Finance committee hears AMG pitch to invest 2016 TIF bond reserve fund to lock yields

Arbitrage Management Group recommended that the city actively invest the debt-service reserve fund (DSRF) for a 2016 Eagle Town tax-increment financing revenue bond and other bond project funds in short- and medium-term fixed-income securities allowed under Indiana law, during a Sept. 22 Finance Committee meeting. The firm said doing so would lock in predictable yields and reduce the risk of falling money-market returns as the Federal Reserve signals more rate cuts.

The DSRF in question is about $350,000 and is associated with a revenue bond issued in 2016 that matures in February 2037. Dave Gadell, representing Arbitrage Management Group (AMG), said the reserve “can only be used for making up shortfalls” in bond payments and that most municipalities never tap the fund. He told the committee the city’s bond official statement and Indiana law permit active investment of those proceeds.

Why it matters: the money currently sits in a variable-rate money-market account and will decline in yield if the Fed follows through on projected cuts. AMG proposed a laddered strategy — splitting the reserve into roughly equal parts across 1-, 2- and 3-year fixed-income securities — to lock yields now while preserving some liquidity to meet bond obligations.

Gadell summarized the allowed investments described in the official statement and Indiana law (cited to Indiana Code 5-13): U.S. Treasury securities, U.S. agency securities, Indiana municipal bonds and certificates of deposit. He advised against CDs for these proceeds because of withdrawal penalties and lower flexibility. He emphasized the investments AMG recommends are fixed-income instruments intended to return principal plus interest; “you'll never see anything in terms of…stocks or equities,” he said.

Gadell also flagged federal tax rules on arbitrage for tax-exempt bond proceeds: under U.S. tax law, borrowers cannot retain investment earnings that exceed the city’s borrowing cost for the bond (he cited the example of the bond’s 4.9% borrowing rate). He said that because the 2016 bond was issued when market rates were low, arbitrage is unlikely to be a problem for this specific bond, but it is a constraint AMG considers when structuring investments.

On operational roles, Gadell made clear AMG would act only as an advisor: “my firm doesn't take custody of these funds. They always stay with custody of the bank or brokerage firm or trustee bank of your choosing.” He described AMG's role as recommending securities and monitoring markets; final purchase authority would rest with the city’s finance officer.

Marla, the city finance official present at the meeting, said she historically has not instructed trustees to change how they hold bond proceeds and that trustees typically default to money-market accounts. She told the committee she would welcome AMG’s assistance in expanding capacity for overseeing trustee-held accounts and asked Gadell to address AMG’s fees and onboarding process during the presentation. “I have never directed the trustees to do anything different… I have to this end trusted the trustees,” she said.

Gadell said AMG charges no out-of-pocket fees to clients and receives a commission only at the time securities are purchased; he described commissions as typically capped at 50 basis points and often materially lower depending on security and trade size. He said AMG does ongoing market monitoring without charging recurring fees and that there are no contractual multi-year commitments.

Committee members and financial advisors present discussed roles and coordination. Landon, identified as a financial advisor with Baird, noted advisory firms “don't generally get involved in the investments themselves” for these niche bond-proceeds strategies. The committee also heard that project funds currently held at Huntington are in money-market accounts earning a lower yield than fixed-income options would provide if yields are locked in now.

Outcome and next steps: the committee did not authorize any purchases at the meeting. Members agreed to take the presentation under advisement and to coordinate further with the city’s clerk-treasurer and administration on whether to proceed. Dave Gadell said AMG would provide onboarding disclosures (a “know your client” form) and proposed strategies for trustee-held accounts if the city wished to move forward.

Details and constraints documented in the meeting: the reserve fund is restricted to covering bond-payment shortfalls; Indiana Code 5-13 was cited in the bond official statement as the source of allowable investments; U.S. tax arbitrage rules limit how much a borrower may retain from investment earnings relative to the bond’s interest cost. The 2016 TIF revenue bond’s reserve amount (about $350,000) and February 2037 maturity were repeatedly referenced by Gadell during his remarks.

The presentation included examples of AMG’s work: Gadell said AMG manages similar funds for several hundred municipal clients and has about $2 billion in these types of funds under management. He noted a recent client engagement in Shelbyville where AMG had locked rates ahead of falling yields to outperform that client’s money-market returns.

The committee reserved decision-making authority to the city finance officer and indicated it would request additional materials, cost estimates and — if desired — proposed trades for formal approval in a future meeting. No formal motion to implement AMG’s recommendations was made at the Sept. 22 session.