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A r c h i v e d  I n f o r m a t i o n

School Modernization Bonds


President Clinton's proposal helps communities leverage more dollars for school construction or renovation by:

  1. Providing federal income tax credits to bondholders in lieu of interest payments made by communities; and
  2. Ensuring that communities use any earnings on temporary investment of unexpended bond proceeds for school construction or renovation.

The Senate Republican proposal (S. 1134) expands support for school construction by:

  1. Expanding the additional amount of school construction bonds on which small issuers may retain arbitrage (used for any governmental purpose) from $5 million to $10 million. (Arbitrage is the practice of delaying construction and investing the funds raised from bonds to earn more interest than they are paying on the bond);
  2. Allowing private activity bonds to be issued to finance school construction in elementary and secondary public schools that are owned by the private sector; and
  3. Allowing Federal Home Loan Banks (FHLB) to guarantee up to $500 million per year in school construction bonds, subject to the enactment of subsequent legislation granting FHLB authority to enter into these guarantees.

The amount of additional funds for school modernization made available by the two proposals was calculated in a two-step process. First, since both proposals would assist communities in the issuance of school bonds, the value to the community of each proposal was calculated per $1000 bond.[1] Because the two proposals would deliver their respective benefits over different periods of time, the benefit figures were then discounted to present value.[2] The benefit figures per $1000 bond calculated in this manner are $624.77 for the President's proposal and $13.93 for the proposal to expand the small-issuer exemption from the arbitrage rebate requirement in the tax code. This calculation assumes no increase in debt service costs to local communities over 1998 levels. As a result, it does not take account of the additional cost or subsidy that might result from increased bond volume under either proposal. No subsidy value has been placed on the proposal for private activity bonds because these activities are already permissible with municipal tax-exempt bonds and this calculation assumes no increase in debt service costs. No subsidy value has been placed on the proposal for FHLB guarantees because of the absence of authorizing legislation.

Second, the two proposals would also apply to different potential volumes of school bonds. Therefore, the benefit numbers per $1000 bond were then multiplied by the estimated maximum number of bonds to which the proposals could be applicable, with no increase in debt service costs to local communities over 1998 levels.[3] The resulting numbers for the two Senate Republican proposals were then combined. The total benefit numbers calculated in this manner are $15.5 billion for the President's proposal and $515 million for that of the Republicans.

Loans and Grants for Urgent School Repair and Renovation

To address the urgent need for immediate school renovation in needy communities, President Clinton's proposal would provide roughly $6.7 billion in loans and grants in FY 2001 (and $33.5 billion over FY 2001-05). The loans and grants would finance the renovation of high-need schools, such as repairs to roofs, electrical wiring, heating and cooling systems, and plumbing. Specifically, President Clinton's proposal provides $175 million in grants for the neediest school districts for emergency renovations and roughly $6.5 billion in loans. The Office of Management and Budget estimates that the proposal would repair roughly 25,000 schools.

The Republicans have not proposed any similar initiative to address the nation's immediate school-repair needs.


1 The debt-service reductions on a $1000 15-year 5-percent tax-credit bond from the no-interest aspect of the President's proposal were calculated by subtracting level annual payments of $42.96 into a sinking fund earning 6 percent from level annual payments of $65.05 on a $1000 30-year 5-percent tax-exempt bond. The present value of the savings is $555.13. The temporary-investment earnings on unexpended bond proceeds were calculated at an assumed rate of 5 percent on an average construction fund balance over three years of $500 per $1000 bond. The present value of these earnings is $69.94. The additional arbitrage income from the Republicans' proposal has been calculated on an assumed 1-percentage-point spread between the earnings rate and the interest rate on the bonds on an average construction fund balance over three years of $500 per $1000 bond.

2 All present values were calculated using a tax-exempt rate of 5 percent.

3 Because the President's proposal is for $24.8 billion of new tax-credit bonds, the present value per $1000 was multiplied by 24.8 million. Because the Republicans' proposal to liberalize the arbitrage rules for tax-exempt school bonds would theoretically apply to all new bonds, the present value of additional arbitrage earnings per $1000 bond was multiplied by 10 years of issuance at an assumed annual rate equal to the 1998 actual rate of $3.7 billion entitled to the expansion of the small-issuer exemption.

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Last Updated -- April 3, 2000 (mhm)