Present Law
Interest on debt incurred by States or local governments is excluded from the income of the
lender if the proceeds of the borrowing are used to carry out governmental functions of those
entities and the debt is repaid with governmental funds of the entities. Interest on bonds that
nominally are issued by States or local governments, the proceeds of which are used (directly or
indirectly) by a private person and payment of which is derived from funds of such a private
person ("private activity bonds") is taxable unless the purpose of the borrowing is specified in the
Internal Revenue Code (the "Code").
In general, States or local governments may issue tax-exempt bonds to finance facilities for
private transportation facilities (airports, ports, local mass commuting, and high speed intercity
rail); privately owned and/or operated public works facilities (sewage, solid waste disposal, local
privately-owned and/or operated low-income rental housing); and, certain private facilities for the
local furnishing of electricity or gas. A further provision allows tax-exempt financing for
"environmental enhancements of hydroelectric generating facilities." In addition to these "exempt
facility bonds," States or local governments may issue tax-exempt bonds for certain small
manufacturing facilities and farmland, for local redevelopment activities, and for eligible
empowerment zone and enterprise community businesses, and to finance the exempt activities of
charitable organizations described in Code section 501(c)(3).
Issuance of most private activity bonds is subject to annual State volume limits equal to $50
per resident of the State, or $150 million if greater. Tax-exempt bonds for airports, ports, certain
high speed intercity rail facilities, hydroelectric environmental enhancement facilities, and for
section 501(c)(3) organizations are not subject to the volume limits. Additionally, bonds for
governmentally owned, but privately operated solid waste disposal facilities are exempt from the
volume limits.
Description of Amendment
The amendment would create a new category of tax-exempt, exempt-facility bonds --
qualified educational facility bonds. Qualified educational facility bonds generally would be
subject to the rules applicable to other types of exempt-facility bonds, except for the current State
volume limits. In lieu of those volume limits, these qualified educational facility bonds would be
subject to separate per-State volume limits of $10 per resident per year ($5 million, if greater).
Bond authority under these separate volume limits could be carried forward for identified school
construction projects under the same rules that apply under the current State private activity bond
volume limits.
Qualified educational facility bonds would be defined as bonds 95 percent or more of the
net proceeds of which are used to finance the renovation or construction of public elementary or
secondary school buildings and related facilities. Related facilities would include functionally
related and subordinate land, facilities such as athletic fields primarily used for school events, and
the acquisition of depreciable personal property for use in bond-financed schools. Property
financed with the proceeds of these bonds generally would be required to be located in a "high
growth" school district. Each State would be allowed to issue up to $5 million per year of the
bonds to finance otherwise qualified school facilities that are not located in high-growth school
districts.
Proceeds of qualified educational facility bonds could be used only to finance facilities and
equipment for schools to be owned by a private, for-profit corporation pursuant to a contract with
the State or local government education department otherwise responsible for providing such
schools and equipment. The contract would be required to provide that ownership and control of
the bond-financed facilities would transfer at no cost to the governmental school district upon
expiration of the contract term.
A "high-growth district" would be defined as a school district established under State law
which had an enrollment of at least 5,000 students in second academic year preceding issuance of
the bonds and which experienced an increase in student enrollment of 20 percent or more during
the five-year period ending with that second preceding year.
Effective Date
The proposal would apply to bonds issued after December 31, 1998.
