Facilities Planning

Federal Low and Zero Interest Bonds for School Construction

  • Section 226(a) of the Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat. 788 (1997), amended the Internal Revenue Code (Code) by redesignating section 1397E as section 1397F and adding a new section 1397E. Section 1397E authorizes a new type of debt instrument known as a qualified zone academy bond.
  • The program allows schools to issue bonds at zero or low interest. Interest is subsidized by tax credits from the Federal government to the bond holders. The obligation to repay the debt will be reduces about 50% in present value terms.
  • Taxable bond issued by a state or local government the proceeds of which are used to improve certain eligible public schools located in empowerment zones where 35 % of the students are eligible for free or reduced price lunch.
  • In lieu of receiving periodic interest payments from the issuer, an eligible holder of a qualified zone academy bond is generally allowed annual federal income tax credits while the bond is outstanding.
  • These credits compensate the holder for lending money to the issuer and function as payments of interest on the bond.
  • The credit rate for a qualified zone academy bond is equal to 110 percent of the long-term applicable Federal rate (AFR), compounded annually, for the month in which the bond is issued
  • Authorizes the Treasury to establish a single, uniform credit rate that will permit the issuance of qualified zone academy bonds without discount and without interest cost to the issuer.
  • Also requires the Treasury to adjust the credit allowance rate on a monthly basis to reflect changes in market interest rates.
  • It is not possible to determine a uniform credit rate that would permit all qualified zone academy bonds to be issued at par. Some borrowers are less creditworthy than others and, therefore, borrow at less favorable rates.
  • National allocation of $400 million in bonds that may be issued in 1998 and an additional $400 million in 1999. New York’s 1998 allocation is $31.5 million. Any unused allocation by a state can be used in future years.
  • Legislation recently proposed by the Democrats would expand the program of low interest bonds to $9.7 billion. New York’s allocation would be $2.17 billion.


Bonds may be used to:

  1. Rehabilitate or repair public school buildings.
  2. Provide equipment for public school use.
  3. Develop course materials.
  4. Train teachers and other school personnel.

Requires the public school to enter into a public private partnership and certify:

  1. that it has written assurances that private entities have agreed to contribute a certain level of goods or services (not less than 10% of the bond amount) to the qualified zone academy, and
  2. that it has the written approval of the eligible local education agency for the bond issuance.
  3. Academic program must be designed in cooperation with the business to enhance the curriculum, increase graduation and employment rates, and better prepare students for the rigors of college and the workplace.

Qualified business support includes:

  1. Equipment for use in the school.
  2. Technical assistance in developing curriculum or training teachers in order to promote appropriate market-driven technology in the classroom.
  1. Service of employees as volunteer mentors
  2. Internships, field trips, or other outside educational opportunities
  3. Other property specified by the local school board.

Effective Date

Temporary regulations became effective January 1, 1998.

Public Hearing

Has been scheduled for May 27, 1998, at 10:00 a.m. in Room 2615, Internal Revenue Building, 1111 C Constitution Avenue NW, Washington, DC. Written comments must be received by April 7, 1998.


The New York State Education is currently drafing regulations. For more information please call Carl Thurnau at (518)474-3906.

Last Updated: June 16, 2009