School Finance: School Building Assistance

Qualified Zone Academy Bond Financing Program

Request for Proposals

The qualified zone academy bond (QZAB) program allows school districts and charter schools to obtain interest-free financing for the purpose of establishing "qualified zone academies." Qualified zone academies are schools, or programs within a school, which are located in economically distressed areas and whose curriculum is designed through school/business partnerships.

To provide the capital financing for these new programs, eligible schools and districts will be permitted to issue no-interest bonds for sale to eligible holders. The holders of the bonds will receive tax credits on their federal income tax returns to compensate them for the value of the foregone interest. The allowable interest rate and maximum term for each bond issue are set by the Secretary of the Treasury. Because some issuers are more or less credit-worthy than others, the use of a uniform interest rate may result in some bonds being issued at a premium above par or at a discount below par.

ELIGIBILITY REQUIREMENTS

Here is a summary of the various requirements that applicants must meet in order to use this financing mechanism:

1. The proposed program must be established by and operated under the supervision of a local education agency. This would include local school districts, regional school districts, and charter schools.

2. The proposed program must be designed in cooperation with business to enhance the academic curriculum, increase graduation and employment rates, and better prepare students for the rigors of college and the increasingly complex workforce. Students in the proposed program must be subject to the same standards and assessments as other students. Post-secondary education and training programs are not eligible.

3. The proposed program must either be located in an empowerment or enterprise zone, or at least 35% of the participating students must be eligible for free or reduced-cost school lunches.

4. The applicant must have written commitments for contributions from private entities amounting to at least ten percent of the amount of bonds to be issued. These can include in-kind contributions, such as equipment; technical assistance; services of employees; internships, field trips, or other educational opportunities; or other property or services agreed to by the district.

5. The bonds must be issued by a state or local governmental agency. For local districts, the bonds would typically be issued by the city or town. For regional districts, the bonds would typically be issued by the district itself. Charter schools, which do not have authority to issue bonds, must enter into a partnership with a public agency that does have such authority.

6. The bond proceeds may be used for facility rehabilitation or repair; acquisition of equipment or other fixed assets; and related costs. Bond proceeds may not be used for the purchase of land or buildings, or for the construction of new buildings.

7. The bonds must be purchased and held by a bank, insurance company, or other corporation actively engaged in the business of lending money.

8. The applicant must meet the applicable federal requirements governing the timing of expenditures from the bond proceeds; arbitrage; and reporting.

9. Because there are statewide limits on the amount of bonds that can be issued under this program, the applicant must receive an allocation of the statewide limit from the Massachusetts Department of Elementary and Secondary Education.

Borrowing under this plan requires the same authorization and local approvals as any other municipal or regional school district borrowing. The borrowing for which application is made under this program could be a portion of an existing borrowing authorization, but that portion must meet the private sector matching requirements described above.

It will be the responsibility of the governmental entity that issues the bonds to certify to prospective purchasers that the school or district has met all the requirements under this program. The IRS has indicated that bondholders may rely on these certifications if they are reasonably made. The Massachusetts Department of Elementary and Secondary Education will not be involved in reviewing or assessing an issuer's eligibility under this program. Potential issuers are strongly urged to consult with bond counsel before making any certifications of eligibility.

In past years, projects approved for QZAB financing were not eligible for funding under the Commonwealth's school building assistance (SBA) program. The SBA program is now under the jurisdiction of the Massachusetts School Building Authority, and questions concerning SBA eligibility should be directed to the authority.

ALLOCATION

The total allocation to be awarded under this request for proposals is approximately $20 million.

PROGRAM PROPOSALS

Applications should be in the form of a letter from the superintendent or charter school leader, providing the following information:

1. Name of school or district.

2. Name, street address, phone number, and email address of contact person.

3. Amount of bonds to be issued, expected date of issuance, and expected term of issue.

4. Description of the project to be funded.

5. Budget for the expenditure of the bond funds.

6. Name of governmental entity that will issue the bonds.

7. Are you using a financial advisor to assist you with the requirements of the QZAB program? If so, please provide their name and contact information.

Please submit applications to:

Massachusetts Department of Elementary and Secondary Education
Attn: Jeff Wulfson, Associate Commissioner
350 Main Street
Malden, MA 02148

Fax or email submissions will not be accepted. Applications will be processed on a rolling basis as they are received. The Department reserves the right to reject any application if it does not meet the program requirements or if, in the opinion of the Department, it appears unlikely that the applicant will be able to complete the financing within the requested time frame.

ADDITIONAL INFORMATION

This sheet is a summary of the main elements of the qualified zone academy bond program. The statutory authorization for this program can be found in section 1397E of the Internal Revenue Code. The most recent amendments were enacted in section 107 of Pub. L. 109-432 (the Tax Relief and Health Care Act of 2006). Because this is a complex program, with very specific eligibility requirements, no city, town, school district, or lending institution should participate in this program without seeking legal advice from bond counsel.

For further information, please contact Jeff Wulfson via email at jwulfson@doe.mass.edu or by phone at 781.338.6500. Additional program information is also available on the U.S. Department of Education website at www.ed.gov/programs/qualifiedzone/index.html.

January 26, 2007