Honorable Robert Bunda

President of the Senate

Twenty-First State Legislature

Regular Session of 2002

State of Hawaii

Sir:

Your Committee on Ways and Means, to which was referred S.B. No. 2100, S.D. 1, entitled:

begs leave to report as follows:

The purpose of this measure is to authorize the issuance of taxable general obligation bonds, in the form of Qualified Zone Academy Bonds, to enable the Department of Education to renovate a former Hawaii National Guard facility into a state-of-the-art technology enterprise for virtual learning.

Your Committee finds that Qualified Zone Academy Bonds are taxable municipal securities that provide bondholders with payments of principal, and a federal income tax credit in lieu of payments of interest. The full faith and credit of the State would back the Qualified Zone Academy Bonds issued under this measure.

According to the U.S. Department of Education, traditionally, states and local school districts issue bonds and the Internal Revenue Code exempts the bondholders from paying federal taxes on the interest they earn. Many investors consider this an incentive to purchase these bonds; therefore, school districts can sell these bonds at lower interest rates than standard corporate bonds. This tax-code provision allows the district to save about twenty per cent of the interest costs in the current market. However, the district must pay the principal and the interest over the life of the bond.

Under the Qualified Zone Academy Bond program, the federal government provides bondholders with a tax credit in lieu of cash interest payments. The school district or other issuer is then, in general, only responsible for repaying the amount borrowed. This is a substantial benefit because interest payments can equal up to fifty per cent of the economic cost of a bond. A Qualified Zone Academy Bond is a better value for the district because, under these tax-credit bonds, the federal government pays, on average, all of the interest, whereas, under tax-exempt bonds, the school district typically recoups only twenty per cent of the interest payments.

Your Committee has amended this measure by making technical nonsubstantive changes for purposes of clarity and style.

As affirmed by the record of votes of the members of your Committee on Ways and Means that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 2100, S.D. 1, as amended herein, and recommends that it pass Third Reading in the form attached hereto as S.B. No. 2100, S.D. 2.