Information Needed on ARRA School Construction Funds Before Congress Acts on Obama's Proposal for More

Last week, the Obama administration released its American Jobs Act of 2011, a set of proposals it wants Congress to enact to spur more job creation. A big part of proposal is $25 billion in new federal grant aid to fund K-12 school construction, renovation, and modernization throughout the country. There’s little doubt that many school districts are in need of funding for construction and maintenance, but before Congress moves to enact the president’s $25 billion proposal, the Obama administration needs to show lawmakers (and the public) how schools are using $22 billion in federally subsidized school construction bonds issued under the American Recovery and Reinvestment Act (ARRA).

In fact, that program – the Qualified School Construction Bond program – is one the largest federal efforts to support school facilities to date. But hardly a shred of centralized information is available on how the program is working, which districts got funding, and what they are doing with it. All this despite the Obama administration’s claims that the American Recovery and Reinvestment Act would be the most transparent federal spending ever enacted.

Here is some background on how the program works.

The QSCB program allowed school districts to issue bonds to finance construction projects in 2009 and 2010, totaling $22 billion. Entities that purchased the bonds receive federal income tax credits in lieu of interest payments, which is a roundabout way of the federal government paying the school districts’ interest costs on loans they issue to build or renovate a schools. In 2010, Congress expanded the program under the Hiring Incentives to Restore Employment (HIRE) Act so that the federal government could make direct payments to school districts to cover most of interest on the bonds instead of giving the bond holder a tax credit.  

The law allocated sixty percent of the bonds to states according to federal Title I grant formulas while the remaining 40 percent were allocated to the 100 school districts with the largest impoverished populations. Each state conducted its own competitive application process to determine which schools and districts could issue the interest-free bonds.

So what do we know about how the program is working and what sort of projects it supports?

First, we know that the program got off to a slow start. Unfortunately, when the program first started in 2009, many districts had trouble finding bond buyers because the terms were not very attractive – mainly would-be bond investors didn’t think the tax-credit-in-lieu-of-interest was an appealing arrangement. However, the 2010 expansion of the program to include direct interest made the terms of the bonds more attractive to potential buyers and school districts had more success in financing projects. Of course, the 2010 expansion significantly increased the cost of the program for the federal government.

According to a table buried in the President’s fiscal year 2012 budget request (page 243), the federal government pays about $1.5 billion each year (in tax credits and direct payments) to cover the interest on the bonds issued by school districts.  About a third of the cost is in direct interest subsidies to school districts.

We also know that each state held its own competition to determine which school districts would get to issue the federally subsidized bonds and for how much, but  that information isn’t available from the federal government in any meaningful format. While it is possible to track down information issued by state governments on their bond allocations, this is a tedious process and doesn’t shed much light on the status of the school construction projects themselves. Similarly, the U.S. Treasury Department doesn’t make publicly available any information on how much a project financed with the bonds costs.

Sadly, it appears that the only source of such information on this massive federal education program is a trade publication for the municipal bond investment industry, called BondBuyer.com. The publication provides a spreadsheet on its website that shows the value of federally subsidized bonds issued by agency (district or state) in calendar years 2010 and 2011 through September 9, 2011. BondBuyer.com does not provide any information on the source of these data or what exactly they include. While these data do not include any bonds that may have been issued in the 2009 calendar year, it appears to be the most comprehensive source of information on bonds actually sold under the QSCB program. (We have reformatted the data for readability and aggregated it by state. Click here to download district level data and here to download state level data.)

According to the BondBuyer.com data, 727 QSCBs were issued in calendar years 2010 and 2011. The combined face value of these bonds is nearly $10.6 billion. The largest bond went to the Puerto Rico Public Buildings Authority for $756.4 million while the smallest bonds went to Cherry County (Valentine) Regional High School District No. 6 and Valley County (Arcadia) School District No. 21, both in Nebraska for $100,000. It is important to note that the BondBuyer.com data doesn’t include any information on the size or cost of the federal subsidy provided for these school construction projects.

When we aggregate the data by state, we see that several states are very close to issuing the entirety of their bond allocations. Delaware, Nevada, and Puerto Rico have all issued 100 percent or more of their allocations (percentages shown in the table over 100 are likely due to rounding). Connecticut has issued 97 percent of its $210.2 million in bonds. These states likely have a high need for school construction and renovation and the necessary political capital and infrastructure to get these projects started.

But many school districts have not been able to find investors for the bonds they were allocated. In fact, according to the data, 10 states have issued less than 25 percent of their total bond allocation. Four states – Hawaii, Mississippi, New Hampshire, and Wyoming – have not issued any of the bonds. This slow distribution of bonds can reflect many factors including a lack of interest in or need for new school construction projects in some states and localities, difficulty in finding investors, or bureaucratic red tape holding back the start of construction and renovation projects. But it also suggests that subsidized bonds, and perhaps school construction in general, may not be the most efficient way for federal lawmakers to support education.

Clearly, the Qualified School Construction Bond program hasn’t been any easy program for school districts to tap. Nor has it been easy for policymakers to track. In fact, it just might be the least transparent federal education program in existence.

As the Obama administration makes the case for another round of school construction funding, the president needs to make good on his promise from the first round – that it would be the most transparent federal spending ever enacted.