H.R. 1 - The American Recovery and Reinvestment Act of 2009 - contains numerous provisions that affect bonds issued by states and political subdivisions. New financial instruments are authorized to be used in the construction of public schools. Additionally, the Act liberalizes the rules governing the use of tax-exempt bonds to benefit such school districts. Consequently, more options exist for school districts as they contemplate their capital needs in 2009 and 2010.

Significant changes that are intended to benefit school districts include:

Extension of tax-exempt bond investment safe harbor to financial institution. This technical amendment has the effect of permitting banks to invest in municipal bonds without a yield penalty. Demand for the bonds of municipal bond issuers of municipal bonds, such as school districts is hoped to increase as a result.

Increase in Bank Qualified Bond Amount. Another disincentive to the ownership of municipal bonds by banks has been minimized through the increase in the amount of bonds that can be designated "bank qualified" (and thus likely to bear a lower interest rate) from $10 million per issuer per year to $30 million. This, too, should increase demand and is intended to exert downward pressure on interest rates.

Reauthorization of QZAB Program. The authorization for qualified zone academy bonds ("QZABs") is extended through 2010 and the allocation is increased to $1.4 billion annually. These tax credit bonds can be used to fund qualifying programs and facilities for qualifying districts. Ideally, no interest is payable on these obligations; the holder receives a tax credit instead of interest. This permits more of the issuer's dollars to go into a project rather than for the payment of interest.

Qualified School Construction Bonds. The newest element of the Act's bond provisions relating to public schools is the newly-created qualified school construction bond. These bonds, which can be issued in 2009 and 2010, will also permit the holders to take a tax credit based upon the principal amount of obligations that such holder owns. 100 percent of the available project proceeds (sale proceeds less issuance expenses, not in excess of two percent, plus investment earnings) of qualified school construction bonds must be used to construct, repair or rehabilitate public school buildings, or to acquire the land on which such buildings are to be located. $11 billion of such bonds may be issued in each of 2009 and 2010. 60 percent of this amount will be allocated to the states based on the proportion of amounts received under the Elementary and Secondary Education Act of 1965 and 40 percent will be allocated to certain "large schools".

Davis-Bacon Act Applicability. One caveat is that projects financed by QZABs and qualified school construction bonds will be subject to the federal prevailing wage law known as the Davis-Bacon Act. Depending on where the proposed project is located and the nature of the use of proceeds, this may result in a cost that is higher for a project financed in this way than that which might exist if a different option is chosen.

The use of bonds to finance capital expenditures is subject to numerous rules and requirements under federal and state law. Anyone considering their use should seek the advice of bond counsel early on in the process to assess their financing options.