Friday, December 11, 2015

Some answers about rules for the QSCB low-cost bonds program

Illinois districts have until Jan. 15 to apply for authority to issue low- to no-interest bonds for school construction projects, repairs, renovations and other building needs through the federal Qualified School Construction Bond program.

The program guidelines and application process were approved by the Illinois State Board of Education (ISBE) during a Nov. 20 meeting. The state expects to distribute more than $495 million in bonding authority to school districts.

The QSCB is a category of tax credit bonds for the construction, rehabilitation, or repair of public school facilities or for the acquisition of land on which a public school facility will be constructed, and expenditures for costs of acquisition of equipment to be used in the facility that is being constructed, rehabilitated or repaired with the bond proceeds.

“These low- to zero-interest bonds will enable school districts to use more of their existing funds for educational uses and educator professional development rather than paying off interest,” State Superintendent of Education Tony Smith said.

The federal QSCB program was created by the American Recovery and Reinvestment Act of 2009, a spending package meant to boost employment during the Great Recession. Under it, the federal government covers most, if not all, of the interest costs on money borrowed. It provides federal tax credits to bondholders in lieu of the issuing school district paying interest on the borrowing.

Bob Lewis, a financial consultant with PMA Financial Network, said qualified school construction bonds are a good thing, particularly for those school districts that have referendum authority and qualified projects.

Illinois has released $500 million to the Chicago Public Schools, while $495 million remains available for other school districts. School districts have the ability to sell these as taxable bonds, meaning an investor gets paid interest and has to pay taxes on them. Essentially the federal government will pay the issuer, in this case the school district, a tax credit that offsets most if not all of the interest expenses. Instead of the incentive going to the investor, meaning they don’t have to pay taxes, the benefit of the Qualified School Construction Bonds goes directly to the school district.

The benefit is substantial. For example, with $10 million of QSCBs and a rate of 5 percent, then each year the bonds are outstanding, the investor gets an annual federal subsidy of $500,000. The subsidy can be provided in the form of a tax credit or, since 2010, a direct federal payment.

Instead of the incentive going to the investor, meaning they don’t have to pay taxes, the benefit of the Qualified School Construction Bonds goes directly to the school district, which is a major benefit, experts say.

This is not a grant and the State Board will not be issuing Qualified School Construction Bonds on behalf of qualifying school districts. Districts must issue the bonds within 18 months of receipt of authority. Each qualified school district that issues this debt will be responsible for the issuance, repayment of the debt, and all federal/IRS reporting requirements. Therefore, each district must work closely with their bond counsel before submitting an application to determine if these bonds are a good debt instrument for the district. Each district must also work closely with their bond counsel, annually, to insure that all federal/IRS reporting requirements are completed, according to ISBE.

Here are answers to some commonly asked questions about the QSCB program from ISBE:
  • How many districts do they expect to help? At least 10, there is no maximum number established.
  • How many have applied to date? None had applied as of Dec. 3.
  • How many potential projects are there? A 2014 capital needs survey of school districts found more than $8 billion worth of projects were needed by 558 school districts.
  • Because it requires them to raise funds, how likely are districts to do this, and is this sufficient incentive? Districts might only use it if they have an existing plan.
  • Explain the scoring matrix. Should application requests exceed the authority Illinois has been granted, a priority ranking will be calculated for each district based upon the following criteria
  1. Referendum and debt capacity, districts are ready to begin their project – shovel ready
  2. The district has passed a referendum to construct a new school, if a new school is being built, OR
  3. The district has passed a referendum increasing their debt extension limitation (if required), OR
  4. The district has the debt capacity to issue the amount requested and the ability to start their project(s)
  • What can a district do to improve their score? Meet all requirements before applying.
  • What happens to those that qualify but are not funded. In theory, they can apply for the next round of funding, if there is one. As a practical matter, however, further funding appears unlikely at this time.
  • This is a federal program; how big is it nationally? It is a $22 billion program.

The submission deadline for the application is Jan. 15 and state officials have said that the school districts will know something by the middle of February.

Application shall be made through submission of ISBE Form 35-10, Qualified School Construction Bond (QSCB) program. The form can be obtained from the State Board’s website on the topic.