President Clinton is expected to approve funding by yearend for a municipal bond insurance program to help historically black colleges issue debt, according to sources familiar with the legislation.
Most black schools lack the name recognition to enter public capital markets on their own and have been unable to obtain backing from private bond insurers or Connie Lee Insurance Co. Connie Lee was created by Congress in 1986 to help lower-rated colleges and universities sell bonds.
Sources familiar with the industry say most of the schools are not rated and usually sell issues that are too small to allow insurers a profit.
The new program, known as the Historically Black College and University Capital Financing was tacked on to the Higher Education Act of 1992. Following deliberations, the Senate and House agreed to fully fund the program in the Department of Education's 1994 budget. The spending program is one of 13 the President is expected to sign automatically.
"This program provides a direct, federal guarantee that will allow some schools with cash flows to do small projects -- about $4 million to $5 million -- that otherwise wouldn't work well in the marketplace," said a Department of Education official who asked not to be identified.
The legislation was sponsored by Rep. William Clay, D-Mo.
The program commits the government to guarantee up to $375 million in total outstanding principal and interest, with a maximum principal outstanding of $357 million.
Some members of Congress opposed the plan at first, arguing that they had created Connie Lee for just such a purpose.
"For a variety of reasons, Connie Lee has executed [its] mission without serving that end of the higher education community that needs the most help," said a Washington source familiar with the program. "They made it quite clear that they did not want to service the group of schools the program is intended for because it would be a drag on their portfolio. Therefore, there was a clear need for this."
A spokeswoman for Connie Lee said, "What they're trying to do is find a mechanism that will work for a broader range of historically black colleges. There is no link there with Connie Lee -- we're not involved at all."
In fact, Connie Lee's lack of involvement paved the way for legislative approval of the program.
"At a meeting with Connie Lee representatives and congressional staffers, Connie Lee stated that this program was going to serve a market they didn't feel they could service," the Washington source said. "That gave us the green light."
Early next year the Department of Education expects to select, through a public bidding process, a for-profit designated bonding authority that will issue federally guaranteed bonds and then use the proceeds to provide loans to historically black colleges.
Department of Education officials say the program should not cost the government money because the school are required to set aside 10% of the loan they receive in a debt service account. The escrow account will constitute the first layer of payment in the event of a default. If the account is tapped then the federal government's guarantee kicks in automatically.
Citing the history of default rates in the tax-exempt municipal market, education officials say the do not expect the debt service account to ever be liquidated, meaning the federal government is unlikely to pay claims.
In addition, the designated bonding authority will be allowed to invest the funds in the escrow account. The authority is also empowered to charge the schools up to 2% above the interest rates on the bonds in exchange for providing the loans.
Aside from being a historically black college or university, specific eligibility requirements for the program are still being developed, Education Department official said.
The officials said the entities using the program must demonstrate the ability to repay the loans, and that renovation projects will take priority over new construction.