The American Recovery and Reinvestment Act of 2009 provides favorable new financing options to Texas school districts and charter schools. The new options are valuable in that financing costs over the term of the debt can be dramatically lower for certain school districts.

The new financing options under ARRA are:

BABs and QSCBs are issued as taxable bonds, in contrast to tax-exempt bonds, and the Federal Government provides a "tax credit" to the purchaser or an "interest rate subsidy" to the district to reduce the interest rate.

Just like traditional tax-exempt debt, the repayment source of BABs and QSCBs will depend upon the type of debt issued by a school district.

General Obligation Bond

Lease purchase revenue bonds, time warrants or maintenance tax notes

Many school districts can secure more favorable net borrowing costs with BABs compared to traditional tax-exempt bonds. Depending upon the repayment period, BABs could reduce a district’s interest rate by as much as 0.85%. To date, BABs have typically provided the most interest rate benefit for debt issued with a maturity of 20 years and longer. As such, BABs may not be applicable for shorter-term financings. The relative benefit of BABs will differ according to various factors, including:

BABs may be issued for:

Any purpose that qualifies for traditional tax-exempt financing.

"Tax Credit" BABs may also be used for working capital requirements or to refund existing bonds.

The Federal Government has not limited the dollar amount of BABs a school district may issue. As such, the maximum funding availability per school district is limited by the statutory provisions pursuant to State law.

To date, Texas school districts have issued QSCBs with a zero percent interest rate, accordingly, obligating school districts to only cover principal payments.

QSCBs may be issued for a wide range of real property purposes, including:

Current funding availability for Texas under QSCBs is $1.004 B. The amount of $466 M was pre-allocated to 18 school districts with high Title I enrollments. Also, school districts have a more favored standing for $100 M (aggregate for these ISDs) of QSCBs if they are located in a county affected by Hurricane Ike. Also, there is $100 M reserved for charter schools. This leaves $338.5 M available under a "First Come First Serve" basis for school districts not included in the above-mentioned categories.

A school district’s ability to issue QSCBs is also limited by the statutory provisions pursuant to State law and is further limited by a formula administered by the Texas Education Agency based upon dollar amount of QSCBs allocated by the Federal Government to Texas school districts. Specifically, the individual school districts limits are the greater of the following:

$5.0 M; or

$5.0 M plus ($500 X (2008-09 student enrollment – 400)

The funding availability for QSCBs may be increased by an additional 5% if a school district designed and constructed facilities that received certification under the LEED Green Building System, the Texas Collaborative for High Performance Schools Criteria, the Green Building Initiative’s Green Globes Criteria or an equivalent standard adopted by the applicable municipality in which the project is located.

The maximum maturity and tax credit rate for the QSCB program is determined on the daily basis and is published by the Bureau of Public Debt on the following website: www.treasurydirect.gov. As of Friday, July 31, 2009, the maximum maturity of QSCB’s was 15-years and the tax credit rate was 7.08%.

It’s "FIRST COME FIRST SERVE" so do not delay in issuing QSCB debt after consulting with a financial advisor and bond counsel.

BABs and QSCBs represent a new paradigm for the majority of school districts that have heretofore primarily issued "tax-exempt" bonds. Some experts believe these new debt instruments represent what may become the norm in the near future as the federal government looks for new and expanded sources of revenues. Nonetheless, the public sector is not likely to turn away from these kinds of arrangements.

School districts that will be financing projects that may be eligible for BABs or QSCBs should not delay in consulting with financial advisors and bond counsel to maximize their options to lower life cycle costs of issued debt. If structured properly, BABs and QSCBs can offer considerable value for a number of reasons described in this article, not the least of which may be local politics and/or a truly limited capacity to generate tax revenues to fund P&I obligations for traditional kinds of debt instruments.

The economic downturn has affected nearly every Texan. Jobs created through new construction of, repairs to and renovations to school buildings continue to be a valuable economic stimulus to Texas. Our school children will benefit from modern and technologically equipped instructional facilities. All Texans will benefit from the economic benefits resulting from the creation of additional jobs.