SAN FRANCISCO — California education officials are planning to seek legislation to address legal concerns over the way the state divvied up its allocation for the qualified school construction bond program.

The QSCB program was created as part of this year’s stimulus legislation, and allows school districts that receive an allocation to issue bonds that provide bondholders with a 100% tax credit.

The legislation authorized $11 billion of QSCBs in 2009. In California, 11 school districts received a direct allocation from the U.S. government, while the state had $700 million to allocate among more than 1,000 other school districts.

The state Department of Education held a lottery to distribute $700 million, awarding allocations to 43 districts, out of 231 applications for more than $3.7 billion in QSCB authority.

In a letter sent to stakeholders, the department acknowledged that questions about the way the process was set up have impacted districts’ ability to get the bonds to market.

“Questions have arisen regarding whether [the department] may properly be considered the 'state’ for purposes of allocating the [American Recovery and Reinvestment Act] tax credits for QSCBs,” according to the letter from Kathleen J. Moore, director of the department’s school facilities planning division.

The letter was dated Nov. 24, four days after The Bond Buyer first ­reported on the QSCB questions.

So far, none of the 43 districts that received QSCB allocations from the state have issued QSCBs, according to ­Thomson Reuters.

Meanwhile, 138 QSCB issues for almost $2.3 billion have priced nationwide, including four of the 11 California districts that have received direct allocations from the U.S. government.

The Department of Education released the text of Moore’s letter through its public information office, but Moore declined to comment.

According to the letter, the allocation process was devised after a stakeholders’ meeting involving the Department of Education, the office of Gov. Arnold Schwarzenegger, and the state ­treasurer’s office.

After bond lawyers started raising questions about the way the tax credits were allocated, the Department of Education “sought and has received a designation letter from the governor granting and clarifying this authority,” Moore’s letter said.

“Notwithstanding receipt of the designation letter, some have requested that [the department] seek legislation expressly authorizing, approving, and ratifying the allocation of the 2009 tax credit allocation,” Moore’s letter said. The department “has agreed to seek such legislation.”

But lawmakers won’t be back in Sacramento full time until the New Year. Districts that receive a 2009 state allocation are supposed to issue the bonds this year, though the state allocation procedures include provisions for requesting an extension.

“Requests for extensions of the time to issue will be considered on a case-by-case basis as described in our application and supporting parameters,” the letter said.

The 11 California districts that received a direct federal QSCB allocation are not affected by the state-level issues, though they could face an entirely different deadline issue.

As it stands now, districts that don’t issue QSCB bonds this year will lose the allocation, though efforts are afoot in Congress to create an extension process.

The Sacramento City School District board is scheduled to vote tonight on a staff recommendation to turn its $21.25 million allocation over to the state, “provided the district is able to secure the state’s assurances it will reallocate the QSCB allocation to the district in 2010,” according to the staff report prepared by chief business officer Patricia A. ­Hagemeyer.

“The market has changed significantly in the past several months and issuing the QSCBs at this time would result in significant costs for the district,” the report said. “This resolution allows the district time to ensure the bonds are sold at the optimum time to reduce the costs of the bonds.”

The Long Beach Unified School ­District will not use its $37.9 million direct federal allocation in 2009, but officials are hopeful that Congress will pass an extension that preserves its options during 2010, said spokesman Chris Eftychiou.

The Bakersfield City School District has decided not to use its QSCB allocation, said spokesman Steve Gabbitas.

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