Case Study

Qualified Zone Academy Bond (QZAB)

PFM prides itself on finding and implementing innovative solutions for our clients which can leverage limited resources and save money. The Qualified Zone Academy Bond (QZAB) program is one such approach that PFM has helped our clients to implement. Despite initial skepticism faced by the program, we have worked with our clients to determine how they can best take advantage of this program and fit QZABs into their debt management efforts.

Created by the Taxpayer Relief Act of 1997, QZABs are taxable bonds issued by state and local governments to benefit public schools located in enterprise communities or empowerment zones or those schools where at least 35% of students are eligible for free or reduced lunch. Instead of receiving interest payments from the issuer of the QZAB, the QZAB holder receives federal income tax credits as long as the QZAB is outstanding. These tax credits are designed to act as interest payments, compensating the lender for lending the funds to the borrower, and thus, theoretically, the borrower can receive an "interest free" loan. The borrower is responsible for repaying the principal amount of the QZAB, and the program limits the term over which the repayment is made to a maximum number of years. This maximum term is calculated by the U.S. Treasury on a monthly basis such that the present value of the QZAB is 50% of the amount borrowed. For QZABs issued in November, 2002, the maximum term is 5 years. In addition, to issue QZABs, borrowers must comply with various other requirements of the federal program and any state legislation implementing the program.

Since the program was initially adopted, PFM professionals have developed a solid understanding of the federal requirements of the QZAB program and how those requirements impact the financial structure of QZABs. We have worked with issuers, federal officials, bond counsels and lenders to find ways to work within the guidelines of the program and provide feedback on the program to make it more user-friendly. A key component of making this program work for our clients has been communicating with the investing community which can buy a QZAB to determine ways the program can fit into their lending portfolio. While working to "get out the bids" for our clients' QZABs, PFM has helped potential lenders explore the ability to receive CRA credit for QZABs and better understand the particulars of the federal program. Additionally, PFM has formulated and negotiated various QZAB structures which not only maximize benefits under the program, but also comply with debt issuance requirements specific to various QZAB issuers.

PFM has been active in assisting many of our clients nationwide with the structuring and issuance of QZABs. We have helped clients and prospective clients to evaluate, develop and implement QZAB programs in Connecticut , Florida , New Jersey , Pennsylvania , Tennessee , Texas , and Virginia . To date, PFM clients have issued over $32 million of QZABs.