THE SHORT ANSWER
An issuer invests bond proceeds by matching each fund's spending schedule to investments selected for safety first, liquidity second and yield third. The bond contract's permitted investments, the federal arbitrage rules, state law and, for GICs and yield-restricted defeasance escrows, competitive bidding under the fair-market-value safe harbor set the boundaries.
A municipal issuer invests bond proceeds by matching each fund's spending schedule to investments selected for safety first, liquidity second and yield third, inside limits set by the bond contract, the federal arbitrage rules and state law.
SIFMA reported U.S. municipal bonds outstanding of $4.5 trillion as of the second quarter of 2026, up 4.8 percent year over year, and 2026 issuance of $473.8 billion through September, up 7.3 percent over the same span of 2025.
This page maps the subject end to end: the funds, the permitted investments, the order of objectives, the arbitrage limits, the bidding rules, the parties and the point at which an independent review earns its keep.
What are bond proceeds and why must they be invested?
In the working language of this page, bond proceeds are what an issuer receives from an issue and invests afterward; the arbitrage regulations use the defined term gross proceeds, and under Treasury Regulation §1.148-1(b) gross proceeds means all proceeds of an issue, meaning sale proceeds, investment proceeds and transferred proceeds, together with all replacement proceeds.
They get invested because the cash sits between the closing date and the dates it is actually spent, and those gaps run long: GFOA lists typical investment horizons of 12 to 36 months for a construction fund, 6 to 18 months for a capitalized interest fund, usually 6 months for an interest account and usually 12 months for a principal account, with an escrow's horizon set by the redemption date and a reserve fund's horizon long term.
GFOA's recommendations target that gap: the investment's duration should be no longer than the expected drawdown schedule, the draw schedule should be revisited periodically as spending develops, and issues should not be sold well before spending begins, which it offers as ways to limit arbitrage liability and negative arbitrage.
The stakes are legal as much as financial: Section 103(a) of the Internal Revenue Code excludes interest on state and local bonds from gross income, and §103(b)(2) withholds that exclusion from any arbitrage bond within the meaning of §148.
Classification drives everything that follows, including whether an issue is a private activity bond, which under 26 U.S.C. §141(a) turns on meeting both the private business use test and the private security or payment test, or on meeting the private loan financing test.
Because these determinations decide which rules apply to a given issue, they belong to bond counsel and tax counsel.
Each of the fund types that hold bond proceeds carries its own investment question, summarized next.
Which funds hold proceeds (project, reserve, capitalized interest, escrow)?
A typical flow of funds puts proceeds into accounts the bond documents create, each with its own purpose and investment horizon.
| Fund | What it holds | Typical horizon |
|---|---|---|
| Project or construction fund | Costs of the capital project the issue finances | 12 to 36 months |
| Capitalized interest fund | Proceeds set aside to pay interest on the securities for a specified period, commonly while a revenue-producing project is built, so debt service does not begin until the project is expected to be operating | 6 to 18 months |
| Debt service fund | Periodic deposits from which debt service is paid on time, often with separate principal and interest accounts | Usually 6 months for interest, usually 12 for principal |
| Debt service reserve fund | A fund used to pay debt service if pledged revenues fall short, with the requirement often a fixed percent of par or of maximum annual debt service | Long term |
| Refunding escrow | One or more funds set up as part of a single transaction or a series of related transactions, holding refunding proceeds and other amounts to pay principal or interest on one or more prior issues | Depends on the redemption date |
| Cost of issuance fund | The underwriter's discount and financial advisory, bond counsel, other counsel and rating agency fees, among other expenses | Pending payment |
The MSRB glossary supplies the capitalized interest, debt service fund, reserve fund and costs of issuance definitions, Treasury Regulation §1.148-1(b) the refunding escrow definition, and GFOA the horizons, which it presents as typical ranges that vary with expectations, not as rules.
Whatever the fund, GFOA's recommendation is the same structural test: the investment's duration should be no longer than the expected drawdown schedule, and the schedule should be revisited as spending actually develops.
What can bond proceeds be invested in (permitted investments)?
Permitted investments are, in the MSRB glossary's definition, the instruments in which bond proceeds or other funds may be invested pursuant to the provisions of the bond contract.
The bond contract is therefore the starting list, and GFOA adds that where there is no indenture, for example on a general obligation bond, the issuer's investment policy should list permitted investments for proceeds, which may be a subset of the list for operating funds.
GFOA's best practice says those bond-proceeds provisions should ensure legal and regulatory requirements are met, fair market value bids are received when required by tax law and state or local laws, and the issuer's objectives are attained.
The SEC has described municipal reinvestment products as typically financial instruments tailored to meet municipalities' specific collateral and spend-down needs, naming guaranteed investment contracts, repurchase agreements and forward purchase agreements.
mGIC helps issuers evaluate and competitively bid guaranteed investment contracts, full-flex repurchase agreements and structured portfolios of U.S. Treasury securities, with the Treasury portfolios matched to anticipated cash needs and a money-market fund allocation for faster-than-expected spend-down; it sells none of the three.
In the securities-law definition, a GIC is an investment that has specified withdrawal or reinvestment provisions and a specifically negotiated or bid interest rate, including agreements to supply investments on two or more future dates such as a forward supply contract, and the SEC's rule limits the term to contracts that relate to investments of proceeds of municipal securities or municipal escrow investments.
Treasury's SLGS securities sit behind a doorway of their own: they may be bought only with an eligible source of funds, and 31 CFR 344.1 defines that source in five categories that mainly mean gross proceeds of tax-advantaged bonds, plus amounts held with them in refunding or defeasance escrows, parity reserve funds or commingled funds, and other yield-restricted amounts.
Whether a particular fund is an eligible source of funds is a determination for bond counsel.
Pooled options raise definitional questions of their own: under 26 CFR 1.148-1(b), an open-end regulated investment company, such as a mutual fund, is not a commingled fund, while a commingled fund otherwise means a fund holding gross proceeds together with more than $25,000 of other amounts invested collectively.
State and local law is part of the requirements GFOA says a bond-proceeds policy has to satisfy, and the state pages take up what individual states authorize.
Each of these bond-proceeds reinvestment products has its own page, including withdrawal provisions, credit protection and collateral mechanics.
What are the three objectives (safety, liquidity, yield) and in what order?
The order is safety first, then liquidity, then yield, and mGIC applies that sequence when it helps issuers structure, competitively bid and close investments of bond proceeds.
Statutes can fix the same ordering by name: under Texas Government Code §2256.006(a), the overall order for investments of public funds in Texas is safety, liquidity, yield.
Safety comes first because the fund has to be there when the contractor bills or the reserve is called, which is why a bid process weighs the non-rate terms, credit and collateral among them, alongside the rate.
Liquidity comes second because an investment that earns more but cannot return cash on the draw dates solves the wrong problem, a point the arbitrage rules themselves encode: Treasury Regulation §1.148-5(d)(6)(iii)(A)(5) requires GIC solicitation terms to take into account the issuer's reasonably expected deposit and drawdown schedule.
Yield is pursued only inside the first two constraints and inside the arbitrage limits described below, and nothing on this page projects what any investment will earn.
The safety, liquidity and yield page works through the sequence and its trade-offs in detail.
How do arbitrage rules limit what proceeds can earn?
The federal arbitrage rules cap the yield proceeds may earn and can require part of the earnings to be paid to the U.S. Treasury, and Internal Revenue Code §103(b)(2) removes the tax exclusion from any arbitrage bond within the meaning of §148.
IRS Publication 5271 treats this as two independent sets of rules: yield restriction under §148(a) and rebate under §148(f), and an issue can satisfy one set yet still be arbitrage bonds because it failed the other.
The two sets also interact: even where the yield restriction rules allow an issuer to invest above the bond yield, the rebate rules may still require those arbitrage earnings to be paid to the U.S. Treasury.
The framework is old enough to have its own architecture: the SLGS program was established in 1972 as the result of federal legislation enacted in 1969 that restricted state and local governments from earning arbitrage profits on bond proceeds.
In practice the limits operate through temporary periods, spending exceptions, yield restriction and rebate, which the arbitrage rules for bond proceeds hub covers in depth, starting with how long proceeds may sit above the bond yield in a temporary period.
How are investments competitively bid under the fair-market-value safe harbor?
A negotiated instrument such as a GIC is not of a type traded on an established securities market, so Treasury Regulation §1.148-5(d)(6)(i) rebuttably presumes it was not bought or sold at fair market value, and the safe harbor in §1.148-5(d)(6)(iii) treats the purchase price of a GIC, or of an investment bought for a yield-restricted defeasance escrow, as fair market value on the purchase date when all of its requirements are met.
The SEC has said competitive bidding run by bidding agents is the most common way to establish fair market value for these products.
| Safe harbor requirement | What the regulation says |
|---|---|
| Bona fide solicitation | Written bid specifications sent timely to potential providers, including all material terms and only commercially reasonable terms (Treas. Reg. §1.148-5(d)(6)(iii)(A)) |
| No-collusion representation | The specifications must state that bidding represents the provider did not consult other providers, set the bid without regard to other agreements, and is not submitting a courtesy bid (paragraph (A)(3)) |
| Drawdown schedule | For a GIC, the solicitation terms must take into account the issuer's reasonably expected deposit and drawdown schedule (paragraph (A)(5)) |
| Equal opportunity | All potential providers must have an equal opportunity to bid; if any provider may review other bids before bidding, all must be able to (paragraph (A)(6)) |
| Solicitation breadth | At least three reasonably competitive providers, meaning providers with an established industry reputation as competitive providers of that type of investment, must be solicited (paragraph (A)(7)) |
| Bids received | At least three bids from solicited providers with no material financial interest in the issue, at least one from a reasonably competitive provider; a negotiated-deal lead underwriter has such an interest until 15 days after the issue date (paragraph (B)) |
| Agent independence | If an agent runs the bidding, that agent must not bid to provide the investment (paragraph (B)(3)) |
| Winning bid | For a GIC, the highest-yielding bona fide bid determined net of broker's fees; for an investment bought for a yield-restricted defeasance escrow, the lowest-cost bona fide bid including broker's fees and no more than the cost of the most efficient all-SLGS portfolio measured when bids are due, a comparison not required if SLGS sales are suspended that day (paragraph (C)) |
| Provider certification | The provider or GIC obligor certifies the administrative costs it pays or expects to pay to third parties (paragraph (D)) |
| Records | The contract, the payment receipt with administrative costs and the certification, the bid log of each bid's submitter, time, date and result, the solicitation form with any deviations explained, and for non-GIC purchases the SLGS comparison, kept with the bond documents until 3 years after the last outstanding bond is redeemed (paragraph (E)) |
Failing a condition means the issuer loses the purchase-price presumption; it does not by itself establish that the price was not fair market value, and the regulation requires the provider's certification while a separate bidding-agent certificate is common practice rather than a stated requirement.
The enforcement record shows what the safe harbor's equal-opportunity and agent-independence conditions are aimed at.
On December 7, 2010, the SEC settled charges that Banc of America Securities rigged bids for reinvestment of municipal bond proceeds, finding it won bids on 88 affected reinvestment instruments through "last looks" and "set-ups"; BAS, which settled without admitting or denying the findings, agreed to pay more than $36 million to the SEC and $101 million to other federal and state authorities.
The next December, the SEC charged Wachovia Bank with rigging at least 58 reinvestment transactions in 25 states and Puerto Rico, in GICs, repos and forward purchase agreements from 1997 to 2005; the litigation release defines a "last look" as a provider's getting competing-bid information from the bidding agent and a "set-up" as the agent's deliberately obtaining non-winning bids from other providers, and Wachovia paid $46 million to the SEC plus $102 million under agreements with other federal and state authorities.
In its December 23, 2011 press release, the SEC reported that more than $743 million had been recovered from financial institutions in these settlements and that 18 individuals had been indicted or had pled guilty, and it said the corrupted bidding deprived municipalities of the conclusive presumption that reinvestment instruments were purchased at fair market value.
The bidding pages walk through competitive bidding of investment agreements step by step, from the safe harbor's conditions to bid specifications, evaluating bids and what happens with fewer than three qualifying bids.
Who does what: issuer, bond counsel, trustee, municipal advisor, Bidding Agent
The issuer's governing body and staff own the policy and the outcome, bond counsel owns the legal conclusions, the trustee holds and pays, and municipal advisors and Bidding Agents carry out the analysis and the bidding.
On the issuer's side, GFOA recommends formal written post-issuance compliance policies and procedures, listing key documents such as the tax certificate, escrow documents and indenture at closing, and it notes that a government keeps ultimate responsibility for compliance even when it outsources tasks such as arbitrage rebate.
The MSRB glossary describes bond counsel as the attorney or firm, typically retained by the issuer, that gives an opinion that the bonds are validly issued and, if intended, tax-exempt.
A trustee is a financial institution with trust powers acting as fiduciary for bondholders under the bond contract, and it often also serves as custodian, paying agent, registrar and/or transfer agent.
Bond-proceeds advice is itself a defined regulatory category: the Exchange Act's definition of investment strategies includes plans or programs for the investment of proceeds of municipal securities that are not municipal derivatives or guaranteed investment contracts, and the recommendation and brokerage of municipal escrow investments (§15B(e)(3)), and the SEC's rule ties its GIC definition to contracts that relate to investments of proceeds of municipal securities or municipal escrow investments.
GFOA notes that brokers may be considered municipal advisors if they provide advice on investments of bond proceeds, and that governments may receive broker-dealer advice through an RFP process or when they have retained an independent registered municipal advisor.
Advice on strategies that are neither bond-proceeds plans nor escrow recommendations or brokerage is expressly exempt (17 CFR 240.15Ba1-1(d)(3)(vii)), which is why advice on proceeds sits in its own regulated category.
In refundings, GFOA describes an escrow agent, typically a commercial bank, holding the escrow investments, a verification agent, typically a CPA firm, confirming the escrow is sufficient and that escrow yield does not exceed the permitted yield where limited, and an escrow bidding agent soliciting bids for open-market escrow securities, a role GFOA says a municipal advisor, if one is engaged, may be able to fill.
mGIC, Municipal Government Investors Corp. of Scottsdale, Arizona, is an independent, SEC-registered municipal advisor founded in 2002 that provides three services: bond-proceeds reinvestment advisory, Bidding Agent services, and documentation and settlement that delivers Bidding Agent and provider certifications to bond counsel and finishes with a compliance file.
As an SEC-registered municipal advisor, it owes its municipal clients a fiduciary duty and does not act as principal in the investments it evaluates.
Its Bidding Agent fee is paid by the winning provider rather than the issuer, is set at or below the safe-harbor maximum in the Treasury arbitrage regulations, and is disclosed.
When to get an independent reinvestment review
The trigger points are concrete: a new issue is about to close, a temporary period is ending, draws are running off the schedule the investment assumed, an existing provider's credit terms deserve a second look, or a funded investment has not been tested against the market since it was signed.
A review of that kind covers fund objectives, permitted investments, projected draw schedules, credit parameters, market conditions and timing, and the independent reinvestment review page sets out how mGIC approaches an investment already in place.
The record behind the work is measurable: mGIC has more than $60 billion in bond proceeds invested and swap notional executed across more than 1,000 transactions for issuers in more than 40 states.
Its representative transactions include Pocahontas Parkway in Virginia, the Grand River Dam Authority in Oklahoma, the DHL air cargo hub at CVG, Miami Air Cargo at MIA, Cardinal Stadium in Louisville, the JFK International Air Cargo Center, Delta Cargo at JFK, aircraft FBOs at Westchester County Airport and Hobby Airport, Birmingham Water Works, Prairie State Energy Campus and OSU Village F student housing.
mGIC offers a free, no-obligation reinvestment review or conversation through its contact page, and it publishes daily rate-update emails covering Treasury yields, SOFR and SLGS links each business day.
Determinations about what an issue's funds qualify for, which exceptions apply and how a structure affects an issuer's tax position belong to bond counsel and tax counsel.
In this section
- Arbitrage Rules for Tax-Exempt Bond Proceeds ExplainedHow federal arbitrage rules limit what tax-exempt bond proceeds can earn: the yield restriction and rebate regimes, temporary periods, exceptions and safe harbors.
- Competitive Bidding of Bond-Proceeds Investments: How It WorksHow bond-proceeds investments are competitively bid: the fair market value safe harbor, bid steps, who can bid, timing against closing, and the closing file.
- What Funds Hold Bond Proceeds, and How Is Each Fund Invested?What funds a bond indenture creates for bond proceeds, and how each is invested: project fund, reserve fund, capitalized interest, debt service, refunding escrow.
- Bond-Proceeds Reinvestment Products: GICs, Repos, Treasuries and SLGSWhat can bond proceeds be invested in? The guide to reinvestment products: guaranteed investment contracts, full-flex repos, Treasury portfolios, SLGS and pools.
- What Can Bond Proceeds Be Invested In, State by State?What each state's law lets issuers do with bond proceeds: closed statutory lists, bond-specific GIC rules, indenture carve-outs, and where to read each statute.
Frequently asked questions
What is the difference between bond proceeds and gross proceeds?
Gross proceeds is the arbitrage-regulation term: under Treasury Regulation §1.148-1(b) it means all proceeds of an issue, meaning sale, investment and transferred proceeds, plus all replacement proceeds. Bond proceeds is the looser working term for what an issuer receives at closing and invests afterward.
Do state laws limit bond-proceeds investments too?
Yes. GFOA's best practice says a bond-proceeds investment policy should ensure legal and regulatory requirements are met and that fair market value bids are received when required by tax law and state or local laws. The state pages on this site take up individual states' statutes.
Who pays a Bidding Agent's fee?
mGIC's fee is paid by the winning provider rather than the issuer, is set at or below the safe-harbor maximum in the Treasury arbitrage regulations, and is disclosed. Under the fair-market-value safe harbor, the provider of the investments, or the GIC obligor, must certify the administrative costs it pays or expects to pay to third parties.
What happens if a GIC solicitation draws fewer than three bids?
The safe harbor condition of at least three bids from providers without a material financial interest is not met, so the purchase-price presumption does not apply. The regulation does not prescribe what happens when fewer than three bids are received, and losing the presumption does not by itself establish that the price was not fair market value.
Can bond proceeds go into a money market fund or a state investment pool?
The bond contract's permitted-investments provisions and the arbitrage rules govern that question for a particular issue, and bond counsel makes the call. For arbitrage purposes, 26 CFR 1.148-1(b) says an open-end regulated investment company, such as a mutual fund, is not a commingled fund, while a commingled fund otherwise means a fund holding gross proceeds plus more than $25,000 of other amounts invested collectively.
Sources
- SIFMA, US Municipal Bonds Statistics
- GFOA, Investment and Management of Bond Proceeds
- GFOA, Post-Issuance Policies and Procedures
- GFOA, Refunding Municipal Bonds
- eCFR, 31 CFR 344.1 (SLGS eligible source of funds)
- TreasuryDirect, About SLGS
- SEC Press Release 2010-239 (Banc of America Securities)
- SEC Litigation Release No. 22183 (Wachovia)
- SEC Press Release 2011-276 (GE Funding CMS)
- eCFR, 26 CFR 1.148-1 (Arbitrage definitions)
- MSRB Glossary of Municipal Securities Terms, 3rd ed. (2013)
- 15 U.S. Code § 78o-4 (Exchange Act §15B, municipal advisors)
- eCFR, 17 CFR 240.15Ba1-1 (SEC Municipal Advisor Rule)
- 26 U.S. Code § 103
- IRS Publication 5271, Complying with Arbitrage Requirements
- eCFR, 26 CFR 1.148-5 (Yield and valuation of investments)
- 26 U.S. Code § 141
- 26 U.S. Code § 148 (temporary periods, §148(c))
- eCFR, 26 CFR 1.148-7 (Spending exceptions to the rebate requirement)
- Texas Government Code §§ 2256.005-2256.006 (PFIA)
This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.
