Financing computer upgrades

In 1998, city offices in Des Moines, Iowa, received a jump start on their technology resources when the city began creating a solid network infrastructure and updating all of its desktop computers. “Technology had not received any attention in the city until three years ago,” says Michael Armstrong, IT director for Des Moines. “We needed to start over.”

To get the money to make such radical technology changes, the city issued $4 million in general obligation bonds in 1998 and another $1.5 million in bonds over three years. The bonds paid for the city’s network infrastructure as well as its desktop computers and software.

Now, most of those desktop computers that the city installed three years ago are ready for upgrades, and those that are not will be next year. Armstrong estimates that it will cost $600,000 to $650,000 to complete the upgrades, and he must find the money to get the job done and to keep the rest of the city’s technology updated. “We have to find a way of building the cost of technology into the cost of doing business,” Armstrong says. “It’s not part of the culture at this point.”

Des Moines, like other cities and counties, faces the challenge of continually funding the technology that will help it efficiently provide services to its residents. Local governments are expected to spend $39.4 billion on IT purchases in 2001, according to the Folsom, Calif.-based Center for Digital Government. That money may come from traditional methods of funding local government projects, like issuing bonds or using general funds, or alternative methods, like leasing and using special technology funds, that acknowledge the short lifecycle and constant need for updating computer systems.

Annual struggle

In Des Moines, taking money out of the city’s operating budget to pay for computers is not an option, Armstrong says, so the city might issue more bonds to cover the costs of its computer upgrades. “We may do an annual bonding cycle and make technology replacement part of it, but I’m not comfortable doing that,” he says. “I’m not comfortable buying short-term technology with long-term bonds.”

Neither are many other local governments that generally reserve the use of bonds for long-term projects like new buildings or for larger technology purchases with long lifecycles like servers and networks. In Tucson, Ariz., issuing bonds for IT is not an option, so the city purchases its computer systems with money in its general fund. That means CIO and Director of IT Todd Sander has to compete with visible city services like the police, parks, paramedic units and libraries for money; every budget cycle, he must explain the value of spending money on technology, which generally remains invisible to the public. “It’s very competitive, but we’ve worked hard to show that $1 spent on IT [has as much value] as $1 spent on anything else,” Sander says.

To determine the technology needs in Tucson, the IT department, which purchases most of the technology for the city, meets annually with representatives of the other departments. The IT department tries to update 25 percent of the city’s personal computers every year, so the oldest PC in the city is four years old. “If one department just got replacements two years ago, but they can demonstrate that they need new equipment, they might get money before someone else,” Sander says.

After all of the city departments agree on which projects to complete, Sander takes the proposal to the city council. “Routine expenditures become annual conversations about the value of what you’re doing,” Sander says. However, having to take part in the annual budget process can be positive because, he notes, the need for IT becomes more visible and, thus, harder to ignore.

Because the mayor, city manager and city council are generally receptive to funding IT projects, the city has not lost out on any important projects. However, as it begins to provide electronic services to its residents, its funding process may change. “The city is just beginning to recognize the importance of IT for the public sector,” Sander says. “Communities that view IT as a cost of doing business are ahead of us.”

Replacing funds

Unlike Tucson, Gaithersburg, Md., does not have to compete for general funds every year to complete routine upgrades of PCs. Each department funds its personal computer needs out of its own budget, and, after the purchase of its PCs, it puts one-third of the equipment’s value into a citywide replacement fund each year. After three years, each department has enough money to purchase replacements.

If the departments do not use the money at the end of three years, the money remains in the fund for the time they do need it. The process does not require the city manager’s review, and it gives the department heads the responsibility of deciding when to replace computers.

Gaithersburg has been handling its computer upgrades like that since it hired IT Director Barry Smith three years ago, and the system has been working smoothly, according to Smith. “Early on, the city manager wanted me to question every PC purchase, but not anymore,” he says.

Large computer system purchases are capital projects that go through the budget process, but otherwise, if the department has the money, it can have the computers it wants. The IT department manages computer procurement, and it consults with departments to ensure that their purchases comply with the city’s network requirements. “If the departments want something and they have the money, IT will buy it for them,” says Smith. “We don’t limit what technology they can get.”

Henrico County, Va., also has a replacement fund, which was established two years ago as an internal service fund separate from the county’s general fund. The county had saved money from a hiring freeze, so the board decided to use $1.5 million of that money to seed the replacement fund. It is dedicated for computer hardware and software purchases. “It just made good sense,” says Henrico County Commissioner Patricia O’Bannon. “The information systems we have in place are so useful that you can’t ignore the benefits of funding them.”

The most visible county services, the police and the library, purchased computers in the first year of the program, and other county departments will join the program over the next four to six years, says John Vithoulkas, budget director for Henrico County.

Using a technology replacement fund has made the process of funding computer upgrades run smoothly and has given the county flexibility in determining when to buy new technology. “We’ve seen that, unless you plan for replacement consistently, you will have cost spikes that you won’t be able to handle,” Vithoulkas says.

Likewise, Hennepin County, Minn., has a replacement fund, similar to those of Gaithersburg and Henrico County, which pays for county department computer needs and gets one-third of the equipment’s costs back every year. The county finances its 8,000 PCs that way, and it is able to replace one-third of the computers every year, says County CIO Bob Hanson.

A $3 million bond issue provided the seed money for Hennepin’s replacement fund and paid for an upgrade of many of the county’s PCs in 1997. The IT department maintains control of all of the county’s computers, and each department pays for their use and maintenance.

While some local governments are using bonds and general funds to establish technology replacement funds, others are being even more creative. For example, San Diego has recently entered into a marketing partnership that has generated $200,000 for its general fund so far. If CIO and Deputy City Manager Dianah Neff gets her proposed strategic plan approved this year, that money will be earmarked for technology purchases.

(The marketing partnership with the city’s wireless provider allows the vendor to announce on banners at city events and in its marketing materials that it is the wireless provider for San Diego. Currently, the city is looking for a PC provider that would agree to a similar partnership.)

Additionally, Neff would like to establish a fund that would be seeded with money from taxes and city-generated revenues (e.g., from the sale of geographic information systems data). The fund would be used to develop applications that could demonstrate some savings in the city, and the savings would be applied to new technology purchases or to additional application development.

Making monthly payments

Fort Worth, Texas, used to purchase all of its computers and replace them every few years, but it did not have a replacement fund to cover its costs. That practice created capital spikes when all of the computers needed to be updated, says David Bragg, assistant director and CFO for the Fort Worth IT Solutions Department.

As a result, since 1998, the city has been leasing its 2,600 computers on 24- or 36-month terms, depending on the type of machine. Now, instead of having spikes every few years, each department budgets for the monthly payments on its computers. Each department pays the IT department monthly fees for its equipment, and the IT department consolidates those fees into one lease payment to the vendor. At the end of the leases, the vendor replaces the computers with newer models.

Second only to setting up the master lease agreements, managing the leases has been the biggest challenge of upgrading computers, according to Bragg. “We have to determine which machines to terminate early and which to keep on a few months after the lease [to distribute the demand of replacement],” he says. It is such a big job, that the city has hired one full-time person to pay the bills every month and to schedule computer replacement.

Although the capital spikes have been eliminated, Fort Worth does not have as much flexibility to determine when to replace its computers as do Gaithersburg and Henrico and Hennepin counties. “There’s an element of discipline from an operating standpoint,” Bragg says. “It’s expensive to terminate leases, so we have to keep the machines for the duration.”

Seating arrangements

Typically used by federal and state agencies to upgrade their computers, seat management is now being considered by local governments. Under a seat management arrangement, governments pay vendors to provide hardware, software and maintenance services for each computer at each employee’s desk or “seat.” The arrangements are performance-based contracts that place the responsibility for acquisition, installation, upgrades, training and disposal on vendors.

Seat management agreements give vendors, instead of governments, control in managing the upgrade cycle and the responsibility of providing service. That could be beneficial, Armstrong says. “[Upgrades] would be their headache,” he notes. “We could get our technicians doing more valuable work than buying and setting up PCs, and the city wouldn’t incur the cost of acquiring equipment and the cost of disposing it.”

Whether local governments issue bonds, use general or special funds or budget for computer system upgrades, the importance of planning for those costs has grown. “Local governments have increased their productivity through the use of technology,” says Vithoulkas. “In the future, the challenge will be to maintain that increased productivity and to continue to fund the technology advances that make it possible. The cost of doing business is no longer just a body – it’s a body and a PC.”

For more information, visit the Web sites for Public Technology Inc. (www.pti.org) and the National Association of Counties (www.naco.org), both based in Washington, D.C.