School districts are going into debt to keep up with technology

This story about school debt is part of the series Districts in Debt, which examines the hidden financial pressures challenging American schools.

SAN JOSE, Calif. — At James Lick High School the slate-gray Chromebooks are ubiquitous. Rolling cabinets stocked with dozens of the laptops sit in classrooms where teachers assign them to students for everything from researching hereditary DNA to writing essays. In this majority-Latino school of 1,100 students, 84 percent of whom qualify for free or reduced-price lunch, a federal measure of poverty, school principal David Porter says making the devices readily available is a significant part of an effort to develop digital literacy for students who might otherwise be left behind.

Nationwide, one out of four teenagers from low-income households lacks access to a home computer and, overall, Latino students have less access than their black and white peers, according to a 2018 survey by the Pew Research Center. “We’re doing a disservice if we’re not teaching the next generation how to use technology. Students being able to access it is critical,” Porter says.

Using computers and online resources in the classroom is part of a growing trend in education. What’s unusual about James Lick’s Chromebook program isn’t the laptops themselves, but how they were paid for. In this school on the eastern edge of Silicon Valley, just a 20-minute drive from Google’s Mountain View headquarters, the district has put these laptops into students’ hands by going into debt, authorizing a $16.2 million sale of general-obligation bonds intended almost exclusively for the laptop purchases.

It’s part of an emerging shift in how schools are thinking about paying for technology, one that city and county officials say is necessary because of inadequate state funding and a highly decentralized education system that leaves smaller, less affluent districts with few other options. Yet it’s an approach that some observers say not only violates the principle of taxpayer-financed debt, but exacerbates inequities for schools in communities lacking the municipal wealth of their higher-income counterparts.

Bonds have been a long-standing source of revenue for public education. School districts sell the bonds to investors for an immediate influx of cash, with an agreement to pay back the money to bond holders over an extended period of time, commonly 20 to 30 years, with interest. Traditionally, bonds have been used to pay for capital assets that hold their value for decades. Issuing a 30-year bond to finance a new school building makes sense, says Ross Rubenstein, a professor at Georgia State University who specializes in public finance and education policy.

Using long-term debt to pay for technology that may be obsolete in a couple of years, he says, is “like taking out a mortgage to buy groceries.” Yet that is precisely what school districts across the country, including some in California, Texas, Minnesota and Kansas, have done in a desperate push to get technology into classrooms.

“One of the fundamental ideas behind debt is you want to try and match the life of what you’re purchasing to the life of the debt,” Rubenstein says.

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In 2008, the San Diego Unified School District won voter approval for $2.1 billion in bond sales. While the majority of that money was for school maintenance and construction, the district allocated some of those funds for technology, buying more than 21,000 iPads. With bond payments stretching out as far as 40 years, it’s been estimated that some of these $400 iPads may ultimately cost the district more than $4,000 each.

Using long-term bonds for tech are “like taking out a mortgage to buy groceries,”

An attempt by the Los Angeles Unified School District to use a long-term bond program to buy student iPads in 2013 resulted in not only high costs for the devices, but also separate SEC and FBI investigations into the legality of the bond spending and possible corruption in the vendor bidding process.

Yet, the 2014 bond sale used to buy Chromebooks for James Lick and the rest of the East Side Union High School District schools has a much different structure. Designed exclusively for technology purchases, these bonds have much shorter payment terms. And because the laptops will obviously need to be replaced every few years, this voter-approved bond measure authorized a recurring series of short-term bond sales — future offerings commence after current obligations are paid off — the last of which will come due in 2035. This structure provides for future financial stability in a fiscally responsible manner, according to district superintendent Chris Funk.

By 2014 the district had won approval for $116 million in short-term bonds sales, including the $16.2 million for the Chromebooks, software licenses and the infrastructure needed to maintain them.

“In a traditional long-term bond the interest would be close to $100 million,” Funk says. “The way we’re doing it dropped the interest down to like $25 million because we’re paying off the debt every 4 to 5 years. That gives a school district like ours a source of revenue for the next 20 years that we can rely on for technology.”

Finance experts agree that school bonds offer substantial savings over most other types of borrowing, given that bonds are backed by a reliable source of funds: property taxes.

“There is a lower cost in using short-term debt rather than going out and getting a high-interest lease with a [laptop] vendor, for example,” says Bart Hildreth, a professor at Georgia State University who studies municipal finances. But bonds are not free money, he cautions. “The bond transaction itself has up-front costs. When you issue debt you have to get a bond rating, get a lawyer, investment banker, broker dealers and prepare the official statement.”

Borrowing that $16.2 million dollars for the Chromebooks cost the East Side Union district an additional $357,000 in these up-front costs on top of what appears to be roughly $1.7 million in interest payments, according to the bond filing.

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The best option, experts say, is to pay for things like laptops with cash, not debt.

“They are today’s pencils and paper,” says Bruce Baker, a professor at the Rutgers University Graduate School of Education. “They shouldn’t have to be a supplemental ask, any more than having a desk and a chair for each kid.”

“All else being equal it would certainly be better to be able to build these purchases into operating budgets, especially since you’re going to just face the same issue again in a few years,” adds Rubenstein.

Adding tech to the regular budget is simply not possible, according to East Side officials who note that California ranks 41st among states in per-pupil spending when adjusted for the cost of living, according to a 2017 study.

“[Computers] are today’s pencils and paper. They shouldn’t have to be a supplemental ask, any more than having a desk and a chair for each kid.”

“Our state budget allocation is barely enough to pay teacher salaries,” says Lan Nguyen, vice president of the East Side Union High School District board. “It would be a struggle to allocate even a small portion of our operating budget for technology.”

San Jose mayor Sam Liccardo also faults the state’s hyper-local control of its education system. “We are a city with a population of just over one million, but with 19 different school districts,” he laments. “We need a coherent governing structure and we don’t have that.”

Joseph Di Salvo, a member of the Santa Clara County Office of Education board, says that with school control diffused across so many small, local districts it is hard to change the status quo. “You would think that in Silicon Valley, technology for students would be a major priority,” he says. “It isn’t. But with such a decentralized system, who do you hold accountable?”

Yerba Buena High School, also in the East Side Union High School District, serves a largely Latino and Vietnamese population. Nearly three-quarters of its students are from low-income households.

“We’re one of the poorest districts in the county,” says school principal Tom Huynh. He walks into a large repurposed office near the commons area where shelves of school supplies, drawers of toiletries and even closets filled with clothes — all donations — are kept for students in need, who can request items on a walk-in basis. “We want to provide students with something they may not have at home,” he says. The laptops provide access for students in a community where, he says, even a cellphone data plan cannot be taken for granted.

California’s school funding formula cleaves its school districts into two groups: a small number of wealthy areas like Palo Alto and Cupertino that can exceed state-mandated funding minimums solely through property taxes; and less affluent communities, with smaller tax bases, that require state aid to reach those minimums. Any additional nonfederal district funding comes primarily from one of two sources: a flat-rate parcel tax on property owners that can be spent on operating expenses, or taxpayer-backed bonds used to take on debt for nonbudgeted costs.

With bond payments stretching out as far as 40 years, one district could pay more than $4,000 for iPads that retail at $400.

The move by districts toward short-term bonds for technology is growing across the state, spurred not only by voter sentiment but also by a 2000 change in California law that lowered the threshold needed to pass voter-approved bonds from 67 percent to 55 percent, says Niu Gao, a researcher at the Public Policy Institute of California who studies technology adoption in schools. By contrast, parcel taxes require a two-thirds majority, a minimum that voters in the East Side Union district have repeatedly failed to meet, according to district administrators.

“The state also recently moved its standardized testing from paper-and-pencil based to computer based … which increased the demand for technology spending,” Gao adds.

San Francisco financial advisory firm Dale Scott & Company sees enough of a demand for this type of short-term debt that it has even trademarked a term for the debt offerings it promotes, branding them as Ed-Tech Bonds. They are pitched as “a fiscally responsible, ongoing solution to the statewide problem of financing educational technology.” The firm currently has 16 active or pending Ed-Tech offerings with districts throughout the state, including East Side Union.

Finance experts caution, however, that the short-term bond approach has its drawbacks.

Though he understands that districts just don’t have the resources in their operating budgets to pay for new technology, Baker says these short-term bonds “violate the premise of bond debt: that the taxpaying public is investing in an asset of some value. If these districts start tacking on incremental increases to their tax rates for the ongoing costs of short-lived computers, it significantly reduces their ability to go back to the voters for bigger stuff they may need later on, like construction or a new roof.” Even in the current bond-friendly climate, “You can only go to the voters so many times asking them to pay for stuff,” he warns.

Then there are the incurred costs of simply preparing for a bond issue. East Side Union had to raise about $150,000 — board members tapped their personal networks and local businesses for contributions — just to put its 2014 bond proposal before voters, Nguyen says, citing expenses like hiring a campaign consulting firm and paying for mailers and lawn signs. Another $5,000 to $7,000 in district funds were spent on surveys of voter sentiment before the district committed even to putting the proposal on a ballot, he says. But it’s an investment that school officials say must be made to create opportunities for students who are starved for resources.

“Here the digital divide for access is now almost zero,” Porter says of his Chromebook program. “The divide we still have is in the three Rs,” he acknowledges. Throughout Santa Clara County Latino students face achievement gaps as high as 56 percent compared to their white and Asian peers, according to California Department of Education figures for 2017-18.

School leaders aren’t suggesting that technology by itself will overcome socioeconomic inequities, but they are adamant that it has a role to play.

“We want kids to be good communicators. We want kids to be good collaborators with critical thinking and problem-solving skills,” says Funk. “That’s what I think technology can do.” And he says that at James Lick, traditionally one of the district’s low-performing schools, progress is being made. “For four straight years their graduation rate has gone up, and they have more kids who qualify for college than ever before.”

Those results among some of California’s least-advantaged children, Funk says, make exploring creative funding options worthwhile.

This story about education technology is part of the series Districts in Debt and was produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Sign up for the Hechinger newsletter.

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