Cut the Cost of Borrowing With Zero-Interest Federal QZAB Funds

• By Laurence Peters
• 02/01/09

School districts are facing a series of unpleasant and difficult fiscal choices in this current recessionary environment. Given the recent steep spikes in gas and food prices, now is the time for some creative thinking as to how best to manage the precious taxpayer resources.

Instead of taking drastic measures such as moving to a four-day week or cutting back on heating and air conditioning, it is now worth examining the Qualified Zone Academy Bond (QZAB) option.

The federal QZAB program, which has been around for a decade, allows districts with schools that have at least 35 percent of their students on free and reduced-price lunch to borrow money from banks at zero interest to renovate buildings; to purchase equipment for areas such as IT, energy efficiency, and solar panels; and to improve curriculum offerings or professional development.

The only real prohibition on the use of QZAB funds is that it cannot be used for new construction.

There is one other caveat — the school district must form a partnership with a business or nonprofit willing to make a cash or in-kind donation equal to 10 percent of the QZAB loan value at below market price. Additionally, the 10 percent match partner must work with the school district to create an academy to “improve the graduation, college attendance, or workforce skills” of the school’s students.

Banks and financial institutions issue the QZAB debt to borrowers at zero interest and receive a federal tax credit.

Hidden Treasure
Each year, the U.S. Department of Education allocates $400M in QZAB funds to state education departments based on the numbers of students in poverty. While large states like California, New York, and Texas receive between $30M and $50M each, the average for middle size states is between $5M and $10M.

However, unlike most other reasonably sized federal education programs, states are not given a percentage of the budget to administer the program and spread the word about the program’s existence. It is an easy program to miss even if you have a reason to carry out a careful search on your state department of education’s Website.

Even when school districts do discover the program’s existence, many fail to pursue the QZAB option because of their inability to find a suitable 10 percent match partner or their unfamiliarity with the esoteric tax code language QZAB rules are couched in. Given the time constraints everyone is under these days, it would be easy to just give up at this point and believe that the program is “not for my school.” That would be a mistake, and this article is designed to give you a brief primer on why QZAB is such a good deal for schools these days.

Free Money?
Most importantly, no school district can afford to turn away from zero borrowing costs these days. Simply put, it is like getting half the money free! As one Ohio school district business manager told me recently, by borrowing $5M at zero interest, he would only be paying back about $2.5M in principal over 15 years in present value terms.

As to the issue of partnering with a business or a nonprofit, this should be seen in a positive rather than a negative light; schools get an opportunity to lean on the expertise and resources of an outside organization to help improve student scores and academic skills.

The paperwork turns out to be minimal; most states have made it easy for school districts to simply state what they intend to use the QZAB proceeds for, the nature of the match, and the way they will measure student progress in the academy. In many states, once you have approval from your board, you can receive the proceeds and be ready within a couple of months.

It is worth noting that the Internal Revenue Service recently increased scrutiny of the perceived QZAB program abuses, such as the matching partner failing to work with the school district to set up a credible academic program. The National Education Foundation is working with Congress to extend the QZAB program this year.

Take the time to learn more about the QZAB program and how it can help you better educate your students.

Laurence Peters served as the U.S. Department of Education’s First QZAB Director and now serves as director of the nonprofit National Education Foundation’s Academic Divide Initiative. His e-mail is [email protected].

Reprinted from the December 2008 issue of School Business Affairs, published by the Association of School Business Officials, International.