The nation’s 3,600 colleges, universities, and teaching hospitals continually need to construct new facilities or renovate obsolete or aging facilities. While it has been long recognized that replacing or repairing facilities is a critical problem for these schools, there are no reliable data on the extent of needed construction and renovation. Connie Lee estimates that more than $100 billion will be required during this decade to meet the need. In the 1980s, federal support of academic facilities in the form of grants and loans to schools of higher education was cut drastically. Alternative financing means such as internal funding, fund raising campaigns, and bank financing options generally were inadequate for significant construction and renovation projects. Issuing municipal bonds to finance such projects was limited mostly to schools with the highest credit standing. To help fundamentally sound but less creditworthy schools issue bonds to finance needed facilities projects, in 1986 the Congress established a college construction loan insurance corporation— Connie Lee. Municipal bonds are debt securities (long-term loans) that issuers (borrowers) sell to investors (lenders) so they can finance public projects—such as roads, airports, and public college facilities—and certain kinds of private projects—such as private college and hospital facilities—deemed to be serving public purposes. Municipal bonds may also be used to refinance existing debt. For the use of investors’ money, issuers promise to pay investors interest on specific dates and to repay the amount borrowed (principal) on a specific date or dates. Municipal bonds are issued through state and local government agencies. Repayment periods typically are 20 to 30 years. Municipal bonds are typically divided into two categories: general obligation bonds and revenue bonds. General obligation bonds usually finance public projects and are backed by the taxing authority of the state or local government that issues the bonds; the principal and interest are paid from tax receipts. The principal and interest on revenue bonds, by contrast, are generally paid from income (revenues) produced by the project that the bonds finance. For example, the principal and interest on a revenue bond issued to finance a college dormitory would be paid from fees collected from residents of the dormitory. Some municipal bonds issued to finance public projects may not be funded from state appropriations. In some states, for example, bonds issued by public colleges and universities for dormitory projects do not qualify for state backing. In these states, public schools may issue revenue bonds to finance the construction or renovation of dormitories. The interest income from municipal bonds is generally exempt from both federal income tax and state and local taxes of the state in which the bonds are issued. Because investors receive tax-free interest, they may be willing to purchase bonds that have a lower interest rate than they would otherwise require. The ability to issue tax-exempt bonds at lower interest rates may substantially reduce the issuer’s costs. To make its bonds appealing to investors, an issuer may obtain a credit rating for its bonds from a nationally recognized credit rating firm. These firms independently assess issuers’ ability to make scheduled interest and principal payments when they are due. The firms assign credit ratings to bonds as a gauge of the risk of default—nonpayment of interest or principal. Standard and Poor’s Corporation, for example, assigns ratings ranging from AAA, for the highest quality bonds, to D, for the lowest quality. Standard and Poor’s refers to bonds rated in its top four categories—AAA, AA, A, and BBB—as “investment grade” bonds. They are judged to have a high probability of on-time interest and principal payments and little risk of default. Bonds rated in categories BB to C, commonly called “junk bonds,” are referred to by Standard and Poor’s as “noninvestment” or “speculative” grade. They are considered to have a higher risk of default. Bonds rated D are in default with respect to principal or interest payments. Other credit rating firms use similar rating categories. Credit rating firms generally consider revenue bonds to have a higher risk of nonpayment than general obligation bonds because revenue bonds are not backed by the taxing authority of the state or local government and usually depend on the project funded to produce sufficient revenues to make interest and principal payments when due. In addition, Standard and Poor’s generally considers hospitals and private colleges and universities to be among the relatively riskier categories of institutions that issue municipal bonds. Private schools lack the backing of any taxing authority, and some of these schools have limited resources. The health care industry, in general, is viewed as having an uncertain future. To enhance a bond’s credit quality, an issuer may purchase insurance for its bond. Through such insurance, an insurer guarantees investors that it will pay the bond interest and principal when due if the issuer defaults. Rating firms that rate bonds also rate bond insurance companies on their ability to pay claims for defaulted interest or principal payments. Consequently, insured bonds are issued with the rating of the insurer rather than the rating of the issuer. Enhancing the quality of a bond in this manner may persuade investors to accept lower interest rates than they might otherwise. The lower interest cost may more than offset the cost to the issuer of obtaining insurance. Rating firms use a variety of criteria to evaluate the creditworthiness of bond insurers. They are judged on capital adequacy, which is the amount of capital they have relative to the amount of debt they have insured; their management experience; their underwriting policies; their financial performance; and other organizational factors. The key area in the assessment, however, is capital adequacy. Since its credit rating is the commodity that the bond insurer sells, the performance guidelines established by firms that rate it exert a considerable influence on its business practices. According to Standard and Poor’s, there are 10 major municipal bond insurance companies in the United States, including Connie Lee, which is one of the newest and smallest of the 10 companies. Nine of the companies, including Connie Lee, are rated AAA by one or more of the major rating firms. The one exception has a AA rating. The municipal bond insurance market is dominated by three insurers that have captured more than 90 percent of the bond insurance market. In 1994, insured municipal bonds totaled about $61 billion, about 37 percent of all municipal bonds that were issued. Connie Lee has approximately a 1-percent share of the overall municipal bond insurance market. It is the only major municipal bond insurance company exclusively insuring schools of higher education. Over the past 3 years, it has insured more BBB schools than any other major municipal bond insurance company. The Congress amended the Higher Education Act in 1986 to establish Connie Lee. The Congress was concerned that there were many fundamentally sound but less creditworthy schools of higher education unable to obtain bond insurance at a reasonable cost, thereby preventing them from issuing municipal bonds to finance needed facilities construction and renovation projects. Connie Lee is authorized to insure municipal bonds rated by a national rating firm at or below the lowest investment grade category—the equivalent of Standard and Poor’s BBB and below ratings—issued by schools of higher education; the proceeds of these bonds are to be used to finance the construction and renovation of academic facilities. In 1992, the Congress further amended the act to allow Connie Lee to insure a limited volume of higher rated bonds through calendar year 1997 on the condition that other municipal bond insurance companies declined to insure the bonds. Under the 1986 amendments, Connie Lee was incorporated in February 1987 as a bond insurance holding company. During 1987 and 1988, Connie Lee sold stock to the Department of Education and the Student Loan Marketing Association (Sallie Mae) and, in 1991, to a group of private investors. Currently, Education owns about 14 percent of Connie Lee’s stock; Sallie Mae owns about 36 percent; and the other stockholders own about 50 percent. Under the act, Connie Lee is managed by an 11-member board of directors: 3 appointed by Sallie Mae, 2 appointed by the Secretary of Education, 2 appointed by the Secretary of the Treasury, and 4 elected by the private stockholders. In December 1987, Connie Lee purchased an existing insurance company, which it renamed the Connie Lee Insurance Company, to carry out its insurance operations. It began insurance operations as a bond reinsurer in December 1988, when it received from Standard and Poor’s a AAA rating as a bond reinsurer. It began operating as a primary insurer in October 1991 when it received from Standard and Poor’s a AAA rating as a primary insurer. The Connie Lee Insurance Company is authorized to operate in 49 states, the District of Columbia, and Puerto Rico. As of October 1995, proposed legislation under consideration by the Congress would sever Connie Lee’s relationship with the federal government, a process commonly referred to as “privatization.” If enacted, such legislation could change the way in which Connie Lee operates and could affect the types of projects it insures. Between October 29, 1991, the date Connie Lee sold its first primary insurance, and September 30, 1995, Connie Lee insured 95 bonds, totaling about $2.6 billion, for colleges, universities, and teaching hospitals. Of these, 90 were rated BBB, the lowest investment grade rating, and 5 were rated A or better. None was noninvestment grade at the time it was insured; that is, none was rated below BBB, although several have subsequently received ratings in the noninvestment grade category. Almost all were revenue bonds. The five bonds rated A or better were insured after the Higher Education Amendments of 1992. According to Connie Lee officials, each bond was refused insurance by other insurance companies before Connie Lee agreed to insure it, in accordance with the 1992 amendments. The bonds did not exceed the limits on the amount of A-rated business imposed on Connie Lee by the act, as amended. In addition to the 95 bonds that Connie Lee insured, at the end of September 1995, 17 schools were considering whether to accept Connie Lee’s offer of insurance.