The price tag for necessary school construction and renovation has soared into the billions across the nation today and is still growing. Tax-exempt municipal bonds currently finance approximately 90 percent of all state and local investment in public schools. Municipal bonds provide an important source of federal assistance from the federal government to states and localities. Because the federal government foregoes the tax revenue on interest earned by investors on qualified municipal bonds, investors demand a much lower rate of interest than they otherwise would. States and localities benefit through a lower cost of capital.
Bonds provide other benefits as well.
They allow school districts to access the capital markets and receive federal assistance without any direct interference of the federal government. This helps concentrate decision making at the state and local level where needs are most accurately discerned. Bonds force a market test of investment projects, since investors must determine whether a school district can adequately support the debt service associated with new borrowing. Finally, compared to some federal programs that provide assistance to states and localities, federal administration of municipal bonds requires relatively little bureaucratic overhead. The Bond Market Association advocates several targeted proposals to expand the use of tax-exempt financing for school construction and provide substantial financial assistance to states and localities in financing more schools.