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May 29, 2009

Dear Chief State School Officers:

I am pleased to inform you about the authorization of  Qualified School Construction Bonds (QSCBs) and Build America Bonds (BABs), and  the extension of Qualified Zone Academy Bonds (QZABs).  The authorizations provide Federal subsidies  for public school improvement and modernization activities.  The American Recovery and Reinvestment Act of  2009 (ARRA) makes QSCBs and BABs available for the first time, while extending  and expanding the authority for QZABs.  QZABs provide funding for school repairs and  renovation and certain other activities for eligible schools and may not be  used for new construction, while QSCBs and BABs provide funding for new  construction as well as renovation.

Charter schools as well as traditional public schools may  benefit from all of these types of bonds.   I encourage you to consider serving charter schools through these  programs.

You may use all three of these types of bonds to modernize  buildings and convert obsolete non-school buildings into modern school  facilities.  I encourage you to design  energy-efficient school facilities that meet widely recognized rating systems  for green buildings.  Please also  consider ways these bonds can improve communities in general.  For instance, some local educational agencies  (LEAs) have designed school facilities in a manner intended to facilitate their  serving as centers of their communities that are available for non-school  purposes outside of regular school hours.   Particularly in a time of economic difficulty, making school facilities  go further by designing and providing them for multiple uses makes eminent  sense.

The benefit of all of these  programs is that they help LEAs save money and make their repair, renovation,  or construction dollars go further.   Purchasers of QSCBs and QZABs receive a Federal income tax credit.  The U.S. Treasury Department establishes  State allocation limits and sets a tax-credit rate for the QSCB and QZAB bond  programs that, on average, equals the amount of interest schools would  ordinarily pay on debt.  With the Federal  Government covering most or all of the interest on the bonds, LEAs receive a  substantial benefit as interest payments typically equal approximately 50  percent of the economic cost of a bond.

The ARRA makes 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.  (An  additional $200 million in each of those years goes to the Department of the Interior for assistance to schools  operated or supported by the Bureau of Indian Education.)  The QSCB bond allocation authority generally  goes to States (not necessarily State educational agencies) based on their shares of Title  I Basic Grant funds under the Elementary and Secondary Education Act (ESEA).  The District    of Columbia and possessions of  the United States also receive these allocations.  Possessions other than Puerto   Rico, however, receive their shares of the QSCB bonding authority  based on their share of the population below the poverty line.  Forty  percent of the national QSCBs bonding authority goes directly to the 100 LEAs  with the largest number of school-aged children living below the poverty  line.  The designated LEAs receive this  bond allocation in proportion to their share of ESEA Title I Basic Grant  funds.  States with LEAs that receive  bond allocations directly from the Federal Government receive a reduced direct  allocation.

BABs are bonds that can be used to finance a wide range of  projects, including construction and modernization of school facilities.  The BABs program allows municipal bond  issuers in 2009 and 2010 to offer an unlimited amount of taxable debt and to  elect either to receive a cash subsidy from the Federal Government or to provide  bondholders with a tax credit.  Both the  payment and the tax credit would be equal to 35 percent of the interest paid on  the bonds.  BABs can assist public postsecondary  institutions in addition to LEAs.

QZABs are another important tool that States and LEAs can  use to provide additional resources for improving school facilities and  instruction.  The ARRA extends QZABs  through 2010.  As you may know, QZABs  were first authorized in 1997 and 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 may now 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 must be located in either an Empowerment Zone or an Enterprise Community  or have at least 35 percent of its students eligible for free or reduced-price  lunch under the Federal lunch program (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; and 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 2007 allocations will expire at the end of this year and, to  make use of these allocations, States or municipalities must issue the bonds by  December 31, 2009.  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
      2007
      2009$400 million
      2008
      2010$1.4 billion
      2009
      2011$1.4 billion
      2010
      2012


On April 3, 2009, the  Treasury Department issued 2008 and 2009 State allocations of QZABs bonding  authority and 2009 allocations of QSCBs bonding authority for the States and  the 100 large LEAs.  I am enclosing those  tables for your information.  I am also  enclosing a Fact Sheet prepared by our Department on these bond programs.

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

Enclosures:

Fact Sheet

Tables download filesPDF (45.55K)

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Fact Sheet

### **AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009**

**Qualified School Construction Bonds and****Qualified Zone   Academy Bonds**

The American Recovery and Reinvestment Act of 2009 (ARRA)  authorized tax-credit bonds for school construction by expanding Qualified Zone  Academy Bonds (QZABs) from $400 million annually to $1.4 billion for each of  calendar years 2009 and 2010 and authorizing $11.2 billion in Qualified School  Construction Bonds (QSCBs) for the first time.   QZABs provide tax credits primarily for school renovation and may not be  used for new construction, but QSCBs provide tax credits for new construction  as well as renovation.

The U.S. Treasury Department establishes State allocation  limits and sets a tax-credit rate for both of these bond programs that, on  average, equals the amount of interest schools would ordinarily pay on  debt.  Since the Federal Government  covers most or all of the interest on these bonds, local educational agencies  (LEAs) receive a substantial benefit, as interest payments may typically equal  up to 50 percent of the economic cost of a bond.

In addition to QZABs and QSCBs, the ARRA contains other  provisions regarding tax-exempt debt and tax-credit programs that entities may  use to finance construction of school facilities as well as other types of  facilities.  Build America Bonds (BABs),  for example, are taxable bonds that can be used to finance a wide range of  projects for governmental purposes.  This  BABs program allows municipal bond issuers in 2009 and 2010 to offer an  unlimited amount of taxable debt and to elect either to receive a cash subsidy  from the Federal Government or have it provide bondholders with a tax  credit.  Either the payment or the tax  credit would be equal to 35 percent of the interest paid on the bonds.  BABs can assist public postsecondary  institutions in addition to LEAs.  The  Treasury Department's recent guidance on this new program can be found at http://www.irs.gov/pub/irs-drop/n-09-26.pdf. The benefit of all of these school construction  financing tools is that they can help State and local governments save money  and make their repair, renovation, modernization, or construction funds go  further.

### **Basic Facts about Qualified School Construction Bonds**

Under this new category of tax-credit bonds, the Treasury  Department distributes $11 billion of the bond allocation in both 2009 and  2010 among the States and certain large LEAs.   QSCBs 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.  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 go to States (not necessarily State educational agencies) based on their share of Title I Basic Grant funds.  The District of   Columbia and possessions of the United States also receive  these allocations.  Possessions other than Puerto Rico, however, receive       their shares of the QSCB bonding authority based on their share of the       population below the poverty line. States with LEAs that receive bond allocations directly from the Federal Government receive a reduced allocation as a result of the  allocations described in more detail below.

- 40       percent of the national QSCB bonding authority goes directly to the 100       LEAs with the largest number of school-aged children living below the       poverty line.1  The designated LEAs receive this bond       allocation in proportion to their shares of Title I Basic Grant       funds.  An LEA in this category that       receives a direct allocation may reallocate any of its unused QSCB       allocations to its State.

- If an       allocation to a State is unused for a calendar year, the State may carry       it forward to the next calendar year.        In other words, States have up until the end of 2010 to use their       2009 allocation and until the end of 2011 to use their 2010 allocation.

- In       addition to the amounts described above, the Department of the       Interior/Bureau of Indian Affairs receives $200 million annually in QSCB       authority for its school facilities in 2009 and 2010.  Indian tribal governments are qualified       issuers.

QSCBs are less restrictive in their uses than QZABs.  For a QSCB bond that is issued by a State or  local government where a public school is located, 100 percent of available  project proceeds must be used for the construction, rehabilitation, or repair  of the public school facility.  In  addition, a portion of the proceeds of such a bond may be used for the  acquisition of land on which a public school facility is to be  constructed.  QSCBs may be purchased by any individual or private  business, and used to generate a tax credit against the individual's or  entity's Federal income taxes.  The  Department of the Treasury recently issued initial guidance for the program,  which is posted at:  www.irs.gov/pub/irs-drop/n-09-35.pdf, that  reports the allocation of the annual bond volume among the States and the 100  largest LEAs.

### **Basic Facts about Qualified Zone   Academy Bonds**

QZABs were first authorized in 1997 and 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.  The Treasury Department  allocates the authority to issue these bonds to States based on their  proportion of the U.S.  population living below the poverty line.   States may directly issue the bonds on behalf of eligible schools or  they may suballocate authority to issue the bonds within the State.  These bonds may be used only on behalf of  schools or programs that:

- are       located in an Empowerment Zone or an Enterprise Community; or
- have a       reasonable expectation (as of the date of the bond issuance) that at least       35 percent of their students will be eligible for free or reduced-cost       lunches under the National School Lunch Act.

To benefit from a QZAB, an eligible 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;
- have       an education plan that is approved by its LEA; and
- subject       its students to the same standards and assessments as other students in       the LEA.

QZABs  may not be used  for new construction but may be used for the following activities:

- renovating       and repairing buildings;
- investing       in equipment and up-to-date technology;
- developing       challenging curricula; and
- training       quality teachers.

In past 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.  The Department of the Treasury has issued  recent guidance for the extended program available at:  http://www.irs.gov/pub/irs-drop/n-09-30.pdf.  Existing ED guidance on QZABs is available at: www.ed.gov/programs/qualifiedzone/faq.html.

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