Government sets school bonds, Congress approves rebates

WASHINGTON (Reuters) - State and school districts can now tap their 2010 allocations of stimulus school construction bonds, which total $11 billion, the Treasury and Education Departments said on Wednesday, as the U.S. Congress moved to create more demand for the debt.

States can sell a total $6.6 billion of qualified school construction bonds and the largest 103 school districts in the country will be able to sell $4.4 billion.

The $863 billion stimulus plan passed last year initially designated those bonds as "tax credit," meaning they could offer credits against federal income tax in lieu of interest payments. But on Wednesday, the U.S. Congress sent a bill to President Barack Obama to sign into law that would transform them to resemble the more popular Build America Bonds created in the stimulus plan.

Taxable Build America Bonds come with a rebate from the federal government equal to 35 percent of their interest costs.

California can sell up to $720.058 million of the bonds and New York state up to $178.782 million through allocations that were determined by formula, according to a press release from the two federal agencies.

The New York City school system was given the biggest allocation of bonds earmarked for school districts at $664.01 million.

Citing the current lack of interest in the stimulus plan's tax-credit bond programs, which also finance environmental and other school projects, Congress changed their structure.

Taxable Build America Bonds come with a rebate from the federal government equal to 35 percent of their interest costs.

Under the bill, tax-credit bonds would also offer federal rebates, but at a level more than double the BABs rate.

On Wednesday, New York City Comptroller John Liu said school construction bonds the Big Apple sells would receive a rebate covering the full interest costs, leaving the city to borrow at "a net rate of zero."

"In the rising battle for space as more schools close and overcrowded classrooms burst at the seams, this is exactly what we need and asked for," he said in a statement.

The legislation would cap the subsidy at whichever is lesser, the federally-set tax-credit rate or the actual bond interest rate. Under current market conditions, that garners New York a 100 percent rebate, Liu said.

According to Senator Max Baucus, the Montana Democrat who chairs the Finance Committee, the rebates are now more in line with the level of subsidy the U.S. government would have provided through tax credits. Baucus also said that the conversion of all the tax credit bond programs will cost the U.S. government $4.6 billion over 10 years.

TAX CREDIT BONDS FACED LIMITED MARKET

Fitch Ratings has said many issuers have still had to offer interest payments on the stimulus tax credit bonds that were allocated last year in order to attract buyers.

For example, the Alabama School and College Authority offered an interest rate of 1.865 percent on $145.88 million of bonds it sold at the end of 2009. The debt already carried a tax credit rate of 5.76 percent.

Information on sales of the school bonds has been slim, as many small issues are sold competitively and many of the bonds are privately placed.

The stimulus plan requires the bonds have a maximum 15-year maturity, which could create the problem of school districts having to make "balloon" payments in the near future, according to Fitch.

The market for tax-credit bonds, which has existed for numerous years, has been small and the stimulus included an authorization to strip the credits from the debt and trade them separately in order to increase investor appetite for the debt.

Last week, the top Treasury municipal bond counsel told a state treasurers' meeting guidance on how credits can be traded would come out "very, very, very soon." That will be more than a year since the Treasury first said it would advise the market on credit stripping.

(Additional reporting by Andy Sullivan; Editing by Andrew Hay)