8.3.4 Monitoring Investment Income and Arbitrage Compliance
In addition to restrictions on the use of bond proceeds, federal tax law rules place limits on the investment of bond proceeds and require that issuers periodically file reporting forms with the IRS and rebate excess earnings to the U.S. Treasury Department, unless one or more rebate exceptions are satisfied. See Section 4.8, Arbitrage Yield Restriction and Section 4.9, Arbitrage Rebate. Issuers should, in particular, do the following:
- Monitor compliance with “temporary period” exceptions for expenditure of project bond proceeds (typically 3 years for new money bonds) and provide for yield restriction of bond proceeds as necessary.
- Monitor compliance with the 24 month, 18 month, and 6 month rebate exceptions if the issuer seeks to take advantage of those exceptions.
- Establish procedures to ensure investments acquired with bond proceeds are purchased at fair market value.
- Consult with tax counsel before engaging in post issuance credit enhancement transactions (e.g., bond insurance, letter of credit) or hedging transactions (e.g., interest rate swap, cap).
- Identify situations and establish procedures in which compliance with applicable yield restrictions depends upon later investments, and monitor implementation.
- Arrange for timely computation of rebate liability and, if rebate is payable, for timely filing of Form 8038T and payment of rebate.
- Arrange for timely computation and payment of “yield reduction payments,” if applicable.