March 26, 1999
Honorable Delaine Eastin
Thank you for sharing your concern with me about Qualified Zone Academy Bonds (QZABs). I understand that because of current financial market conditions, California districts' attempts to sell these bonds have been somewhat disappointing. Apparently, under current conditions, the bonds can only be sold at a discount, in part because the subsidy is not high enough for the bonds to sell at face value. The original Congressional intent was that, on average, the bonds sell at par or face value.
My staff has been discussing this problem with staff at the Department of the Treasury to ensure that it does not carry over into the Administration's proposal for $24.8 billion in bonds for school construction, which includes an additional $2.4 billion for QZABs. The problem arose unexpectedly this past fall when the spread in interest rates between Federal debt and other forms of debt diverged due to investors' concerns about the level of risk associated with other debt instruments. The subsidy for QZABs was based on the interest rate for Federal debt, so as the interest rate for Federal debt dropped, the subsidy for QZABs also dropped.
The Department of the Treasury has proposed to relieve this problem by setting the subsidy for QZABs and other tax code bonds using an interest rate based on corporate rather than Federal debt. This proposal is part of the Administration's new school construction proposal. We believe that the interest rate on the proposed school construction bonds would fluctuate more closely with the interest rate on corporate debt, which should reduce the likelihood of this problem recurring.
Thank you for your continuing interest in this program. Please contact me if you need any additional information.
Richard W. Riley
Our mission is to ensure equal access to education and to promote educational excellence throughout the Nation.
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This page last updated April 15, 1999 (pjk)