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Paducah to remit $946,515.49 to Treasury after bond proceeds earned above allowed yield
Summary
City finance staff and outside consultants told the commission that earnings on 2020 bond proceeds exceeded the allowable arbitrage yield; the commission authorized a $946,515.49 payment to the U.S. Treasury to resolve the liability.
The Paducah Board of Commissioners on March 4 authorized the finance director to remit $946,515.49 to the U.S. Department of the Treasury after consultants calculated a yield‑restriction (arbitrage) liability tied to a 2020 general obligation bond issue.
City staff explained the background: in January 2020 the city issued a general obligation bond (GLB 2020A) that produced roughly $20 million in proceeds originally intended to finance an aquatic facility. Subsequent decisions redirected some proceeds to other capital projects. Federal rules for tax‑exempt bonds allow an issuer a limited period to spend proceeds; funds invested past those windows can create arbitrage liabilities if investment earnings exceed the bond yield the city pays bondholders.
A city speaker described the city’s arbitrage yield as 2.44%. Outside consultant Mark Franklin of Densmore explained that in recent years market rates rose and the construction fund began to earn more than the allowable yield; the city’s calculations showed earnings in calendar year 2023–24 averaged about 5.25%, producing earnings well above the bond yield. The city said it set aside earnings specifically to pay any required rebate to Treasury.
Mark Franklin, with Densmore, described how the IRS tests work and why a payment was required now. He said the IRS permits some offsets for earlier low‑rate periods and that the city would keep roughly the portion of earnings allowed under the calculations while remitting the remainder to Treasury. The payment covers earnings through January 2025; the city will run another recalculation at the earlier of five years after issuance or at final bond disbursement.
Finance staff said the payment will not be taken from the operating budget because the city had reserved the earnings in anticipation of a rebate. The commission approved the municipal order by unanimous roll call.
Quotes "We earned it. We put it aside," said John Perkins (staff member) explaining the city’s approach to the restricted earnings. "We've been blessed with earnings on money we should have already disbursed over the past 2 or 3 years."
"At the beginning of year four of your bond issue, you were earning over 5% in your construction fund," said Mark Franklin of Densmore, describing why the recent earnings triggered the larger rebate calculation.
Next steps include remitting the payment to the Treasury by the deadline noted in the meeting and performing the required five‑year recalculation for the remaining construction fund balance.
