Published Online: October 29, 2013
Published in Print: October 30, 2013, as Risks Seen in Using Bonds for Tech Work

Critics See Risks in Use of Bonds for School Tech Projects

As school districts across the country seek to implement costly, large-scale technology projects, a growing number of them are asking voters for approval to go into debt to pay for that work, through the issuance of long-term bonds.

That strategy is standard practice in many areas of government, when public entities, such as school systems, need money to pay for special capital projects such as new construction or infrastructure upgrades. But districts' attempts to use long-term bonds to underwrite major purchases of tablets and laptops, which have a limited shelf life, are coming under fire from both taxpayers and financial experts, who worry that school systems will still be paying off those costs long after the technology is obsolete.

"You don't debt-finance something where the term of the debt is going to extend beyond the life of the asset," said Bruce D. Baker, a professor of school finance at the Rutgers University Graduate School of Education in New Jersey. "You don't want to be paying for it once it has outlived its usefulness."

New attention is being focused on this issue following criticism of the Los Angeles Unified School District's plan to use money from long-term construction bond issues to fund a 1-to-1 iPad initiative that could ultimately cost nearly $1 billion. The first phase of the plan, a $50 million rollout, is the only aspect of the project that has been approved by the 650,000-student district's board of education to date, said school system spokeswoman Shannon Haber. That money will come from long-term construction bonds approved in 2004 and 2005, Ms. Haber said. Additional money for the initiative could come from a $7 billion construction bond issue approved by voters in 2008.

But some, like architect Stuart Magruder, believe that money from the bond issues should not be used to purchase iPads.

Mr. Magruder sits on the district's bond oversight committee, an advisory body providing guidance on how bond money should be spent. He worries the district will be paying off devices long after they need to be replaced. But he's even more concerned that the bond issues were billed as a way to fund construction, not 1-to-1 computing, and that voters feel misled.

"There's a public trust and credibility issue that's massive," Mr. Magruder said. "People are saying they're not going to be voting for a bond issue again and that's terrifying."

Public Trust

Despite the criticism, districts large and small are still using long-term bonds to pay for computing devices, saying in some cases that it's their only option for upgrading technology. Typically, a bond issue is a lump-sum amount that districts borrow through the sale of bonds. The taxpayers must vote to approve the bond sale, and then pay off the loan with interest through tax payments.

In the 3,000-student Woodward, Okla. school district, voters approved a $29 million construction bond earlier this month, with $2.8 million of it slated for technology. The project includes a 1-to-1 program for the district's 700 high school students, said Kyle B. Reynolds, the district's deputy superintendent.

"We would not have been able to fund this without the bond issue," Mr. Reynolds said. "I use a computer for my job every day and it's a travesty that we're not providing this technology to our kids."

Repayment Cycle

Though the life of the bond is 10 years, the money borrowed for technology purchases will be paid off in the first five years, to help ensure funds are not being spent on devices that may be outdated a decade from now, Mr. Reynolds said.

Other districts are taking a similar approach. Voters in the 16,500-student Ann Arbor, Mich., district approved a $45.8 million technology bond in 2012 to be repaid over five years to pay for a variety of technology upgrades, including purchasing devices. The district deliberately structured the bond to be repaid over a shorter period of time, due to concerns about the life span of technology devices like tablets and laptops, said Liz Margolis, the school system's spokeswoman.

"The tech bond allows us to keep as up-to-date as we possibly can in our district...and not having to spend operating dollars and classroom dollars," she said.

However, even a five-year repayment cycle may be too long a period of time, said Douglas Levin, the executive director of the State Educational Technology Directors Association, based in Glen Burnie, Md. "Within three to four years it is less expensive to replace the device than repair it," he said. "For technology, the functionality and power of devices is not going to age well."

When devices do need to be replaced, a bond issue doesn't provide continuing funds to do that, said Mr. Baker of Rutgers. Ongoing technology-refreshment cycles should be built into operating budgets, not financed by one-time bond issuances, which won't help districts continue to support 1-to-1 programs down the line or replace devices, he argued.

Ms. Margolis, of the Ann Arbor system, acknowledged the district faces long-term funding questions. But she noted that the district's options have been limited partly by cuts in state funding, amounting to reductions of nearly $70 million over the last five years.

In addition, districts in Michigan have limited means to raise funds for big projects, Ms. Margolis said. One way is through bonds. The other is through a "sinking fund"—a limited property-tax increase, considered more of a pay-as-you-go strategy. However, Michigan has strict limitations on the use of sinking-fund dollars and technology is not on the list.

This most recent issuance is the district's third technology bond since 2004, and the community has been supportive, Ms. Margolis said.

"We've been very open with our community," Ms. Margolis said, telling them, "'You will hear from us again in five years.'"

Voter Backlash

But not every community is supportive. In August, voters in the 8,000-student Lake Orion, Mich., district rejected a $33.2 million, 20-year bond issue, which would have paid in part for tech upgrades and new devices.

Burke Cueny, the president of Lake Orion's Taxpayers Advisory Group, a local watchdog group, said voters were troubled by the debt being incurred and the fact that technology would be antiquated before it would be paid off.

"These items are rapidly going out of style and becoming useless," he said. "It was a major factor in defeating the bond issue."

Though Mr. Baker, of Rutgers, said he's concerned about the use of a bond issue for technology purchases, he's sympathetic toward districts who see no other way of upgrading the tools their students use.

Some state policies exacerbate pressure on districts by prohibiting or impeding the use of other, more stable, methods of funding, he said.

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"A lot of [district officials] know this isn't the right way to go, but they feel this sense of desperation and that's not a good thing," he said. "Policy constraints are encouraging bad financial planning."

David Neter, the chief business officer for the 153,000-student Wake County, N.C., school system, agrees. Voters in his district recently approved a $939 million bond issue that contains $60 million for technology. The debt on those technology expenditures will be paid off first, within a few years, he said.

He admitted that the bond strategy doesn't account for how the district will cover costs of replacing technology over time. He said the district will try asking the county, which provides funding, to boost funding to cover those costs.

"It's not ideal," Mr. Neter said. "It leaves the question open as to what we are going to do in three to six years. It's not a good long-term solution."

Vol. 33, Issue 10, Pages 1,12-13

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