Congress recently extended authorization for the Qualified Zone Academy Bond (QZAB) program for the calendar years 2004 and 2005. The prior authorization for the program expired at the end of 2003. The QZAB program permits public schools serving large concentrations of low-income families to benefit from interest-free or low-interest QZAB financing to pay for certain improvements to school facilities. Financial institutions purchasing QZABs are entitled to federal income tax credits and are thus willing to receive no interest or interest that is well below market rates. In Ohio, the school district issuing QZABs may use the borrowed funds to renovate, repair or equip one or more qualifying school buildings (each an "academy").
Congress has limited the total amount of QZABs nationally to $400 million per calendar year. Each year the federal government has allocated the $400 million QZAB amount among the states based on relative poverty levels. Unused allocations for a particular year may be carried forward for a limited number of years. For 2004, Ohio's allocation is approximately $12 million. Ohio school districts must apply to the Ohio Department of Education (ODE), Office of School Finance, to receive an assignment of the state QZAB allocation. Applications for Ohio's 2004 QZAB allocation must be submitted by Feb. 15, 2005. Applicants may request up to $1 million per academy building and up to an aggregate of $3 million for all academies. Additional information about the application process is available on the ODE website.
There are a number of eligibility requirements that a school district must meet in order to participate in the QZAB program. First, the school district must be able to enter into the financing transaction under state law. Second, the academy building must be in an empowerment zone or an enterprise community, or the school district must reasonably expect that at least 35 percent of the students in the academy building would qualify for free or reduced-price lunches. The school district must also have established a partnership with one or more private entities that will make a contribution to the academy that has a present value (as of the date the QZAB financing closes) equal to at least 10 percent of the proceeds of the QZAB issue. This contribution may be cash or an in-kind contribution of property or services. Federal tax rules require that the contribution be received after the district has indicated its intent to use the contribution to qualify for a QZAB allocation.
In Ohio, QZABs may be structured as unvoted general obligation bonds (limited to 1/10 of 1 percent of assessed valuation), unvoted energy conservation bonds under Revised Code Section 133.06(G) (limited to 9/10 of 1 percent of assessed valuation) or lease-purchase obligations under Revised Code Section 3313.375 (exempt from debt limits). Voted general obligation bonds may also be issued as QZABs.
Squire, Sanders & Dempsey L.L.P. has served as bond counsel and purchasers' counsel on numerous QZAB financings for Ohio school districts and has assisted other Ohio school districts in the QZAB application process. Below is a list of Ohio QZABs that Squire Sanders has been involved with to date.
- $14,000,000 Canton City School District (2000)
- $10,000,000 Cleveland Municipal School District, Ohio (2001)
- $5,750,000 Cleveland Municipal School District, Ohio (2001)
- $5,500,000 Cleveland Municipal School District, Ohio (2001)
- $5,500,000 Cleveland Heights-University Heights City School District, Ohio (2004)
- $3,000,000 Garfield Heights City School District (2003)
- $2,000,000 Garfield Heights City School District (2004)
- $2,100,000 Canton City School District (2001)
- $1,000,000 Kent City School District (2000)
- $10,000,000 Dayton City School District (2002)
- $7,900,000 East Liverpool City School District (2003)
- $1,000,000 Valley Local School District, Ohio (2001)
To learn more about the QZAB program, please contact Katherine Petrey, +1.216.479.8094, Robert Eidnier, +1.216.479.8676 or any of the other Squire, Sanders & Dempsey L.L.P. lawyers with whom you work.