Get Full Government Meeting Transcripts, Videos, & Alerts Forever!
Get email alerts on the Municipal Finance topic
No spam. Unsubscribe anytime.
Council warned of arbitrage liability on open-space bond proceeds; staff to get estimate before May deadline
Summary
City officials said federal arbitrage rules require Midway to determine and potentially remit excess investment earnings on open-space bond proceeds; a consultant estimate and options to avoid future liability were discussed ahead of a statutory deadline tied to the bonds.
Midway's finance staff and council discussed a federal arbitrage issue tied to the city's open-space bond proceeds and the need to calculate and possibly remit excess investment earnings.
City staff and a bank representative explained that arbitrage rules require municipalities to pay the federal government any investment earnings that exceed the bond yield after a three-year spend period. The council was told Midway issued the bonds on May 14, 2020, so the three-year compliance period has passed and the city will need to determine any excess earnings and remit them by the five-year anniversary (May 14, 2025), which staff said is approaching.
Brad (city finance staff) told the council the bonds had a yield of roughly 2.28% while Midway's current Public Treasurers Investment Fund (PTIF) return is about 4.48% (a variable rate). He said the city has dispersed some bond funds but that proceeds still earn interest in PTIF. Staff said they will contract with a consultant to calculate arbitrage liability; initial quotes for that work ranged from about $1,000 (initial estimate) to $4,000to $5,000 in more recent responses.
Staff presented options to reduce future arbitrage risk. One approach is moving bond proceeds into a State and Local Government Series (SLGS) security, which can be structured as a time deposit set to yield the bond rate and thereby avoid producing excess earnings. Staff said the SLGS option can be tailored so the investment yield matches the bond yield and prevents arbitrage. The meeting record shows council members asked staff to prepare a high-level, in-house estimate of excess earnings so the council can weigh whether to hire a consultant or proceed with staff calculations.
Staff said they will return with a specific recommendation on whether to hire a consultant and, if so, will follow purchasing rules to obtain quotes. The council did not make a final decision during the meeting.
