Few Takers So Far For Low-Interest Renovation Bonds

By Joetta L. Sack — March 15, 2000 5 min read

When the tiny Roff school district in southeastern Oklahoma upgraded the interiors of its five school buildings and added high-tech equipment, school leaders soon realized that their efforts would be wasted if they didn’t replace the buildings’ leaky roofs as well.

But no money was left over from a recent $500,000 bond, and state law prohibited the school board from even asking its impoverished community to approve another one. So the 350-student district looked to a little-known source of additional funding: the federal government’s Qualified Zone Academy Bonds.

For More Information

Information on Qualified Zone Academy Bonds is available from the U.S. Department of Education.

Under the 3-year-old program, qualified districts in impoverished areas have opportunities to secure interest-free or low-interest loans to help them make repairs and upgrade their technology. The Department of Education distributes money to all the states that choose to participate in the form of tax credits; states can then use those credits to secure loans for the districts that qualify.

Last year, the Roff district benefited from the program by issuing a $250,000, 10-year bond to put new metal roofs on its facilities. The interest rate is just 3 percent.

But while the program clearly worked for the Oklahoma district, response to it from schools overall so far has been underwhelming—even as lobbying for federal funding for school construction continues to be a top priority of most national education groups.

Since fiscal 1998, $400 million a year has been allotted for tax credits through the program.

“Up until now, only about 25 percent to 40 percent of that first year’s allocation actually has been used, but there’s a lot in the pipeline,” said Robert P. Canavan, the chairman of Rebuilding America’s Schools, a coalition that lobbies for school construction funding.

The problem, according to those familiar with the program, is that about 20 states have not set up systems to allocate and distribute the funds, and the bonds have been a hard sell to bond buyers. Moreover, many districts don’t even know the program exists.

But federal officials and school groups hope to change the situation as they get the word out about the bonds, sometimes referred to as “Q-zabs,” and as states and financial institutions become more familiar with the process. Soon, they say, such loans may become an attractive commodity.

“There was some cynicism at first, but we think it’s coming along well,” said Tom Corwin, the Department of Education’s acting deputy secretary for elementary and secondary education. As many as half of all school districts in the country may be eligible for the funding, he said.

Strict Requirements

The program is a modest version of the $5 billion, five-year school construction program President Clinton has unsuccessfully asked Congress to approve for the past three years.

The $400 million-a-year tax credit plan will cease after fiscal 2001, although bonds will be available until 2003. Meanwhile, congressional lawmakers are looking at legislation to extend and expand the program.

Although the bonds cannot be used for new construction, they finance more than renovations. The money can also be used for equipment and technology, as well as related curriculum and teacher-training expenses.

But recipients must meet strict eligibility requirements. Each school must be in a designated “empowerment zone” community, which is an area identified by the federal government for rehabilitation and financial incentives, or have at least 35 percent of its students qualify for free or reduced-price lunches. The school must have entered into a partnership with one or more local businesses, and it must receive donations, either cash or equipment, totaling 10 percent of the bond’s proceeds from those businesses.

The taxable bonds are issued by a local government agency or school district, and are sold to banks, other financial institutions, insurance companies, and other private lenders. A lender receives a tax credit from the federal government.

“It’s not that it is a bad idea, but it is an idea that isn’t well-understood because it’s so different from the ways people have historically financed construction,” said Bruce Hunter, the chief lobbyist for the American Association of School Administrators.

Typically, bond authority for school construction is given at the local level. Most districts ask the local government or their communities to approve a bond and secure the bond through private financing.

Mr. Hunter added that because there isn’t enough money to go around in the “Q-zab” program and few education officials and bond salespeople know how the program works, “it doesn’t have the kinds of legs that the current way of financing does.”

For districts with qualifying schools, though, the savings in interest costs are significant: The Education Department estimates that the interest paid on traditional bonds is typically about half the cost of the project.

The Clovis Unified School District in Clovis, Calif., one of the first districts to receive a Q-zab, recently estimated that it saved more than $6 million in interest costs on a $6 million loan to help convert an old warehouse into an educational technology center.

Cumbersome Process

McLiney & Co., a Kansas City-based financial group, has helped more than 50 school districts apply for the bonds. Its president, Edward D. McLiney, believes they are “extremely beneficial” to districts, but agreed that the process of securing them can sometimes be cumbersome.

“The bureaucratic problem is at the state level, and getting states to move forward to allocate the money,” Mr. McLiney said.

But some districts have also grappled with forming the required business partnership, he added. And some bond buyers who are not familiar with the program have been skeptical of it.

Superintendent Steve Crawford of Oklahoma’s Roff district believes more states and districts will apply for the program once they become familiar with the application process.

“It provided revenue for us that we wouldn’t have had otherwise,” he said. “Once [states] get it done, it’s a simple process.”

A version of this article appeared in the March 15, 2000 edition of Education Week as Few Takers So Far For Low-Interest Renovation Bonds