WASHINGTON — Issuance of qualified school construction bonds skyrocketed in the first half of 2010, primarily because of a new law permitting the debt to be sold as direct-pay bonds similar to Build America Bonds, market participants say.
All told, 167 issues of QSCBs totaling $2.53 billion were sold in the first half of 2010 — a 2,283% increase from the first half of 2009, when just three issues worth $106.1 million of the bonds were sold, according to Thomson Reuters.
However, the numbers for the first half of 2009 are understandably low because the American Recovery and Reinvestment Act that authorized the bonds was not enacted into law until February of that year, and the Treasury Department did not allocate the bonds to states and large local school districts until April.
As a result, QSCBs could not have been issued until after the first four months of the year.
The figures for this year are almost as high as the 186 issues totaling $2.801 billion of QSCBs sold in all of 2009, according to data in The Bond Buyer/Thomson Reuters Yearbook. Market participants point to the Hiring Incentives to Restore Employment Act, enacted in March, as a major reason.
“We’re just really pleased that Congress earlier this year amended those programs to make them direct-pay eligible,” said Michael Decker, managing director and co-head of municipal securities at the Securities Industry and Financial Markets Association. “They were really underutilized.”
“There’s a lot of demand for school construction. And the way the program is structured, it’s very attractive for issuers, they get very attractive rates of financings,” he added. “It takes advantage of this growing market of taxable munis, and it’s encouraging.”
The HIRE Act gave issuers the option of issuing QSCBs — as well as qualified zone academy bonds, clean renewable energy bonds, and qualified energy conservation bonds — as direct-pay taxable bonds.
Issuers have the option of receiving subsidy payments equal to a portion of their interest costs from the federal government in lieu of investors obtaining a tax credit.
Issuers of the school bonds that opt for the direct-pay mode receive payments equal to the lesser of the actual interest rate of the bonds or the tax-credit rate for muni tax-credit bonds, which the Treasury sets daily.
Issuers of direct-pay energy bonds receive payments equal to 70% of that amount.
QSCBs were never very popular in the tax-credit mode. Following the enactment of the HIRE act, issuers made a near-universal shift to the direct-pay mode, which offers a simpler, more direct subsidy than tax credits.
Congress had been pushing tax-credit bonds for schools and renewable energy projects for years with the qualified zone academy bond program, which was created in 1998.
That effort greatly increased as part of the ARRA, which created the QSCB program and authorized $22 billion of bond authority for it — the most ever for a tax-credit bond program.
The stimulus law also authorized an additional $1.8 billion of QZABs
However, the tax-credit bond market had always struggled to grow into a viable, reliable market, amid complaints that it was difficult to market the tax credits to investors.
That problem was exacerbated by the financial crisis, which greatly reduced the allure of tax credits.
Meanwhile, after the ARRA created BABs, the first-ever direct pay bonds, they took off in the taxable market.
More than $100 billion have been issued in the year and half since they were created, and market participants are clamoring for Congress to extend the program beyond its expiration date at the end of the year, if not make it a permanent fixture of municipal finance.
“The tax-credit portion of the market never really developed,” said William Daly, senior vice president of government relations at the Regional Bond Dealers Association. “Moving them into direct pay makes a big difference.”
QSCBs can be used for the construction, rehabilitation, or repair of public schools, as well as to purchase equipment for those schools or acquire land for the purposes of building a school.
The bonds were allocated in two $11 billion tranches to be used by states and localities in 2009 and 2010.
In addition to allocating bond authority to each state and territory, the Treasury also allocated bond authority directly to the 100 largest local school districts nationwide.
An additional $200 million was allocated each year to tribal governments.
