Five Keys to Successfully Managing Your Arbitrage Rebate Calculation

This article is the first in a series on arbitrage.

The term "Arbitrage" should not make tax-exempt bond issuers nervous. If you follow a few simple rules when issuing the bonds and when allocating the proceeds among the various funds, the arbitrage calculation process should be much smoother and less costly.

Generally, arbitrage is defined as the excess earnings resulting from obtaining tax-exempt bond proceeds and investing those funds in higher yielding taxable securities resulting in profit. Under certain circumstances the federal government may require a rebate computation and payment of any excess arbitrage earnings (profit).

The five keys to successfully managing your arbitrage rebate calculation are:

1.                  Develop an Investment Strategy

2.                  Review the Tax and Arbitrage Certificate

3.                  Develop Project Accounting Strategies

4.                  Take Advantage of Spend-Down Exceptions to Rebate

5.                  Arrange for Your Rebate Calculation

Let's look at the details on the first of those five keys.
 

Key 1: Develop an Investment Strategy - Management should work closely with their engineer/architect, bond counsel, trustee, local counsel and financial/investment advisor to determine:

• when the bonds need to be issued,
• what funds or accounts are to be maintained, and
• the type and timing of investments that will be purchased with the remaining proceeds as the project moves forward to a) maximize the investment earnings you retain while b) remaining in compliance with tax laws and regulations.

Key 2: Review the Tax and Arbitrage Certificate - Review with bond counsel and your financial advisor the Tax and Arbitrage Certificate located in the bond transcript. The Tax and Arbitrage Certificate spells out much useful information such as amount of the bond proceeds that will go into each fund, what the issuers' reasonable expectations are for each of the funds, the arbitrage yield limit, and what accounts are subject to rebate.

In our next issue, we'll review the remaining keys to successfully managing arbitrage in more depth.

Umbaugh offers arbitrage rebate services and cash advisory services to assist management of governmental entities through their projects. We provide investment recommendations with a goal of creating additional interest earnings as well as guidance on arbitrage rebate rules. If you need assistance or have questions, please contact us at footnotes@umbaugh.com.