Build America Bonds

BABs were included in the American Recovery and Reinvestment Act (the “Act”) signed into law by President Obama on February 17, 2009.  The following questions and answers highlight the major characteristics of these bonds.  Readers can then see how they are and will be used to denude public education by extending the neo-liberal hand to investors in the form of extending investments in’ debt’.

What are BABs?

“BABs are state or local governmental bonds that could be issued as tax-exempt bonds, but which the issuer elects to treat as BABs.  Interest on BABs is taxable to the bondholder, but tax credits are provided in lieu of the tax-exemption.

There are two general types of BABs. The first, or basic, form provides the bondholder with a non-refundable federal income tax credit of 35% of the interest paid on the bond in each tax year. If the bondholder lacks sufficient tax liability in any year to fully utilize that year’s credit, the excess credit can be carried forward for use in future years. 

The second form, “Issuer BABs,” provides no credit to the bondholder, but instead the issuer of the BABs receives payments from the Federal Treasury equal to 35% of the interest paid by the issuer. No more than 2% of Issuer BABs proceeds may be used to pay costs of issuance and, with this type of BABs, it appears that only new money projects for capital purposes can qualify. Because the credit is paid to the issuer, and BABs are taxable obligations, the purchasers of these bonds need not be taxpayers. This opens a new market for the debt of State or local governmental units, including tax-exempt entities like pension plans and foreign entities” (Miller Canfield, http://www.millercanfield.com/publications-alerts-550.html). 

According to Reuters the whole notion of municipal debt is sparking like wildfire throughout the world:

“Taxable BABs have spread through the municipal bond market like wildfire since debuting in April 2009, with more than $100 billion sold by states, cities and other municipal issuers wanting to obtain the program’s 35 percent federal rebate on interest costs. In May, BABs made up a third of new issues, according to the U.S. Treasury”. (Reuters)

Meanwhile, investors such as U.S. pension funds that do not need tax breaks afforded by typical tax-free municipal bonds have swept up the safe debt that pays higher yields than most munis and is one place investors feel safe parking their capital.  Same is true for foreign capitalists looking for safe bets on returns.

Now investors in Europe, Asian financial centers such as Hong Kong and even the Middle East are looking into the bonds, including sovereign funds and central banks. 

The initial focus has been on big muni issuers such as Illinois and California, the leading BABs-sellers, mostly because deals totaling more than $250 million are the most cost-effective to sell abroad” ((Lambert, L. Piergot, K. Reuters, June 17th, 2010, Build America Bonds may be the new sovereign debt,http://www.reuters.com/article/idUSTRE65G5G520100617).

Arne Duncan has made it known that for those who wish to see charter schools proliferate, BAB is open for business.  In the following letter issued on May 29, 2009 Duncan let investors know, be they foreign or national, the Build American Bonds can and would be used for charter school construction.

Key Policy Letters from the Education Secretary or Deputy Secretary

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,

Arne Duncan

Enclosures:

Fact Sheet

You can see more on Build America Bonds, the new debt peonage plan for constructing charter schools at: http://www2.ed.gov/policy/gen/guid/secletter/090529.html