March 1, 2007

Dear Chief State School Officers:

I am pleased to inform you about the extension of Qualified Zone Academy Bonds 
(QZABs) through 2007 and to remind you that the 2005 allocations 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.

As you may know, 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 2007 as part of the Tax Relief and Health Care Act of 2006 (Public Law 
  109-432). This legislation continues the QZAB program at its prior annual bond 
  allocation level of $400 million a year but includes new restrictions for issuers. 
  Under the new law, issuers must reasonably expect to spend 95 percent of QZAB 
  proceeds within five years of a sale and must expect to enter into a binding 
  commitment with a third party to spend at least 10 percent of the proceeds within 
  six months. Issuers must also comply with arbitrage rebate and information reporting 
  requirements and redeem QZABs within 90 days if the proceeds have not been spent 
  within the five-year period.

As the following chart shows, QZABs are currently available. However, unused 
  funds from the 2005 allocations will expire at the end of this year and, to 
  make use of these allocations, bonds must be issued by December 31, 2007. 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 2004 QZAB allocation has already expired.



|Amount       | Calendar yearfirst available | Bonds must be issued by 
      December 31 of the year
|------------ | ---------------------------- | ------------------------------------------------------
|$400 million | 2005                         | 2007                                                  
|$400 million | 2006                         | 2008                                                  
|$400 million | 2007                         | 2009                                                  

For your information, I have enclosed a table showing the State allocations 
  of QZABs for the years 2005-2007. 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 2006 and 2007 allocations 
  in Rev. Proc. 2007-18.

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. Thank you for working with them to ensure 
  that no child is left behind.

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

Enclosure

|Last Modified: 03/09/2007
|-------------------------