Bond Accountability Commission 2 Recommendations Page 119
Because the tax benefit to be derived from QSCBs (either in the form of the credit for holders or the direct subsidy for issuers) depends upon the principal amount of the bonds outstanding (that is, the credit or the subsidy is a percentage of the outstanding principal), issuers have an incentive to keep either type of QSCBs outstanding as long as possible, subject to the maximum maturity allowed by the Code and current Treasury Department pronouncements. As a result, QSCBs are generally issued with a single, “bullet” maturity. To provide comfort to the holders of the QSCBs that the issuer will have enough cash on hand to pay the bullet maturity and to provide for a more level payment to the issuer over the life of the QSCBs, QSCBs generally are structured with annual “sinking fund” installments that are deposited in a reserve against the maturity payment. Under federal tax law, this sinking fund may be invested at up to a rate established on a regular basis by the Treasury Department. The tax rule generally allows for permitted “arbitrage” (i.e., the earnings may be kept and applied to the payment of the QSCBs) so long as the annual deposit into the sinking fund is no more than a pro rata amount of the ultimate principal payment. For example, if the QSCBs have a maturity of 15 years, the issuer will deposit 1/15 th of the principal amount into the sinking fund each year. As a result of the tax rules, an issuer using either type of QSCBs may finance a wide variety of public educational facilities at an extremely low cost—the annual cost of the supplemental coupon (if any) and a pro rata deposit of the principal amount into the sinking fund. However, as mentioned above, the proceeds may not be used for equipment or training costs.
Published on May 14, 2014