Navigating the Challenge of School Technology
Sustaining an education technology program presents school districts with several challenges, including these:
Obsolescence. As technology assets age, their hardware components, such as processors and memory, become outdated, leading to decreased performance and reduced productivity for students and educators.
Maintenance Costs. Schools incur higher maintenance costs as equipment ages and warranties expire. Schools may need to replace components to keep laptop units operational, which may increase costs.
Security Risks. Older laptops may no longer receive software updates and security patches from manufacturers, leaving them vulnerable to cybersecurity threats such as malware, viruses, and hacking attempts. This vulnerability poses a significant risk to sensitive student data and the integrity of the school's IT infrastructure.
Compatibility Issues and Dissatisfaction. Aging laptops may struggle to run newer software and applications efficiently. This frustration can affect the overall satisfaction of students and educators with technology-enabled learning experiences, thereby impeding the adoption and effectiveness of the technology initiatives within the school.
The decision to categorize the acquisition of technology assets as an operating expense rather than a capital investment provides a new approach to funding needs.
Financial Complexity in Education
How have educational institutions attempted to meet these changing needs and increased budget challenges, particularly with the expiration of the availability of ESSER funds?
Many schools purchase technology assets using funds from the capital side of the budget. Schools may also use grants when available to reduce the budget impact, although they are not a reliable funding source. Adding pressure to school budgets is decreasing student enrollment, generating less revenue and putting the purchase model in jeopardy when coupled with the need to replace obsolete devices.
Some educational institutions have sought financial assistance from commercial banks, acquiring funds at relatively high interest rates in today's competitive marketplace. This approach lets the school repay the loan gradually, aligning expenditures with revenue over time.
While this strategy represents progress by shifting the funding of technology assets from the capital section of financial statements to the operational side of the budget, it can incur significant costs.
The decision to categorize the acquisition of technology assets as an operating expense rather than a capital investment provides a new approach to funding needs.
As previously noted, technology assets depreciate rapidly, losing value daily. Capital funds are typically earmarked for assets with extended useful lives, such as buildings, land, or infrastructure that surpasses 10 years of utility. Therefore, allocating funds from the operating budget for technology assets, which have a shorter lifespan, aligns with optimal financial management practices.
Leasing as a Solution
Leasing can be a more effective approach to financing technology. Leasing treats an asset as a utility, akin to essential resources like electricity that are consumed incrementally.
This budget-friendly strategy addresses the ongoing need to replace outdated technology devices such as Chromebooks, laptops, printers, or servers by implementing a planned lifecycle, typically two, three, or four years, depending on the device type. By spreading these costs over the useful lifespan of the devices, leasing provides a clear roadmap for annual expenses and the expected number of devices reaching obsolescence within the educational environment. Consequently, it eliminates uncertainty from the budgeting process, offering schools a more predictable and manageable financial strategy.
Entering into a lease agreement may seem daunting due to the perceived complexity of contractual obligations, yet this process can become significantly more manageable with guidance from seasoned professionals. With the right expertise and oversight, the complexities involved in lease transactions can be streamlined, paving the way for years of smooth operation.
Furthermore, despite ongoing changes in accounting rules surrounding leasing, the treatment of leases is relatively straightforward for educational institutions, as they are not typically burdened with intricate tax considerations. This simplifies the accounting treatment, offering a clearer and more easily defined framework.
When structured appropriately, a lease offers several advantages, including flexibility, cost savings, and the ability to align revenues with expenses.
The two primary types of leases are the dollar buyout (DBO) and the fair market value (FMV) lease. The dollar buyout lease is like a loan, with generally lower rates than a bank loan because the lessor will have access to a lower cost of funds. The fair market value lease factors into the calculation the residual value of the equipment at the end of the lease term, which generally lowers the lease payment from 10% to 15% of the cost of a comparable dollar buyout lease or bank loan, depending on the lease term selected.
Note, however, that in a traditional FMV lease, educational institutions may not participate in the residual value of the equipment if it exceeds the expected residual value. Additionally, an FMV lease may not offer a cost-effective solution if the equipment cannot be returned at the end of the lease term.
The Benefits of the Hybrid Lease
COVID-19 ushered in a new lease model known as the hybrid lease. This innovative type of lease combines the flexibility of ownership or financing with the option to return the equipment at the lease term's end. At the conclusion of the lease term, ownership of the equipment is transferred to the school, granting it full ownership rights.
Notably, in a hybrid lease, educational institutions can benefit by sharing in the residual value of the equipment, receiving up to 85% of the funds obtained by the lessor.
While the financial benefits of the hybrid lease for Chromebooks may not be as large as the benefit for laptops, the economics of this lease option still prove more advantageous than outright device purchases. By significantly reducing the overall acquisition costs of technology assets, the hybrid lease offers a compelling solution for managing equipment obsolescence and safeguards against hidden costs often associated with FMV leases, especially concerning end-of-lease charges.
The hybrid lease provides flexibility in scenarios where replacement devices may not be available due to factors such as supply-chain disruptions. Under a traditional FMV lease, payments are still needed even after the initial lease term expires. With the hybrid lease, no additional lease payments are required beyond the original term, allowing the school to retain the use of the equipment.
Unlike an FMV lease, the hybrid lease eliminates the risk of late return fees, extra monthly payments, or equipment damage charges.
Considering all these advantages and disadvantages, the hybrid lease presents a compelling option for educational institutions seeking to establish a sustainable technology program.