July 6, 2005

Dear Chief State School Officers:

I am pleased to inform you about the extension of Qualified Zone Academy Bonds 
  (QZABs) through 2005 and to remind you that the 2003 allocation for QZABs will 
  expire at the end of this year. QZABs are an important tool that States and 
  local educational agencies (LEAs) can use to provide additional resources for 
  improving school facilities and instruction.

QZABs are bonds the Federal Government subsidizes by allowing bondholders to 
  receive tax credits that are approximately equal to the interest that States 
  and communities would pay holders of taxable bonds. As a result, issuers are 
  generally responsible for repayment of just the principal. QZABs were first 
  authorized under Section 226 of the Taxpayer's Relief Act of 1997 (Section 1397E 
  of the Internal Revenue Code).

States and LEAs have considerable flexibility in the use of QZABs. They may 
  be used for rehabilitating or repairing school facilities, purchasing equipment, 
  developing curricula, and training school personnel, but not for new construction. 
  QZABs can help schools save up to 50 percent of the cost of financing allowable 
  activities. In addition, State educational agencies are not required to submit 
  an application to the Federal Government before using QZABs.

Congress adopted President Bush's proposal to extend the QZAB authority through 
  2005 as part of the Working Families Tax Relief Act of 2004 (Public Law 108-311). 
  This legislation continues the QZAB program at its prior annual bond allocation 
  level of $400 million a year.

As the following chart shows, QZABs are currently available. However, unused 
  funds from the 2003 allocations will expire at the end of this year and, to 
  make use of these allocations, bonds must be issued by December 31, 2005. If 
  a State does not issue the amount of QZABs allocated by the Federal Government 
  between the calendar year the funds are first made available and the date by 
  which they must be issued, the unused QZAB allocation expires and cannot be 
  used. The 2002 QZAB allocation has already expired.



|Amount       | Calendar yearfirst available | Bonds must be issued by 
      December 31 of the year
|------------ | ---------------------------- | ------------------------------------------------------
|$400 million | 2003                         | 2005                                                  
|$400 million | 2004                         | 2006                                                  
|$400 million | 2005                         | 2007                                                  

For your information, I have enclosed a table showing the State allocations 
  of QZABs for the years 2003-2005. The allocations represent the maximum amount 
  of QZABs that may be issued within a State beginning in a given calendar year. 
  The Internal Revenue Service recently published the 2005 allocations in Rev. 
  Proc. 2004-72.

If you have questions, please contact either Zoran Stoyanovic of the Internal 
  Revenue Service (202-622-3980) or Ian Soper of the U.S. Department of Education 
  (202-401-0907). I am confident that your school districts have needs that can 
  be met by this simple-to-use program and thank you for working with them to 
  ensure that no child is left behind.

| | Sincerely,        
| | ------------------
| | /s/               
| | Margaret Spellings

Enclosure

|Last Modified: 07/18/2005
|-------------------------