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March 11, 2011

Dear Chief State School Officers:

I am pleased to inform you about the extension of Qualified Zone  Academy Bonds (QZABs) through 2011, and to remind you that the 2009 allocations  for QZABs will expire at the end of this calendar 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 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.

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 QZAB allocations are still available.  However, unused funds from the 2009  allocations will expire at the end of this calendar year and, to make use of  these allocations, the bonds must be issued by December 31, 2011.  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**$1.4 billion
      2009
      2011$1.4 billion
      2010
      2012$400 million
      2011
      2013


The Internal  Revenue Service posted the 2011 State allocations of QZABs bonding authority at: http://www.irs.gov/irb/2011-06_IRB/ar12.html.  A  table with the 2011 State allocations is enclosed for your information.

On December 17, 2010, the President signed the  Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of  2010 (Public Law 111-312).  This  legislation continues the QZAB program at a bond allocation level of $400  million a year but repeals a cash subsidy alternative to tax credits that was  created as part of the American Recovery and Reinvestment Act (ARRA) and  applied to QZABs by the Hiring Incentives to Restore Employment Act (Public Law  111-147).  As a result, issuers will no  longer have the option of receiving a cash subsidy on QZABs issued after  December 31, 2010, using the 2011 allocation.   The repeal will not apply to QZABs issued after December 31, 2010, using  any carry-forward of unused allocation from prior years.  Thus, an issuer may irrevocably elect to  receive the cash subsidy under 26 USC Section 6431 for a QZAB it issues in 2011  pursuant to a carry-forward from 2009 or a QZAB it issues in 2012 pursuant to a  carry-forward from 2010.

I would also like  to remind you about the Qualified School Construction Bonds (QSCBs) authorized  under ARRA.  The ARRA made available, to  States and certain large 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.   Public 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.

QSCB allocations to a State or a large LEA  that went unused in the previous calendar year may be carried forward to the  next calendar year.  There is no  limitation on the number of years to which unused allocations may be carried  forward.

If you have questions about this information  or these programs 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:

Table download filesMS Word (67 KB)