Qualified School Construction Bonds (QSCBs) support the construction, rehabilitation, or repair of public school facilities; the acquisition of land on which such school facilities will be constructed; and furniture and equipment for school facilities. Projects financed with QSCBs must comply with federal wage rate requirements and labor standards. State and local governments issued up to $22 billion of QSCBs, including $11 billion allocated in 2009 and another $11 billion in 2010. Indian tribal governments were given authority to issue an additional $200 million annually in 2009 and 2010.
The federal government used a statutory formula to allocate the authority to issue QSCBs to states and large local educational agencies (LEAs). Forty percent of the allocation was distributed to the 100 LEAs with the largest populations of school-age students in poverty plus up to 25 LEAs determined to be in-need by the U.S. Secretary of Education. The remaining 60% of the allocation went to states based on their proportion of the prior year’s Title I grant funding for disadvantaged students under No Child Left Behind (NCLB), with the amount allocated to any state reduced by the aggregate amount of allocations to the LEAs within the state. Individual states determined which portion of their allocations, if any, could be used by charter schools.
QSCBs can be structured in one of two ways: as tax credit bonds or direct pay subsidy bonds. If an investor chooses to invest in them as tax credit bonds, the federal government provides a tax credit in lieu of interest payable on the bonds, lowering interest expenses for the borrower. The bondholder receives all or a portion of its return on investment as a federal tax credit against its federal tax liability. The maximum maturity and the rate of the federal tax credit is set daily by the U.S. Treasury Department, but is fixed for the life of the bonds at issuance. QSCBs are generally structured as bullet term bonds, with a single principal payment at maturity; however, borrowers may create voluntary sinking funds subject to certain requirements.
The second method, more heavily utilized by investors, is to structure QSCBs as direct payment bonds. In March 2010 the Hiring Incentives to Restore Employment (HIRE) Act was signed into law, authorizing QSCBs to be issued as direct payment bonds for which an issuer irrevocably elects to receive cash subsidy payments from the Treasury Department in lieu of tax credits that could otherwise be claimed. The amount of the cash subsidy paid directly to issuers on each interest payment date is equal to the amount of tax credit that would have been available on each quarterly date based on the tax credit rate set by the Treasury Department.
While it was anticipated that QSCBs would be zero-cost to borrowers, investors have typically required a supplemental coupon payment that, together with the tax credit, meets their required return. In a few cases, bond issuers and investors have structured the bonds to have the ability to strip the tax credits and sell them separately. Additionally, a few bond issuers and investors have chosen to pair these bonds with other federal subsidy programs, such as the New Markets Tax Credit (NMTC) program, to further lower the cost of capital to charter school borrowers. Since 2014 several investors have combined QSCBs with Community Development Financial Institutions (CDFI) Bond Guarantee Program loans, enabling charter school borrowers to take advantage of a long-term product with the interest subsidy.
The Treasury Department is no longer making allocations of QSCBs through states and there currently is very little QSCB allocation remaining nationally.
Last Updated: April 2017