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Schools Have Trouble Tapping Stimulus Funds

The stimulus program included $11 billion in bonds intended to let school districts raise capital through interest-free bonds to fund repairs and construction, but red tape and other roadblocks have prevented many school districts from taking advantage.

Structural faults in the gym at Jones Senior High School, N.C. (REI Engineering)
This story was co-published with USA Today.

JONES COUNTY, N.C. – Jones Senior High School has one of the best boys' basketball teams in eastern North Carolina, but its gymnasium is on the verge of collapse.

In March, engineers found that the walls and roof don't meet the state's building code and that "moderate- to high-wind velocities could threaten the stability of the structures."

"I wouldn't want to be in here in a bad storm," said physical education teacher Debbie Philyaw.

After the federal stimulus passed in February, North Carolina school officials thought they had found a way to repair the 58-year-old gym and other crumbling school structures. The stimulus provided money for Qualified School Construction Bonds, which is intended to let school districts raise capital through interest-free bonds to fund construction.

The program also was expected to boost North Carolina's construction industry. Ben Matthews, director of school support for North Carolina's Department of Public Instruction, estimated it would create 11,000 jobs.

But the bond program has become entangled in financial and bureaucratic red tape. Only $2.3 billion of the $11 billion in bonds available this year have been sold as of last week, data compiled by Bloomberg show.

Click to see an interactive map showing the estimated funding required to repair schools in each state, as of 2008. "States are missing a once-in-a-lifetime opportunity," said Judy Marks of the National Clearinghouse for Educational Facilities.

In North Carolina, one of the 69 districts chosen by the state to benefit from the program has found a buyer for its bonds. "The idea is to stimulate the economy," Matthews said. "Then it comes to a screeching halt because our people can't find lenders."

Not seen as profitable

North Carolina's experience highlights why it's been so hard to get the program started. For one, North Carolina law prevents the state from issuing bonds directly, so they must be sold by individual counties. But some counties have low credit ratings, and some have been allotted such small amounts of money under the program that lenders aren't interested.

Matthews said even North Carolina-based Bank of America, one of the nation's largest banks, hasn't bought any of the bonds in the state. Bank spokeswoman Nicole Nastacie said the company has invested in the bonds, but would not say where. She said the bank "will continue to consider them, subject to our ability to structure and price appropriately."

Some potential lenders are also reluctant to buy bonds because it's hard to make money from them.

Lenders are paid through tax credits from the U.S. Treasury worth an estimated $8 billion over 10 years. But banks battered by the financial crisis can't use the tax credits if they have no profits and no tax liability. And Treasury has yet to issue regulations allowing banks to strip off the tax credits and sell them to third parties.

Some lenders have asked for interest. Branch Banking & Trust, which is headquartered in Winston-Salem, N.C., offered to buy Jones County's bonds – if the county paid 2.9% interest, in addition to the tax credits, according to Michael Bracy, the Jones County schools superintendent. BB&T spokeswoman A.C. McGraw refused to comment on the Jones County bid. She said rates are "based on a thorough analysis of each individual transaction and the terms of the loans."

Jones County's manager, Franky Howard, said the county won't act until next year, when he hopes Treasury will have issued new regulations.

Doesn't just hurt education

Rep. Bob Etheridge, D-N.C., met with Treasury Secretary Timothy Geithner to ask him to issue rules allowing investors to strip and sell the tax credits. Etheridge said Geithner promised his staff was working on it. That was six months ago.

"It's complicated. I can appreciate that," Etheridge said. "But that's only a reason, not an excuse. Get it done."

Nayyera Haq, a Treasury spokeswoman, said in an e-mail: "We remain committed to making the Recovery Act bond programs as effective as possible and are in the process of developing additional regulations."

Etheridge successfully added a provision to a jobs-creation bill passed by the House last week that would allow state or local governments to choose to get a direct payment from Washington equal to the value of the tax credit. The bill heads to the Senate, which will take it up next month.

Students and teachers in Weldon City are among those waiting for the money. The school district hopes to use part of its $894,000 allotment to replace the science labs at Weldon Science and Technology High School, where rusted gas pipes have forced students to do their experiments on computers instead of Bunsen burners.

"As far as any hands-on experiments, we can't do it," said Elie Bracy, the superintendent.

The impact of the delay has been economic as well as educational. The city planned to use a local company, Freeman Roofing, for the repairs. On Dec. 2, Freeman went out of business and 18 workers lost their jobs.

"If we had gotten those projects," said Bill Freeman, the company's owner, "we'd be in business today."

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