factor because these soft costs are becoming increasingly large portions of technology projects.

Lease purchase arrangements also allow school districts to operate within a fixed budget. The lease is usually structured to be funded from the operating budget, which generally is easier to access and use than the capital budget.

School districts, like other agencies of state and local governments, qualify for tax-exempt leasing. These leases usually include non-appropriations language, which means that if the institution does not appropriate funds in each subsequent year, the lease can be terminated (with return of equipment) with no legal obligation or liabilities going forward. That language also precludes the lease funds from being considered long-term debt and may eliminate the requirement for voter referendum.

Lease arrangements in which equipment reverts to the leasing company at the end of the lease sometimes are unattractive to school districts. Lease payments may be relatively high and the lease period relatively long, making a lease-purchase option generally preferable.

Prince Georges County School District in Maryland used a lease purchase arrangement to fund a $10 million initiative to upgrade computer laboratories in its magnet schools. After selecting the lowest interest rate from bids submitted by financing institutions, payments were made in annual installments over three years. The equipment purchased was used as collateral for the loan. This arrangement enabled the district to keep pace with technology development and ensured that its magnet schools were upgraded simultaneously. In a similar move, the county arranged a $5.5 million lease purchase agreement through a local bank to equip 68 elementary schools and three training sites with integrated learning system laboratories. 34

Another example of tax-exempt financing helped the Green Local School District in Ohio to speed up implementation of its technology plan despite limited available capital. Using tax-exempt lease purchase financing to supplement funds awarded to district schools through state and federal programs, the superintendent drastically accelerated implementation of plan components while positioning the district to enjoy greater flexibility in future incorporation of new technologies. This scenario involved a variety of systems and technologies from several vendors.

Leasing’s major benefits, in summary, are preservation of capital dollars, avoidance of long-term debt on a school’s books, overall limitation of debts, flexible payment structure and terms, low rates, and availability of financing whole projects, including their soft costs, as units.

Whether leasing is advantageous for a particular district may depend on the state's aid formula. For example, if the formula provides aid for current expenditures but not capital expenditures, it may be better to lease. Even though interest is being paid, leasing may result in lower annual cash outlays if the lease enables the district to obtain a substantial discount by buying in bulk. These discounts may not be available if the district funds its technology plan by spreading purchases over several years. Many vendors such as Compaq, IBM, Apple, and Jostens Learning Corporation work with districts to create flexible payment plans for their products. School districts may also consider working through a third-party leasing agent such as AT&T Capital Corporation or a local or regional financing institution to tailor a vendor-neutral package that includes equipment, programs, and support from a variety of companies.

System Contracting

Contracting for the installation, maintenance, and operation of the technology system is another financing alternative. Commercial developers of educational technology have begun offering school districts a complete "one stop" package that includes hardware, networks, courseware, and training for an inclusive, annual flat fee per student.35 This indicates that developers are beginning to tailor their selling and pricing policies to suit the funding constraints of schools and districts. However, in these arrangements the school district loses control over some aspects of the system and may have insufficient choice of suitable contractors to enable a competitive bid.

Finding Grants

Grants can supply funds for initial capital outlays. Consider the following scenario where they are used to fund staggered deployment of technology in a district.

A school district may want to abandon equity-based notion that investment should take place in all its schools at the same time. Instead, it would select some schools or grade levels for early development and help them lead the way for others to follow.

The district could establish an education foundation with a board that then selects and invests in individual schools based on proposals received. Funding could come from a specified percentage of district revenues; grants from state and federal governments, businesses, and philanthropic foundations; and other sources. The school district could develop policy guidance for the foundation, but leave the foundation free to invest funds to achieve the highest possible return in terms of educational outcomes.

Schools in the district necessarily would be treated differentially in the short term, as the foundation would ensure that funds were placed in their highest valued uses. But in the long term, the school district would require that schools be treated equitably. For example, it could insist that all schools attain some minimum level of technology within a specified time. The foundation's board would regularly evaluate the return on the investment in each school to determine whether further investment (or disinvestment) was required. (Other funding roles for local education foundations are discussed later in this chapter.)

Funding Ongoing Operating Costs

After a school or district makes an initial investment in technology, the dynamics of sustaining the investment are quite different from those governing the decision of whether to invest. Budget resources may need to be reallocated. In the operational phase of the investment, substantial resources will need to be devoted to staff support and development to ensure effective use of technology.

One school of thought concludes that there is not enough money in school districts to fund technology and all the other programs in the education budget. Another school of thought maintains that there are already enough funds, and that money can be made available for technology by re-engineering how schools conduct their business and by reprioritizing funding. Regardless of these view points, a number of steps can be taken to improve the budget process so that additional funding can be made more readily available for educational technology.

Although the budget process is not highly visible, it is the best mechanism for coordinating and controlling most of the functions performed within the school district, including technology implementation. The remainder of this section describes areas of potential improvement in the budget and management process and examines areas within existing budget categories where money for technology might be found.

Four basic methods of funding ongoing operating costs are available:

Capitalizing the Cost of Educational Technology

Many school districts try to pay for computer hardware and equipment from the general operating budget and do not consider these purchases part of the capital budget. For example, for six years the Loudoun County School Board in Virginia asked its Board of Supervisors to fund a technology plan as part of the operating budget in this fast-growing district. And each year, since 1990, the technology plan has gone without funding.36 The plan was always one of the first things to be cut in each budget submission. Now, the School Board is pursuing $12.6 million in technology funding through a $21 million capital improvement. The construction portion of that bond, $8.4 million, has already been approved through the state. The technology portion goes to a voter referendum in November 1997. Capitalizing the cost of educational technology in the manner chosen by the Loudoun County school district may be necessary to overcome the hurdle posed by the large initial expenditure outlays that technology plans often require.

States and districts could encourage the capitalization of technology expenditures by requiring that a given proportion (e.g., 15 percent) of the budgets for each school construction project be spent on technology and the supporting infrastructure. Training and staff development costs likewise could be viewed as an investment in human capital and treated in the same way as other capital expenditures, although standard accounting practices do not recognize the asset value of staff. Capitalizing and financing training and staff development through bonds or other capital investment instruments such as certificates of participation, instead of relying on the general operating budget, is more likely to result in appropriate funding in these areas – often considered to be 30 percent.

Setting Budget Priorities and Increasing Flexibility

To obtain sufficient funds to sustain the technology system, it is particularly important for the school district to send a strong signal that technology expenditures are a priority. There are several ways this could be done:

If greater flexibility is introduced to the budgeting process or granted to schools when executing their budgets, it may be possible to "create" some funds to help sustain the ongoing costs of the technology investment. For instance, a zero-based budgeting process, involving a critical examination each year of all district programs, personnel, instructional strategies, equipment, and other services, allows technology to be given top priority.37

Even though there is limited ability in traditional school budgets to reallocate resources, the ongoing costs of technology deployment are relatively modest. For instance, these costs amount to only about 3 percent of the national average annual expenditure per student. Some of the money needed to provide additional staff development and training might be obtained from the resources currently allocated to instructional services, which nationally account for 4 percent of current school expenditures. Another 4 percent or so of expenditures is spent on supplies (mainly textbooks), and a further 3 percent on purchased services and tuition. 38 Portions of these budget categories may provide the relatively modest amount of resources needed to sustain the technology investment. Also, savings that result from technology use may reduce costs in areas such as administrative staff, travel, acquisition of library reference materials, and excess inventory.

In the commercial world, many companies are vigorously outsourcing functions that were formerly performed in-house. School districts are now beginning to look at outsourcing or contracting-out services as a device for freeing up money for educational technology. For example, Piscataway School District in New Jersey obtained the funds for outsourcing a customized service of getting curriculum materials on demand.39 Over three years, 10 percent of the district's budget was reallocated from non-instructional services to instructional services. By outsourcing food and transportation services, $2 million a year was saved against an annual budget of $60 million. 40 The sale of the district's bus fleet raised $1.5 million, which was then applied to school technology Labor resistance prevented the janitorial service being outsourced to produce even more savings. The savings obtained from this aggressive outsourcing program were redirected toward the district's technology plan, which is being implemented over four years. Some funds were also directed toward teacher training and development: in the first year, $700,000; in the second year, $550,000; in the third year, $400,000; and in the fourth year, $275,000.

Increasing School Autonomy in Personnel Decisions

Giving schools greater autonomy in personnel decisions could facilitate the reallocation of costs. For example, with greater school autonomy in budgeting, a high level of investment in technology could produce savings in personnel and personnel-related costs. Incentives in the salary system could be used to encourage appropriate staff development in areas critical to technology deployment and its integration into the curriculum. With greater autonomy, a school could accept higher student-teacher ratios to free funds for creation of teacher-assistant and technology coordinator positions.

Technology provides the opportunity to significantly adapt instructional experiences to the individual student. Technology also can blur the distinction between classes and even between age groups. In these circumstances, average class size becomes a confounded, and perhaps not very meaningful, statistic. In the long run, a shift might occur toward the physician/nurse professional model. With technology fully embraced, the status of teachers could be elevated by allowing more extensive use of teacher assistants. In this scenario, the subject expert sometimes would prescribe the instruction for the individual student, leaving the teacher's assistant to monitor the student's progress and liaise with the "prescribing" teacher.

Finding Additional Funds

Although the costs associated with operating the technology plan may appear within reach, they represent a significant cash outlay for many school districts that already operate under stringent budgets. Districts may turn to funding options that fall into three categories:

Traditional funding methods (i.e., raising revenue from property tax) may be regarded as a last resort to bridge any funding gap.

Cost-saving measures. Measures aimed at saving costs should target the largest cost elements in the technology plan: hardware, network installation, product support, personnel, and staff development. Some of these items were discussed in Chapter 2; additional examples are listed below. In each case, it is important to quantify how much each measure will save in terms of both the initial capital costs of the project and the annual costs over the system's life cycle. Any such cost saving should be reflected in the estimated cost of the plan.

Reprogramming of existing resources. State and school district budgets may have funds that can be earmarked for local technology initiatives. One way to create Anew@ money for technology is by reallocating money from other items in existing budgets to technology. Budget rules could be changed to simply allow more funding to go to this category. For example, instructional support" includes money spent on instructional supervisors such as departmental heads. Some of these resources could be redeployed to meet some teacher training and support needs. Under this item, it may be possible to exploit savings created by technology efficiencies. After deploying its technology plan, for example, the school district in Carrolton, Georgia, was able to cut administrative staff costs 20 percent to 30 percent. Distance-learning technologies similarly may help schools bring staff development opportunities on site and reduce related travel costs.

Creative funding. The ability of school districts to raise funds from completely new sources, as opposed to fashioning them from existing sources, is much more limited than the state's. However, recognizing that a substantial portion of the costs of school technology must be raised locally, there has been a concerted effort in recent years to develop new creative funding mechanisms. Most of the suggestions outlined below are summarized from several recent publications. 41

Working with businesses. Education foundations, if established locally, can provide a tax incentive to companies and individuals who donate technology or give assistance. The total contribution made by commercial companies to the costs of school technology is relatively small, but in special cases they stimulate a great deal of action. At the local level, supermarkets and telephone companies can be talked into offering a percentage of sales as a contribution toward school technology. Usually, these schemes are marketed through the school's PTA. Through its foundation, the Fairfax County Public Schools system in Virginia raised more than $100,000 in the first year of a credit card program. One percent of the average annual $2,000 in credit card purchases by the 5,000 participants in the program was credited by the credit card company to the foundation. 42 Additional revenues that cover the foundation's operating costs are raised from membership dues from 30 to 50 local businesses.

Some advocates of school technology believe that tax incentives are the most politically and economically feasible means of funding technology in schools. As non-profit, non-taxpaying organizations, schools cannot take advantage of tax deductions for depreciation. Thus, some suggest that schools be allowed to sell "depreciation credits" to businesses, with the proceeds being used for educational technology. Schools could use the credits to bargain with vendors for better prices. This suggested scheme is similar to one in the Clean Air Act that allows third-party traded credits.

Dedicated funding sources. To cover the cost of new school construction, sometimes part of the payment burden is placed on those who create the demand. Thus, some districts levy a special tax (of say $1,000) on each new residence constructed in the district to fund the new schools these developments require. Through voluntary contributions of $300 to $500 per house, the school district in Galloway Township, New Jersey, raised $2 million for technology by granting housing developers minor density concessions.43

Local taxes levied on the local cable TV company, phone company, and other service providers are another potential funding source for school technology. The school system in Prince Georges County, Maryland, obtained part of the county's 5 percent cable revenue tax in the form of a one-year grant for school technology. 44 Calcasieu Parish schools in Louisiana went directly to consumers, imposing a half percent increase in the local sales tax to raise funds for educational technology.45


34 National School Boards Association (1989), On-Line: Financing Strategies for Educational Technology, Alexandria, Virginia, p.24.

35 Washington Post, February 7, 1996.

36 The Sterling Observer, June 21, 1996.

37 American Association of School Administrators, (1995).

38 RAND (1995).

39 National School Board Association, (February 1995). Insider's Letter . Alexandria, Virginia.

40 American Association of School Administrators (1995).

41 These publications include: National School Boards Association, (1989) On-Line: Financing Strategies for Educational Technology ; Finding Funds for Technology: A Handbook for Educators (Supplement in Technology & Learning , 1996); and American Association of School Administrators, (1995) From Here to Technology; How to Fund Hardware, Software, and More Appendix 13.

42 American Association of School Administrators (1995) 15.

43 American Association of School Administrators (1995) 11.

44 American Association of School Administrators (1995) 13.

45 Further details of this funding mechanism are provided in the final section of this chapter.


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