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Trustees question arbitrage risk as LDFA earns interest on captures; finance director explains difference
Summary
A board member asked whether the LDFA faces federal arbitrage liability because invested captured receipts earn more than some historical borrowing rates; Finance Director Tom Eldridge said the captured tax receipts are new money (not unspent bond proceeds), a distinction that changes the arbitrage analysis.
During board questions, a trustee raised concerns that the LDFA might face arbitrage risks when invested earnings on receipts exceed historic borrowing rates. The trustee referenced a prior large project where earnings exceeded borrowing costs and the municipality owed federal arbitrage penalties.
"Back when we did a large scale project... we borrowed money at 1.9% and we are earning about 3.5 to 4% in the market," a committee member said, noting the prior need to hire an arbitrage specialist and to pay money to the federal government. The committee member asked whether Coldwater’s situation could trigger the same problem as captures exceed bond payments and accrue earnings.
Tom Eldridge responded that the situations differ because the LDFA is accounting for new tax-capture receipts rather than invested bond proceeds left unspent. "The difference here is that this is the money that we're earning on is new money," he said, adding that the city had spent its bond proceeds appropriately in prior instances so those scenarios are not directly comparable. The exchange was explanatory; there was no board action taken.
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