In The Beginning, (1997-2005)

The United States Congress enacted a bill called the Tax Payer Relief Act of 1997 that allowed schools to borrow at no or nominal interest cost. The intended use for these funds was to create, in each "ACADEMY", resources to help better educate kids and better prepare them them for their futures (ie. college or the workforce). The first year this was available was 1998. 

In 1998 not a single school district in the United States took advantage of this opportunity. 

The projects that can use QZAB funds are too numerous to list here. In fact, the easier answer is explaining what can't be funded. New building construction can not be funded with QZAB, most other projects qualify. [Qualifying]

Why no school took advantage of this program illustrates the uniqueness of this financing tool. Not until 1999 and 2000 did a few creative investment banking firms start working with this program and offering it to their clients. Even today, most schools, investment bankers and investors, have little understanding of QZABs. [See Directory of Firms with Experience]

As mentioned, currently there are only a handful of firms nationwide that will even consider these securities. Unless you have a very large project, most will not consider handling a QZAB. 

Why? For an Investment Banker to successfully handle a QZAB he will have to understand how to:

1. Properly create and establish the Zone Academy

2. Create a Public/Private partnership

3. Locate a 10% matching contribution or grant (must be a private, nongovernmental entity)

4. Seek State Department of Education Allocation for QZAB financing.
    

5. Locate a "Qualified Lender" (as defined by the IRS) who wants to take a tax credit instead of an interest check (not a very attractive credit)

These steps, most of which take enormous amounts of time, are very different from what your typical Investment Banking Firm is accustomed to handling. Only a very few Investment Banking "Boutiques" have had the flexibility to handle QZAB projects successfully. [See QZAB Providers]

2006-2007 Times Have Changed:

In December of 2005, the Federal Government decided to tinker with this remarkable program. They introduce regulations, that were to be retro-active to January 1, 2006, requiring all QZABs to have the required matching contributions in CASH. This virtually killed the entire QZAB market. Few if any schools were able to take advantage of this remarkable program.

In August of 2006, and after seeing the dire consequences of their actions, Congress removed the cash only restrictions and, for a short time, the schools were able to borrow at no interest cost.

In December 2006, President Bush signed into law changes that applied section 148 of the IRS Code to the QZAB regulations. This section applies the tax-exempt arbitrage and rebate regulations to the TAXABLE QZABs. The result, most QZABs are being issued with interest, dramatically increasing the funding costs to all US schools that participate.

BACK TO THE FUTURE:

QZABs have always been uncertain. The program expired in December 2007 and was not reauthorized until the BAILOUT BILL OF October 2008.

The benefit is that the previous structure allow QZABs to be issued WITHOUT interest have again be allowed. SECTION 148 is still a part of QZABs, but specific exemptions have been made.