1. Qualified Zone Academy Bonds (QZAB)

Section 26 of the Taxpayer’s Relief Act of 1997—codified into Section 1397E of the U.S. Internal Revenue Code—provides a financial tool that can be used by State Education Agencies to encourage formation of partnerships between public schools and local businesses. The Act provided $400 million of bond authority cap in 1998 through 2008 and $1.4 billion for 2009 and 2010 and $400 million in 2011, 2012, and 2013 for issuance of Qualified Zone Academy Bonds (QZAB’s). These partnerships with local businesses are to:

  • Enhance the academic curriculum;
  • Increase graduation and employment rates; and
  • Better prepare students for the rigors of college and the workforce.

In addition

  • Schools must be located in an Empowerment Zone or Enterprise Community or;
  • There is a reasonable expectation–as of the date of bond issuance–that at least 35% of the students will be eligible for free or reduced cost lunches under the school lunch program established under the National School Lunch Act.

QZAB’s are an unusual financial instrument that provide a different form of subsidy from traditional tax-exempt bonds that school districts or public charter schools might issue. Under this program, the State receives an allocation from the US Department of Education, the Internal Revenue Service or the Rural Housing Service of the U.S. Department of Agriculture. School districts seek an allocation from the State in the amount of a loan that they pay back over several years. A local financial institution purchases the bond; the interest on the bond may be “paid” by the federal government in the form of annual income tax credits to the financial institution that holds the bond, and for 2009 and 2010, the Act allowed direct subsidy payment to be made to the issuer. The amount of the direct subsidy payment to the issuer is equal to the lesser of:

  • The interest payable on the QZAB on each interest payment date; or
  • The amount of interest that would be payable on the QZAB if the credit rate published by the Secretary of the Treasury on the sale date of the QZAB were the interest rate on the bond.

More about the Qualified Zone Academy Bonds

Administrative, Procedural and Miscellaneous information from the IRS on QZAB allocations for 2012 and 2013 is available at the link below:

QZAB Allocations for 2012 and 2013

A memorandum from Chapman and Cutler LLP with additional QZAB information is available below.


There is one requirement for QZABs that may "make or break" your decision to this sort of interest-reduced bond funding: the QZABs require that the project for which the bond proceeds are used must comply with the Davis Bacon Fair Labor Standards Act. That is, you are required to pay prevailing union-level wages to all workers participating in projects funded with the QZAB funding.

Section 1601 of Division B of ARRA specifies that five specific tax-favored bond programs, including QZABs, are subject to Davis-Bacon prevailing wage standards. On May 5, 2010, the U.S. Department of Labor issued a memorandum that highlights the responsibilities of State and local government entities, contractors, and others for implementation of, and compliance with, the Davis-Bacon labor standards in connection with the identified ARRA bond projects. Questions regarding the applicability of the Davis-Bacon Act to a specific QZAB project may also be directed to the Department of Labor at whdarra[at]dol[dot]gov(whdarra@dol[dot]gov).

The Davis-Bacon Wage Determination by State website that may help you estimate your wage/benefits labor costs if you use the QZAB bond funding process for building construction. Select “Utah” from the criteria, then on the county in which your construction project is located. Select “Building” from the "Construction Type" to estimate your hourly wage rates and additional fringe (benefit) costs for various laborers.

The U.S. Department of Labor has affirmed that a project partially funded with QSCB/QZAB funds results in the entire project falling under the requirements of the Davis-Bacon Act.

The following documents have further information on QZABs:

Zions Bank Public Finance

The Bond Buyer, February 1, 2013

On March 18, 2010, the President signed the Hiring Incentives to Restore Employment Act (Public Law 111-147). This legislation gives bond issuers the option of issuing QSCBs and QZABs as bonds under which an issuer may receive a cash subsidy from the Federal Government as opposed to providing bondholders with a tax credit. Issuers of QSCBs and QZABs that elect to receive the direct payment will receive payments equal to the lesser of the actual interest rate of the bonds on each interest payment date or the tax credit rate set daily by the U.S. Department of the Treasury for municipal tax credit bonds. Further information about these direct payments may be found in the IRS Notice 2010-35.

2. QZAB Application Form

QZAB Application Form

National Education Foundation
Schools with at least 35% Free and Reduced Enrollment as of October, 2008, are shown on the attached file:

35% Free and Reduced Enrollment - October 2012

QZAB/QSCB Allocations to Utah School Districts and Public Charter Schools

2009 Allocations
2010 Allocations
2011 Allocations

Historical information can be found on the following documents:

Attorney General Opinion Re: QZAB Indebtedness