4.4.4 Reserves

Tax exempt bond proceeds can also be used to fund a debt service reserve fund(DSRF) securing the payment of debt service on the bonds if it is a “reasonably required reserve or replacement fund.” A DSRF amount will generally be considered to be a reasonably required reserve fund or replacement fund only if the amount is limited to the lesser of (1) maximum annual principal and interest requirements on the issue, (2) 10% of the principal amount of the issue, or (3) 125% of the average annual principal and interest requirements on the issue. Other reserves, such as an operating reserve, may be funded with bond proceeds in limited situations.