Simpler school financing with qualified zone academy bonds.

• Author: Kimmel, Thomas

Local governments have a new and less expensive financing technique at their disposal to deal with the need for school repairs, new equipment, and teacher training. Regulations published on January 7, 1998, by the Department of Treasury provide the details necessary for certain public schools, designated as "qualified zone academies," to enter into public-private partnerships for the sale of bonds (called qualified zone academy bonds, or QZABs), at little or no cost, for "qualified purposes."

The regulations are the by-product of the 1997 Taxpayer Relief Act of 1997 and provide a state-by-state breakdown of the $400 million allocation for calendar year 1998, shown in Exhibit 1.

Two key features of the bond program reflect an emerging trend in federal tax policy for school financing. First, the program requires a public-private partnership with a commitment of substantial contributions from the business community. Second, the program relies on tax credits as an incentive for investment rather than the traditional incentives of permitting tax-exempt earnings for the investors.

Perhaps more importantly, the program offers issuers an alternative with some distinct advantages. First, because QZABs are not required to be traditional bonds, but can be a simple loan, the issuance process may be streamlined and made less costly. Second, because the interest is effectively paid by the federal government through tax credits, borrowing costs can approach 0 percent interest. Finally, repayment terms of the principal amount of the loan are scheduled so that the local government will repay, in present value terms, 50 percent of the borrowed amount. Finally, because QZABs are not considered private, activity bonds, they are not subject to arbitrage concerns and are not included in the federally imposed state volume caps limiting issuance of private activity bonds, areas of potential liability for the issuer and investor alike.

Who Can Participate?

The program is available to public schools located in empowerment zones or enterprise zones. Enterprise zones were authorized by Congress in 1990 to revitalize areas of high unemployment, pervasive poverty (not less than 1.5 times the national poverty rate), and general distress. Between 1992 and 1995, the Secretary of Housing and Urban Development designated 25 such zones, where a combination of federal, state, and local tax credits and other incentives have been offered to encourage investment and hiring in the...