Districts face questions in spending long-term bonds for short-lived technology
December 17, 2012 | By John Fensterwald | 10 Comments
(Update: Please note corrections at the end of the article on points marked with an asterisk.)
Is it legal to buy personal computers for students using school construction bonds? And if it’s legal, is it wise to pay interest long-term on devices with a short shelf life?
Last month, the Bond Oversight Committee for Los Angeles Unified balked at endorsing Superintendent John Deasy’s plan to buy tablet computers with bonds intended primarily for building and renovating schools. In doing so, the Committee raised questions that other school districts also should be asking.
There’s no unqualified answer to the questions that the Bond Oversight Committee asked, and school districts like San Diego Unified and Riverside Unified have come to opposite conclusions. What all agree on, however, is that the state needs to provide legal clarity and, most importantly, dollars.
Most districts don’t need convincing that technology is key to a 21st century classroom, but, with budgets remaining tight after years of cutbacks, they’re scratching their heads over ways to pay for it. And they’re questioning how the state can commit to computer-based standardized tests in two years, based on the new Common Core standards, without helping equip schools to administer the tests.
Deasy wants to use $17.5 million in previously approved construction bonds to buy 7,000 computers for students in 14 schools, upgrade schools’ Internet capacity, install management systems for the devices, and train personnel in how to maintain them. This would be a pilot program, step one in Deasy’s goal to spend upwards of $400 million for the district eventually to go fully digital.
He came one vote shy of getting the Bond Oversight Committee’s blessing; he needed eight votes on the 14-member committee but got seven. In a letter to Deasy, Committee Chairman Stephen English reassured him that the committee is sympathetic but wants more assurance that such a program is sustainable long-term.
“I believe the BOC will prove enthusiastic about this program, which the BOC has been advocating for several years. However, in order to fulfill its oversight responsibilities, the BOC will need to be confident that the program has a well-structured and realistic implementation plan,” he wrote.
Legal use but …
There’s no disagreement that school bond funds can be used to upgrade wiring, install wireless receivers and pay for computer management systems. Bonds can also be used to train system managers. But laptops, tablets and netbooks – devices that cost anywhere from $200 to $800 – are a different matter. Unless the financing is structured carefully, taxpayers could end up paying interest on 25- or 30-year bonds used to buy devices that only last a few years.
The average life of an asset, whether a building or furniture, should match the length of financing as a rule of thumb. If financed with a 25-year bond at, say, 4.5 percent interest, a $500 computer would accrue $1,000** in interest expense by the time it’s paid off.
But Tom Rubin, a consultant for the Bond Oversight Committee, cautions that the bond market is complex, and districts would have options to lower costs. They can make heavy principal payments in early years, lowering the interest expense. And they can take out bonds with maturity dates of three to seven years at a lower interest rate. Since short-term bonds require compressed payments, districts usually seek the flexibility from a mix of terms. The average length of maturity of bonds in Los Angeles Unified is 21 years.**
Rubin said that after a thorough review of state regulations and laws – including the education code; Proposition 39, which lowered the threshold for passing school bonds to 55 percent; and the fine print of Measure Q, the district’s bond initiative – both the general counsel and bond counsel for LA Unified agreed that it’s legal to buy iPads with construction bonds. The important distinction is that they’re assets, not operating expenses, said Rubin.
But, he added, several concerns have given the Bond Oversight Committee pause. How will the district pay for replacement computers: more bonds, its operating budget? And will the district have the staff to manage and repair the computers? The committee wants answers before recommending the pilot program. Although its vote is strictly advisory to the school board, so far Deasy has not pressed forward.
Then there’s the question of whether students can take the computers home with them – the district’s eventual intention. The bond counsel’s conclusion was no,** not if they’re purchased with construction bonds. And there are equity concerns that the Bond Oversight Committee would like addressed: Suppose students at home don’t have Internet connections needed to do schoolwork.
One problem is that law and interpretations of it haven’t kept up with technology. A state attorney general’s opinion from 1963 said that districts could use bond funds to stock a new school’s library but not to buy replacement volumes. In the 1990s, the attorney general’s office took the position that districts couldn’t use bond funding to buy textbooks. Two decades later the comparable question is, are netbooks more analogous to library books or textbooks? And, as learning shifts to the Internet and takes place 24/7, shouldn’t students be able to take home equipment that’s integral to learning? Rubin, English and others say it’s important for the attorney general and the Legislature to clarify the conditions under which districts can use bond money on technology.
Meanwhile, districts are going their own way. Using authority from a 2008 bond measure, San Diego Unified financed 77,790 netbooks for $38.6 million and 21,507 iPads for $9 million. Within a few years, every student from third grade on will have a computer in the state’s second-largest district. There is no policy restricting home use in the current pilot program, said Bernie Rhinerson, the district’s chief of staff and district relations.
But Riverside Unified, a district that has been aggressive in deploying technology and expanding online learning, has chosen not to use bond money to buy portable computers. “The question for me is how do you justify [using money intended for capital improvements] for a lifetime of two or three years?” asked Superintendent Rick Miller, adding that $200 netbooks don’t rise to the threshold requiring them to be inventoried.
By using grants, discretionary money at the school site and unrestricted textbook money, Riverside Unified, with 42,000 students, has managed to buy 18,000 devices. Using bond money would be risky,
Miller said. “All is OK until someone challenges it [the use of bonds] and then things go haywire. I want to avoid that situation.”
How the state can help
School districts in other states don’t have to resort to long-term borrowing to buy computers; they have sufficient money in their operating budgets, Miller said. He suggests ways that the state can aid California’s cash-strapped districts:
Parcel taxes: They generate additional operating money for districts and make more sense than bonds for funding inexpensive computers. But parcel taxes require a two-thirds majority for passage. More districts might consider them if the threshold for passage were lowered to 55 percent – the same as for school construction bonds. Early next year the Legislature, with a supermajority of Democrats, may vote to put the issue before voters in 2014.
Tax credits for parents: Riverside Unified has a policy of allowing students to bring their own computers to class. Miller said the Legislature should consider tax credits to encourage more families to buy their own computers, reducing the need for the district to fund them.
State bond issue: Superintendent of Public Instruction Tom Torlakson is advocating placing a state school construction bond on the ballot in 2014, though he hasn’t yet said for how much and for what purpose. Miller said that funding technology needs of districts should be the first priority – ahead of building new classrooms and schools. “Solve the technology infrastructure problem first,” Miller said.
Torlakson doesn’t need to be convinced that school technology is important. In August, a 48-member Education Technology Task Force released a 35-page memo endorsing a broad expansion of online learning and assessments. Among its recommendations, it called on the state to “ensure that every student has access to at least one Internet connected device for learning any time, any place.” The report, however, did not discuss how to pay for them.
Update: Several points in the article, as indicated by asterisks, were inaccurate. The interest on a 25 year bond at 4.5 percent interest would be $337.93 on a typical bond amortization used by Los Angeles Unified and most districts. The $1,000 interest cited would be for those districts that unwisely financed with a capital appreciation bond with compound interest. 2. The current average length of maturity for Los Angeles Unified’s construction bonds is 12.3 years. The district, when possible, finances with shorter term debt. The 21-year average cited in the story refers to one series of bonds that the district floated. 3. It is unclear whether students legally can take to their homes computers purchased with school bonds, and districts would like the Legislature to clarify the issue. At this point, Los Angeles Unified’s bond counsel has not taken a position on the matter.