The Office of Superintendent of Public Instruction OSPI

							February 16, 2011                                                 (X)     Action Required
                                                                  (X)     Informational


BULLETIN NO. 006-11 SCHOOL FACILITIES AND ORGANIZATION


TO:           Educational Service District Superintendents
              Educational Service District Fiscal Officers
              Chief School District Administrators
              Assistant Superintendents for Business and/or Business Managers

FROM:         Randy I. Dorn, State Superintendent of Public Instruction

RE:           Qualified Zone Academy Bonds—2011 Authorization

CONTACT:      Lorrell Noahr, Program Development Manager
              (360) 725-6265, Lorrell.Noahr@k12.wa.us, TTY (360) 664-3631


The Office of Superintendent of Public Instruction (OSPI) announces the availability of
$7,176,000 of Qualified Zone Academy Bond (QZAB) authority for the 2011 calendar year.
These bonds can be used for the rehabilitation or repair of a public school facility. School
districts pay only the principal amount of the QZAB at maturity. QZABs do not require voter
approval. However, school districts must obtain an allocation from OSPI to issue QZABs.

ABOUT QZABs
Pursuant to Section 54E of the Internal Revenue Code, the federal government authorized a tax
credit program whereby school districts may issue taxable, interest-free QZAB and use the
QZAB proceeds to rehabilitate or repair public school facilities. School districts pay only the
principal amount of the QZAB at maturity. QZABs do not require voter approval. However,
school districts must obtain approval from OSPI to issue a QZAB. An eligible investor that buys
the QZAB is allowed annual federal income tax credits in lieu of periodic interest payments.
These credits compensate the owner for lending money to the school district and function as
interest payments on the bond.
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February 16, 2011


Federal law provides a national limitation on the amount of QZABs that may be issued for each
calendar year. The national limitation is allocated among the states in proportion to the
respective amounts of Federal assistance each state is eligible to receive under the Elementary
and Secondary Education Act of 1965. The amount allocated to each state is then allocated by
the state education agency (in Washington, OSPI) to eligible school districts. Allocations will be
granted on a first-in first-out basis based on the calendar year the allocation was granted to
Washington State. OSPI has the following allocations available:

          Allocation Year                 Allocation           Allocation Expiration Date
               2009                $25,395,000                         12/31/2011
               2010                $24,830,000                         12/31/2012
               2011                $7,176,000                          12/31/2013

The purpose of this bulletin is to provide: (a) notice to school districts of the 2011 national
QZAB limitation amount available for allocation to Washington school districts, (b) guidance for
who is eligible and how to apply to receive a QZAB allocation, and (c) an explanation of the
OSPI QZAB application process.

Please note that QZABs are subject to specific, technical state and federal laws. Because of
the complexity of these laws, a school district contemplating financing capital projects with a
QZAB should consult with their bond counsel, underwriter and/or financial advisor. This
bulletin is not intended to provide legal advice or counsel.

ELIGIBILITY REQUIREMENTS FOR QZAB
To qualify a bond as a QZAB, the following requirements must be satisfied:

1. Use of Proceeds. 100 percent of the “available project proceeds” must be spent for one or
   more “qualified purposes” with respect to a “qualified zone academy” established by a public
   school district.

   A “qualified zone academy” means any public school (or academic program within a public
   school) established and operated by a school district to provide an education or training
   program at the secondary level that meets certain requirements, and the school is a) located in
   an empowerment zone or enterprise community or b) there is a reasonable expectation on the
   date the QZABs are issued that at least 35 percent of the students will be eligible for free or
   reduced-cost lunches under the National School Lunch Act. Information relating to specific
   school districts can be found at OSPI Child Nutrition Program’s website at
   www.k12.wa.us/ChildNutrition/Reports/FreeReducedMeals.aspx.
   Note: The 35 percent requirement applies to the public school (or academic program within a
   public school) as opposed to the entire school district.
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   A “qualified purpose” for the use of QZAB proceeds means (a) rehabilitating or repairing the
   public school facility in which the academy is established, (b) providing equipment for use at
   the academy, (c) developing course materials for education provided at the academy, and (d)
   training teachers and other school personnel in the academy. Note: A “qualified purpose” for
   QZABs does not include the acquisition or construction of new public school facilities.
   Further, state law may not permit QZABs to be used for “developing course materials for
   education to be provided at such academy” or “training teachers and other school personnel
   in such academy.” School districts should consult with their bond counsel to determine
   whether such purposes are permissible expenditures for QZAB proceeds under state law
   applicable to the type of debt instrument being issued as a QZAB. As a result, in
   Washington QZABs may be used primarily to finance rehabilitation and repair of public
   school facilities and to provide equipment for use at the academy.

2. OSPI Approval of QZAB Allocation. The school district must receive an allocation of the
   national qualified zone academy bond limitation from OSPI. See Application Process herein.
   School districts must issue the QZAB within two years of the limitation year. For example, a
   school district receiving a QZAB allocation under the 2009 limitation year must issue the
   QZAB no later than December 31, 2011. OSPI will allocate first from the 2009 limitation
   year, then the 2010 and 2011 limitation years on a first in first out basis.

   Allocations from OSPI are only to determine the authority to issue QZABs and will not
   result in any commitment of direct funding from OSPI.

3. Designation of QZAB. The school district must designate the bonds as QZABs. Typically,
   school districts will issue a non-voted limited general obligation (LGO) bond and designate
   the bond as a QZAB.

4. Jurisdiction to Issue QZAB. QZABs must be issued by a school district within whose
   jurisdiction the academy is located.

5. Issuance Approved. The school district must certify it has approved the issuance of the
   QZABs.

6. Private Business Contributions. The school district must certify that it has written
   assurances that the required “private business contributions” for the academy will be
   received. The “private business contribution” requirement will be met if the school district
   has written commitments from “private entities” to make “qualified contributions” having a
   present value (as of the issue date of the QZAB) of not less than 10 percent of the proceeds
   of the QZAB.

   A “private entity” for this purpose is any person other than the United States, a state or local
   government, or any agency or instrumentality thereof, or any related party.
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   A “qualified contribution” means any contribution of a type and quality acceptable to the
   school district of (a) equipment for use in the academy (including technology and vocational
   equipment), (b) technical assistance in developing curriculum or training teachers, (c)
   services of employees (not including school district employees) as volunteer mentors, (d)
   internships, field trips or other outside opportunities for students, or (e) any other property or
   service specified by the school district, including cash received from a private entity that will
   be used to purchase qualified property or services.

   PRACTICE TIP: The IRS has expressed some concern about whether this “private
   contribution” requirement is being properly satisfied in certain cases. Any business partner
   should furnish the school district with a statement that contains information similar to a
   proposal to perform services for the school district, including: (1) the work that would be
   performed, (2) the specific named school facilities it would relate to, (3) the number of
   employees who would perform the work, together with their job titles, (4) the number of
   hours that would be spent on each discrete portion of the work, (5) the hourly rates used to
   assign a value to the services performed, (6) estimated cost of unreimbursed out-of-pocket
   expenses to be incurred, and (7) the value of services to be performed, which must be at least
   ten percent of proceeds of the QZAB. It would also be useful to have some other party, such
   as the school district’s own independent architect or engineer, review the information
   provided by the business partner and certify that the estimated value/cost of the services to be
   contributed by the business partner appears to be reasonable and “at market” for those types
   of services. If the contribution includes real or personal property, the school district should
   establish the estimated value through the same valuation process required by the IRS for a
   donor seeking a charitable contribution for such property.

7. Term. The term (the length and therefore the year of the final maturity of the QZAB) and the
   tax credit rate of QZABs are determined by the Secretary of the U.S. Department of
   Treasury. See https://www.treasurydirect.gov/GA-SL/SLGS/selectQTCDate.htm. Over
   the last several years, the maximum maturity for QZABs has been approximately 12-19
   years.

8. Expenditure Test. School districts must reasonably expect on the issue date that: (a) 100
   percent of the “available project proceeds” (sale proceeds, minus issuance costs not
   exceeding 2 percent of proceeds, plus investment earnings on sale proceeds) will be spent for
   one or more qualified purposes within 3 years after the issue date, and (b) a binding
   commitment with a third party to spend at least 10 percent of available project proceeds will
   be incurred within 6 months after the issue date.

9. Reimbursement. An expenditure for a qualified purpose made after the school district has
   received an allocation of the national zone academy bond limitation may be reimbursed with
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February 16, 2011


   proceeds of a QZAB, provided that the reimbursement is consistent with the reimbursement
   requirements applicable to tax-exempt bonds.

10. Information Return. The issuer is required to file IRS Form 8038 to provide information on
    an issue of QZABs, with certain modifications and special instructions for completing the
    form, at the same time and in the same manner as required for tax-exempt bonds. The school
    district must also submit a copy of the IRS Form 8038 to OSPI within 15 days after the
    issuance of the QZABs. Additional reporting to the IRS may be required throughout the life
    of the bonds. School districts should consult bond counsel for the specific reporting
    requirements regarding their issuance.

11. Debt Limit. An LGO bond designated as a QZAB constitutes “indebtedness” of a school
    district; therefore the principal amount of LGO bonds, together with other non-voted debt,
    must not exceed 3/8ths of 1 percent (.00375) of the value of taxable property within the
    school district.

ASSISTANCE
A school district contemplating financing capital projects with a QZAB should first consult with
their bond counsel, underwriter and/or financial advisor. Additionally, the U.S. Department of
Education or the Internal Revenue Service may be available to answer questions. Please contact
David E. White or Timothy Jones, (202) 622-3980, of the Internal Revenue Service.

APPLICATION PROCESS
A school district requesting authorization to issue QZABs must submit the following to OSPI.
Allocations will be made on a first come, first serve basis.

1. Application Resolution. The Board of Directors (Board) of the school district must adopt a
   resolution authorizing the Secretary to the Board and/or Assistant Superintendent for
   Business and/or Business Managers to apply to OSPI for authorization to issue a QZAB.

2. OSPI Application. The OSPI QZAB application is available at the OSPI Web site,
   http://www.k12.wa.us/SchFacilities/EconomicStimulus/SchoolBondOpport.aspx. The
   application will require the following information:

   (a) Identification of the qualified zone academy and confirmation that it (i) is located in an
       empowerment zone or enterprise community, or (ii) qualifies under the 35 percent free or
       reduced cost lunch program.

   (b) The bond authorization amount requested including the minimum amount the district
       would accept if all requests exceed.
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   (c) A brief statement describing the school district’s expected plan for spending the proceeds
       of the QZABs.

   (d) A description of the planned private business partnership and its expected benefits.

3. Private Partnership Agreement. A copy of the written agreement between the school district
    and the private business partner(s) that includes the amount of their contribution.
Please send your application resolution, OSPI application and written private partnership
agreement by post, fax or email to:

POST: Office of Superintendent of Public Instruction
      Attn: Lorrell Noahr
      School Facilities and Organization
      PO Box 47200
      Olympia, WA 98504-7200

FAX: 360-586-3946

EMAIL: lorrell.noahr@k12.wa.us

Attachment

FINANCIAL RESOURCES                          SCHOOL FACILITIES AND ORGANIZATION
Shawn Lewis                                  Gordon Beck
Chief Financial Officer                      Director

RD:GB:LDN
BULLETIN NO. 006-11 SF&O
Attachment A Page 1
September 16, 2010


    ATTACHMENT A
    AN EXAMPLE OF THE WAY A QZAB COULD WORK

    A for-profit hospital is a major employer in an enterprise community zone. The hospital has
    indicated a willingness to cooperate with the school in the zone to establish a special academic
    program that would prepare students for jobs at the hospital. The hospital is willing to donate
    state-of-the-art medical equipment and computer software to the school and to provide internship
    and mentoring experiences for students. The school district has determined that it needs to
    renovate classrooms to accommodate the donated equipment, purchase appropriate instructional
    materials, and train teachers to facilitate the use of the equipment and internship and mentoring
    components of the program. The school district estimates that this would cost $500,000.

    In order to obtain the benefits of the low-cost capital afforded through the QZAB tax credit, the
    school district would need to take the following steps:

    The school district consults with its bond counsel, underwriter and/or financial advisor.

    The school district obtains from the hospital an estimate of the value of the equipment, personnel
    time, and facility cost associated with the internship and mentorship opportunities.

    If the value of the hospital’s donation is equal to at least 10 percent of the gross bond proceeds,
    the school district will obtain a written commitment from the hospital of this donation.

    The school district must determine the source of repayment of the $500,000. School districts
    should exercise caution so these bonds do not cause them to exceed their statutory non-voted
    debt limitation.

    The school district adopts a resolution that authorizes the Secretary to the Board or Business
    Manager to apply to OSPI for authorization to issue a QZAB.

    The Secretary to the Board or Business Manager prepares and submits the OSPI application for a
    QZAB allocation in an amount equal to $500,000 (the amount the district expects to borrow).
    OSPI will then provide written approval to the school district for the QZAB allocation.

    Thereafter, like LGO bonds, the Board, through the assistance of its bond counsel, underwriter
    and/or financial advisor, adopts a resolution authorizing the issuance, sale and delivery of the
    QZAB. The manner of sale is normally accomplished through a private placement with a
    financial institution similar to a private placement for an LGO bond.

    Once the QZAB closes, the proceeds of the QZAB are used to renovate and equip the
    classrooms.