Pub. 6 2016 Issue 3

Anecdotally, this measure has been quoted by regulators from the Fed and OCC in CRA performance evaluations for a number of institutions: From the Fed: 9 “Qualified investments consisted of three municipal bonds totaling $291,000 used to acquire school buses for a district where the majority of students receive free or reduced rate lunches…” From the OCC: 10 “[Bank A] purchased 4 different blocks in the Payne County ISD #3 Municipal Bond totaling $475 thousand. Proceeds were used to construct a new gym and purchase school furniture and fixtures…over 63 percent of the kids at- tending qualify for free or reduced lunches.” From the FDIC: 11 “In 2011, the bank made two investments totaling $3 mil- lion to finance the construction and improvement of various capital projects within the Hermiston School District, which over 60 percent of the students qualify for free or reduced lunch.” Conceptually, free and reduced lunch percentages are a better test than census tract incomes. School boundaries do not follow census tract borders, so the location of a school in a distressed census tract does not necessarily mean it serves low income students. The converse is also true – students can and often do commute from low income tracts to a facility in an upper income area. FDIC guidance supports the view that the incomes of students served by a district are the prime determinant of CRA qualification, even if the district is geo- graphically located in a high income area, 12 “Activities that stabilize or revitalize particular low- or moderate-income areas…also qualify as community development, even if the activities are not located in these areas.” Indeed, institutions are often surprised at the number and geographic diversity of districts with more than 50% of stu- dents eligible for free lunches. In the Los Angeles metro area, for example, 62% of school districts would meet the CRA income test. 13 In some states, the number of districts that qualify for CRA purposes approaches 100%. 14 Purpose: The agencies have opined in several interpretive letters that the provision of educational services to low-or-moderate income individuals is a qualified community development purpose. Because most states explicitly restrict school district bond issuance to debt financing capital projects, rather than deficit financing, almost all municipal bonds issued by or for school districts should qualify for CRA consideration. Un- like city and county issuance, bondholders can often point to a specific campus or set of facilities that benefited from the bond proceeds. Federal Subsidy Programs (ARRA and Others): Income: In order to qualify for federal subsidies, American Recovery and Reinvestment Act (ARRA) subsidy bonds must already meet stringent hurdles regarding the income of communi- ties served. For example, Qualified Zone Academy Bonds (QZABs) must finance development at schools that provide at least 35% free or reduced lunches. Recovery Zone Economic WHETHER A MUNICIPAL BOND SATISFIES A “COMMUNITY DEVELOPMENT,” PURPOSE SHOULD BE DETERMINED AFTER CONSIDERING TWO CRITERIA IMPLICIT IN THE REGULATION: THE BOND’S SPECIFIC PURPOSE AND THE INCOME OF THE INDIVIDUALS SERVED. 15 ISSUE 3. 2016 CRA w Continued on page 16