Qualified Zone Academy Bonds

Qualified Zone Academy Bonds (QZABs) are a U.S. debt instrument created by Section 226 of the Taxpayer Relief Act of 1997. It was later revised and regulations may be found in Section 54(E) of the U.S. Code. QZABs allow certain qualified schools to borrow at nominal interest rates (as low as zero percent) for costs incurred in connection with the establishment of special programs in partnership with the private sector.

The normal annual allocation each year has been $400,000,000. However, during 2008, 2009, and 2010, the American Recovery & Reinvestment Act (ARRA) increased these amounts to 1.4 billion. The 2011 allocation has returned to the $400,000,000 level. The allocation is divided up by all fifty states and US possessions. QZABs are a temporary program, subject to reauthorization. The last authorization was for the calendar years 2010 and 2011. Authorizations must be used within two years following the year for which they were given, meaning that authorizations given in 2010 must be used by 2012. As of November 1, 2012, the reauthorization of the QZAB program has not been passed by the U.S. Congress.

Public schools (K-12) located in empowerment zones or enterprise communities and public schools with 35% or more of their student body on the free and/or reduced lunch programs are eligible to participate.

In order for a school district to participate, a Zone Academy must be created. The Zone Academy must create programs to enhance the curriculum, increase graduation rates, improve employment opportunities, and better prepare students for the workplace or higher education.

Funds can be used for renovation and rehabilitation projects, as well as equipment purchases (including computers). QZABs can not be used for new building construction. The school district must obtain matching funds from a private-sector partner equal to at least 10% of the cost of the proposed project. All state and local laws applicable to bonds also apply to QZABs, including Section 148 of the IRS Code.

A qualified lender as defined by the law must purchase bonds. Qualified lenders can be insurance companies, some banks or other corporations actively engaged in lending (each qualifying entity is determined by the Internal Revenue Code governing each). The lender receives a tax credit in lieu of interest payments from the school. The IRS determines the amount of this tax credit.

"Pay to play" contributions are strictly prohibited. Set up fees, discounts on equipment purchased with QZAB funds, or contributions associated with the district’s construction projects are not eligible.

The renovation of Oak Ridge High School in Oak Ridge, Tennessee has been partially funded by $8 million in QZABs. Matching funds to qualify for QZAB funding were provided through private donations.