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Providence Financial



As I’m sure you are aware, the American Recovery and Reinvestment Act of 2009 (the “Stimulus Bill”) that Washington passed includes funds allocated to states to be used to fund various programs including education. This will presumably mitigate, to some degree, the reductions in education funding that many states have planned. In addition to this helpful benefit to schools and amidst all of the dollar signs and huge numbers in the Stimulus Bill, there were a couple of provisions that may be very helpful for financing charter school facilities. These are welcomed provisions due to the significant challenge of financing charter school facilities in the current difficult credit markets. While these provisions may not be applicable to all schools, they could be very beneficial if a school meets the relevant criteria. Following are summaries of the Qualified School Construction Bonds and the Build America Bonds.

Qualified School Construction Bonds

The Stimulus Bill includes $11 billion in each of 2009 and 2010 of Qualified School Construction Bonds to be used for the construction of public schools (which by definition include charter schools). The purpose of these bonds is to provide schools with funds at a 0 percent or close to 0 percent interest rate. These are taxable bonds and purchasers of these bonds will be provided tax credits in lieu of interest from the issuer. Because a primary purpose of these bonds is to promote economic stimulus through construction, only construction projects are eligible. Of course with the good news, there is a caveat – these bonds include a requirement for the school to follow Federal Davis-Bacon prevailing wage rules, which will increase construction costs.

The $11 billion will be allocated 40 percent to the 100 largest school districts in the nation plus 25 school districts selected by the U.S. Secretary of Education. The remaining 60 percent will be allocated to states in proportion to the amount of federal education funding each state receives. Each state will then be responsible for the allocation to specific projects. A significant outstanding question is the method each state will use to allocate these funds. Given the substantial financial benefit, we can count on pressure from traditional school districts and those who do not support charter schools for states to use their allocation for traditional schools. Hopefully charter schools will receive a fair allocation of these resources. If a school is interested in receiving an allocation, it should apply as soon as possible.

Build America Bonds

The Stimulus Bill also includes a provision to allow state and local governmental issuers to issue taxable bonds with substantially the same economic benefit of tax-exempt bonds. Build America Bonds are designed to allow municipal borrowers to access the taxable bond market, which is larger and may provide more liquidity than the tax-exempt bond market.

Taxable bonds bear a higher interest rate (approximately 35 percent higher) than tax-exempt bonds. To provide similar economics to the borrower as tax-exempt bonds, the federal government will provide either tax credits to investors or will make direct subsidy payments to borrowers of 35 percent of the interest expense on the bonds. This will function to provide a similar borrowing cost as tax-exempt bonds for municipal borrowers but will provide access to more potential bond investors. As an example of the latter option, if a municipal borrower issues taxable bonds and pays 11 percent interest and elects the subsidy payment option, the federal government will pay the borrower 35 percent of the interest expense on the bonds. So in this example, the borrower would end up with net interest expense of 7.15 percent.

There is no limit to the amount of Build America Bonds available, but they may only be issued through 2010, at which time this provision sunsets. Now, where it gets sticky…Build America Bonds can only be issued as governmental bonds and not as 501(c)3 bonds. Most charter schools are 501(c)3 entities but in some states even a 501(c)3 charter school may still be able to issue these bonds. Because of different state laws, the ability to issue Build America Bonds will depend on state law.

There are details about each of these programs for which we are waiting for additional guidance from the Treasury Department. Hopefully, these programs will provide the ability for some charter schools to finance their facility purchase when they otherwise would not have the ability. If you have questions about these provisions and whether your school will qualify, please give us a call

For information contact Rick Van Alfen, Providence Financial Co., LLC
Phone: 801-556-2290 Email: brent@providencefinancialco.com