Introduction

The infrastructure needs plaguing our nation's schools are widely documented. Inadequate and often unsafe buildings exist in many poor, urban, and rural schools, and overcrowding challenges some affluent communities. Many schools do not have the resources to support new technologies. Charter schools, in particular, often lack access to sufficient facilities. While adequate campuses are only one of the obstacles facing public schools, too often deplorable provisions threaten the fundamental work of teachers, administrators, and students.

School facilities are traditionally the responsibility of local school districts. In recent years, however, more states have begun participating in the demand for school construction, and there is an increasing call for the federal government to help states and local communities address these deficiencies. In particular, some have called for a federal program dedicating tax credit bonds for new and improved school construction. In theory, this proposal would allow schools or school districts to invest in new facilities by paying the interest on school construction bonds in the form of a federal tax credit for bondholders, thus reducing the cost of construction for schools and districts.

Tax credit bonds are strongly supported by major education interest groups, many Democrats, and some moderate Republicans, but opposed by conservatives and the Republican leadership who believe the federal government should not play a part in school construction. In the 106th Congress, a bill to create tax credit bonds received the support of both the Clinton administration and a majority of the House of Representatives, but was eventually scuttled by partisan disputes about labor issues. Tax credit bond proposals re-emerged in the 107th Congress and are likely to appear again in the 108th, particularly if Democrats maintain a majority in the Senate or gain control of House.

Schools and states need help dealing with the school facilities crisis, especially given the budget shortfalls currently facing many states. Unfortunately, however, the drawn-out political debate over school construction has obscured some policy issues. Given the political baggage tax credit bonds have collected over their six-year history, supporters of school construction should determine whether partisan battles are more important than addressing schools' immediate needs with less contentious alternatives. A small federal program piloting tax credit bonds, the Qualified Zone Academy Bond (QZAB), has existed since 1997 -- providing important evidence of how tax credit bonds could work.

This paper analyses the results of QZABs to date in order to inform policymakers, advance the debate over federal school construction aid, and provide more effective support to schools and states in need. In particular, this report finds that:

• QZABs got off to a slow start because of low funding and inadequate federal support for implementation;
• State education agencies (SEAs) were also slow to implement QZABs, which sometimes conflicted with existing state policies;
• Education and finance communities have been reluctant to adopt the tax credit bond concept, which is complex and unfamiliar;
• Even among schools that qualify to use them, QZABs do not meet the needs of many, particularly charters and others that lack access to capital;
• Despite these obstacles, QZABs have become well-established and are used in the vast majority of states -- over 82 percent of the bonds have been allocated; and
• For many small, rural, and innovative schools, QZABs have provided a valuable source of aid for critical repairs that could not have otherwise been undertaken.

These findings show that, in the absence of more substantial federal assistance, QZABs play an important role in helping needy districts build and maintain school facilities, even though they are not the most effective long-term solution to the problem. The complexity of tax credits for school construction, as well as their one-size-fits all approach that often does not mesh well with state policies or the needs of schools and investors, makes tax credits an insufficient answer to America's school construction needs. PPI recommends that the QZAB program, with some modifications, be continued while encouraging Congress to enact a more robust, durable school construction program focused on flexible and accessible initiatives. For example, state infrastructure banks, a promising remedy to the core problem of capital access for public schools, should be explored to replace current tax credit bond programs.