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June 11, 2010

Dear Chief State School Officers:

I am pleased to  inform you about the 2010 allocations for Qualified School Construction Bonds  (QSCBs) and Qualified Zone Academy Bonds (QZABs), as well as recent legislation  and guidance concerning QSCBs and QZABs, and to remind you that the 2008  allocation for QZABs will expire at the end of this calendar year.  QSCBs and 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.

On March 18, 2010,  the President signed the Hiring Incentives to Restore Employment Act (Public  Law 111-147).  This legislation gives  bond issuers the option of issuing QSCBs and QZABs as bonds under which an  issuer may receive a cash subsidy from the Federal Government as opposed to  providing bondholders with a tax credit.   Issuers of QSCBs and QZABs that elect to receive the direct payment will  receive payments equal to the lesser of the actual interest rate of the bonds  on each interest payment date or the tax credit rate set daily by the U.S.  Department of the Treasury for municipal tax credit bonds.  Further information about these direct  payments may be found in IRS Notice 2010-35 posted at http://www.irs.gov/pub/irs-drop/n-10-35.pdf.

As you know, the  American Recovery and Reinvestment Act of 2009 (ARRA) authorized allocations  under the QSCBs program for 2009 and 2010.   The ARRA made available, to States and certain large local educational  agencies (LEAs), $11 billion for 2009 and $11 billion for 2010 in QSCB bonding  authority for construction, rehabilitation, or repair of a public school  facility, and for the acquisition of land on which the school facility is to be  constructed with QSCB funds.  Charter schools  as well as traditional public schools may benefit from QSCBs.  States may directly issue the bonds on behalf  of eligible schools or they may suballocate authority to issue the bonds within  the State.

Under the QSCB program  authorization, 40 percent of the total bond limitation is allocated to the  largest school districts.  The statute  defines these school districts as the 100 LEAs with the largest numbers of  children aged 5 through 17 from families living below the poverty line and not  more than 25 additional LEAs as designated by the Secretary of Education.  While I did not designate any additional LEAs  in 2009, I designated three additional LEAs as large school districts  for 2010: Marion County School District (FL), Knox County School District (TN),  and Omaha Public Schools (NE).  These  three LEAs have the largest numbers of children aged 5 through 17 from families  living below the poverty line among the LEAs not included in the 100 large  school districts. Accordingly, the  Internal Revenue Service announced direct allocations to 103 large LEAs.

If a QSCB  allocation to a State or a large LEA is unused for a calendar year, the State  or large LEA, respectively, may carry it forward to the next calendar year,  increasing the following year’s limitation.   There is no limitation on the number of years to which unused  allocations may be carried forward.
  QZABs are another  important tool that States and LEAs can use to provide additional resources for  improving school facilities and instruction.   The ARRA extended QZABs through 2010 and expanded the authority from  $400 million in prior years to $1.4 billion for 2009 and 2010.  In earlier years, QZABs could be purchased  only by banks, insurance companies, and other companies engaged in the business  of lending money. Effective October  2008, however, QZABs may be purchased by any individual or private business.

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.  To meet QZAB eligibility criteria, a public  school (including a charter school) must be located in either an Empowerment  Zone or an Enterprise Community (as designated by the Federal Government) or  have at least 35 percent of its students eligible for free or reduced-price  lunch under the National School Lunch Act.  The school must also have an education program  designed in cooperation with business; receive a private contribution (which  may be in-kind), the net present value of which is not less than 10 percent of  the proceeds of the bond; and have an education plan that is approved by its  LEA.  In addition, its students must be  subject to the same standards and assessments as other students in the LEA.

As the following  chart shows, previously authorized QZABs are still available.  However, unused funds from the 2008  allocations will expire at the end of this calendar year and, to make use of  these allocations, bonds must be issued by December 31, 2010.  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.

**QZABs Amount**
      **Calendar year first available**
      **Bonds must be issued by    December 31 of the year**$400 million
      2008
      2010$1.4 billion
      2009
      2011$1.4 billion
      2010
      2012


Section 1601 of Division B of  ARRA specifies that five specific tax-favored bond programs, including QSCBs  and QZABs, are subject to Davis-Bacon prevailing wage standards.  On May 5, 2010, the U.S. Department of  Labor issued a memorandum that highlights the responsibilities of State and  local government entities, contractors, and others for implementation of, and  compliance with, the Davis-Bacon labor standards in connection with the  identified ARRA bond projects.  This  guidance, which includes several resources on this subject, is posted at http://www.dol.gov/whd/recovery/AAM208.pdf.  Questions  regarding the applicability of the Davis-Bacon Act to a specific QSCB or QZAB  project may also be directed to the Department of Labor via e-mail to WHDARRA@dol.gov.
The Internal  Revenue Service issued the 2010 State allocations of QZABs bonding authority on  February 9, 2010, and the 2010 allocations of QSCBs bonding authority for the  States and the 103 large LEAs on March 17, 2010.  The IRS Notices containing these allocations are  posted at: http://www.irs.gov/pub/irs-drop/n-10-17.pdf for QSCBs and http://www.irs.gov/pub/irs-drop/n-10-22.pdf for QZABs.  Enclosed are those tables for your  information.

If you have questions about this information  or these programs (other than the application of Davis-Bacon standards), please  contact Branch 5 of the Internal Revenue Service, Office of Associate Chief  Counsel (Financial Institutions and Products)   (202-622-3980) or Jane Hess of the U.S. Department of Education  (202-401-8292).  I am confident that these  bonds can help your communities meet some of their facility needs.

| | Sincerely, 
| | -----------
| | /s/        
| | Arne Duncan

Enclosure:

Tables download filesPDF (83 KB)