On November 3, 2009, electors in Detroit will vote on Proposal S, which would allow Detroit Public Schools
(DPS) to borrow $500.5 million. Proposal S is a bond referendum placed on the ballot by the emergency financial manager of DPS. The federal American Recovery and Reinvestment Tax Act of 2009 would reduce the borrowing costs of these bonds to taxpayers by lowering the interest costs.
Programs and Definitions
A general obligation bond is a municipal bond in which the issuing government pledges to use all available revenues at its disposal to repay bondholders, including raising property taxes. If property tax revenues fall short of the required bond payments, the terms of a general obligation bond require the local government to raise property taxes to make up the shortfall. A limited tax general obligation bond allows a local government to raise property taxes within constitutional, statutory, or charter limits.
An unlimited tax general obligation bond allows a local government to levy taxes of up to 100 percent of a property’s value if necessary. Both types of general obligation bonds are generally rated highly by credit ratings agencies with unlimited tax bonds almost always rated higher because they require voter approval and have a stronger tax pledge backing them.
As part of the American Recovery and Reinvestment Tax Act of 2009, the federal government allocated authority for Qualified School Construction Bonds (QSCBs) and Build America Bonds (BABs). QSCBs, a new type of tax credit bond, allow state and local governments to issue up to $22 billion ($11 billion in 2009 and $11 billion in 2010) for the construction, rehabilitation, and repair of public school facilities. This includes the acquisition of land, work on existing
schools, and new construction. No more than two percent of the available proceeds may be used for issuance
costs, and 100 percent of the proceeds must be reasonably expected to be spent within three years with a binding commitment from a third party that 10 percent of the proceeds will be spent within the first six months. This program
reduces school borrowing costs by providing tax credits to bondholders in lieu of interest giving school districts interest-free loans. On large projects, savings can be 50 percent. The federal government has allocated up to $246.5 million in total QSCBs to DPS for years 2009 and 2010. State law requires voter approval before the bonds can be issued.
Read more about Proposal S in the Citizens Research Council of Michigan