Qualified zone academy bonds.

AuthorPowers, Kevin

A frequently overlooked investment, qualified zone academy bonds (QZABs) are available to banking institutions. In addition to a fair rate of return, investor banks will be facilitating local schools in obtaining financial assistance where most needed. QZABs can also provide an alternative investment for banks with a significant number of municipal bonds in their portfolios.

What Are QZABs?

QZABs are used by states and local educational agencies to provide additional resources for improving school facilities and instruction. These agencies have considerable flexibility in using QZABs for rehabilitating or repairing school facilities, purchasing equipment, developing curricula and training school personnel; they cannot be used for new construction.

The QZAB program was designed to help schools that have the most need for financial assistance. According to Sec. 1397E(d)(4)(A)(iv), to be eligible to use such bonds, a public school must:

  1. Be located in an empowerment zone or enterprise community (as defined in Sec. 1391(b)); or

  2. Have a reasonable expectation that at least 35% of its students will be eligible for the free or reduced-price lunch program under the Richard B. Russell National School Lunch Act.

In addition, a school is required to receive donations from private entities worth at least 10% of the value of the funds borrowed.

Background

Section 226(a) of the Taxpayer Relief Act of 1997 added Sec. 1397E, to provide a credit to QZAB holders, so that such bonds generally can be issued without discount or interest. Each year, the Federal government allocates $400 million in QZAB bonding authority to the various states (including the District of Columbia and U.S. possessions). States receive a specific amount of QZAB authority based on the number of individuals within each state with incomes below the poverty level. Individual school districts then apply to their state for bonding authority.

Although the QZAB program was originally scheduled to expire at the end of 2001, the Job Creation and Worker Assistance Act of 2002 extended the program to calendar years 2002 and 2003; the Working Families Tax Relief Act of 2004 further extended the program to calendar years 2004 and 2005. While currently, there are no extensions beyond 2005, school districts have until Dec. 31, 2007 to issue QZABs allocated in 2005. Rev. Proc. 2004-72 set forth the maximum face amount of QZABs that may be issued for each state for calendar-year 2005.

How Do QZABs...

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