Important Changes to the School Bond Qualificaton and Loan Program

In the flurry of legislative activity at the end of 2012, the Michigan Legislature passed a series of bills which make significant changes to the School Bond Qualification and Loan Program ("SBQLP"). The changes include amendments to the School Bond Qualification, Approval, and Loan Act which implements the SBQLP pursuant to the mandate for this program under the Michigan Constitution.

The SBQLP has been around in various forms since its inception in 1955. The purpose of the SBQLP is to assist school districts with the issuance of school building and site bonds to finance capital improvement and infrastructure projects. Under the SBQLP, a school district issuing capital improvement bonds which meet various qualification requirements can issue the bonds as "qualified bonds" with a State credit enhancement and access to a loan mechanism.

The SBQLP provides two types of loans to school districts with respect to its qualified bonds. The first is a loan to prevent a payment default on qualified bonds (i.e., the State credit enhancement), and the second is a loan to allow school districts to maintain a lower and more stable debt millage rate than would otherwise be possible, (i.e., the loan mechanism). Under the SBQLP, a school district with outstanding qualified bonds is generally permitted to borrow from the State an amount equal to the revenue in excess of a "computed millage" amount (which can range from 7 to 13 debt mills) that the school district would otherwise have to raise by levying higher debt service millage.

Under the SBQLP, a school district is required to continue to levy the computed millage until both the qualified bonds and the State loans are repaid. The SBQLP requires that the State loans be repaid no later than 72 months following the final maturity date of the qualified bonds.

In recent years, the State has become concerned with the escalating costs of the loans the State is required to maintain to fund the SBQLP. Although these loans are ultimately the obligation of the participating school districts, the State was concerned that the repayment dates of the school district loans were being extended many years past the originally contemplated repayment date requiring the State to carry these loans for a longer period. The cause of the repayment delay is twofold: first it is due to school districts rolling over loans through the issuance of new qualified bonds; and secondly, it is due to the recent drop in property values.

The changes to the SBQLP, for the most part, are intended to reduce the amount of loans the State is required to maintain to fund the SBQLP. The following is a summary of the changes to the SBQLP under the new legislation:

• The availability of SBQLP loans is restricted for bonds issued after the State's outstanding SBQLP loan balance reaches $1.8 billion. It is anticipated that this cap will be reached by October 2014. This cap will sunset on June 30, 2016.
• Set a single final mandatory repayment date by which all qualified loans, whenever made, must be repaid.
• Allow school districts to issue additional bonds and have a later final mandatory repayment date only if a school district levies an increased millage rate.
• Require that the computed millage ( i.e. the debt millage rate necessary to repay all qualified bonds and qualified loans by the final mandatory repayment date ) to be recalculated annually, beginning October 1, 2013, based on changes in taxable values, the issuance of new money bonds or refunding bonds, and other circumstances.
• Require school districts to maintain books and records of bond proceeds and make those records available to the Department of Treasury.
• Set a single interest rate on loans issued to the school districts under the SBQLP.
• Permit the Department of Treasury the discretion to pre-qualify a bond issue based on whether there is no "adverse financial impact" to the State.
• Permit a school district to use excess bond proceeds remaining after a project is complete for project enhancements only if the school district's bond counsel opines that using the excess bond proceeds to make debt service payments or to repay qualified loans would adversely impact the federal tax treatment of interest on the bonds.

The bottom-line is that the changes to the SBQLP will in most instances cause debt millages to increase for school districts with outstanding SBQLP loans and could severely limit the benefits of the SBQLP for future school bond issues. School districts with outstanding SBQLP loans may want to determine the impact these changes might have on their debt millage and notify taxpayers of any anticipated increases explaining the reasons for the increase. The negative consequences of the new legislation may be partially mitigated to the extent property values increase in the future.

If you have questions about the changes to the SBQLP please contact your Clark Hill Education Law attorney.