THE SHORT ANSWER
An investment agreement is a negotiated contract with a provider, built around specifically negotiated withdrawal provisions and a specifically negotiated rate; a securities portfolio is a set of securities the issuer owns, matched to the same spending schedule. Federal tax rules reach both, and the choice turns on the fund's draw pattern, permitted investments, credit structure, custody and the procurement steps each route carries.
Should bond proceeds be held in an investment agreement or in securities the issuer owns?
The two routes differ in what the issuer holds: a negotiated contract with a provider on one side, and securities the issuer owns on the other, and the comparison turns on the fund's spending pattern, permitted investments, credit structure, custody and the procurement work each route carries.
mGIC evaluates and competitively bids both routes and sells neither, working in the safety, liquidity, yield order: safety first, then liquidity, then yield.
Which structure fits which fund?
The short answer runs by fund type, because each fund's spending pattern sets what each structure has to deliver.
In a construction or project fund, spending follows the draw schedule, and GFOA recommends an investment duration no longer than the expected drawdown schedule, so the comparison is between a contract that schedules withdrawals to the draws and a portfolio that places maturities on the same dates.
In a debt service fund, which Treasury Regulation §1.148-1(b) treats as bona fide when it is used mainly to match revenues with principal and interest within each bond year and is depleted at least once each bond year, apart from a carryover of up to the greater of the prior bond year's earnings on the fund or one-twelfth of the prior bond year's principal and interest, either structure has to have cash available when those payments come due.
In a debt service reserve fund, which the MSRB glossary describes as one used to pay debt service if pledged revenues fall short, the term and the permitted-investment list decide.
A refunding escrow has its own narrower version of the question, run between SLGS and open-market securities in the SLGS versus open-market guide.
| Fund | What the agreement-versus-securities comparison turns on |
|---|---|
| Construction or project fund | Draw timing: withdrawals written into a contract, or maturities placed on the same dates |
| Debt service fund | Cash matched to principal and interest within each bond year, in a fund depleted at least once each bond year apart from the permitted carryover (bona fide fund definition) |
| Debt service reserve fund | Term and the permitted-investment list, since the fund pays debt service only if pledged revenues fall short |
| Refunding escrow | SLGS versus open-market securities, a narrower version of the same question |
The product-level versions of the question are separate guides: GIC versus Treasury ladder, full-flex repo versus Treasury portfolio and GIC versus full-flex repo.
How does each structure work?
An investment agreement is a negotiated contract with a provider, and a securities portfolio is a set of securities the issuer buys and holds.
On the agreement side, the Exchange Act defines a guaranteed investment contract broadly, as any investment that has specified withdrawal or reinvestment provisions and a specifically negotiated or bid interest rate, including any agreement to supply investments on two or more future dates (Section 15B(e)(2)).
The SEC rule adds the proviso that the contract relate to investments of proceeds of municipal securities or municipal escrow investments (17 CFR 240.15Ba1-1(a)).
The MSRB glossary gives the general definition: an investment, secured by a contract with a financial institution, that guarantees a fixed rate of return and a fixed maturity.
Bond-proceeds contracts often carry flexible draw schedules rather than one fixed maturity, and the tax definition reflects that: Treasury Regulation §1.148-1(b) includes in the term any nonpurpose investment with specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate, and also any agreement to supply investments on two or more future dates, such as a forward supply contract.
The SEC has described the family as financial instruments tailored to meet municipalities' specific collateral and spend-down needs, such as guaranteed investment contracts, repurchase agreements and forward purchase agreements (SEC Litigation Release No. 22183).
Where a repurchase agreement fits these definitions is its own question, and the contract-based products are described one by one from the Investment Agreement hub.
On the securities side, the issuer owns marketable U.S. Treasury securities matched to anticipated cash needs, with a money-market allocation alongside for faster-than-expected spend-down, which is the structure mGIC evaluates and bids as a Securities Portfolio.
Treasury also offers non-marketable State and Local Government Series (SLGS) securities to provide issuers of tax-advantaged bonds with investments that help them comply with the Internal Revenue Code (31 CFR 344.0(a)), under an offering that continues until the Secretary terminates it (31 CFR 344.0(d)).
Safety: credit, collateral, custody
The two routes put proceeds behind different kinds of claims, so the safety questions split into the provider's credit, collateral and custody.
In an agreement, the issuer holds the provider's contractual promise, so the provider's credit stands behind the contract for as long as it runs.
What credit support an agreement carries is set by its own terms, and the GIC credit protection guide covers how downgrade provisions and similar terms work.
A repurchase agreement is different in form: it is a sale of securities combined with an agreement to repurchase them on a specified future date at a prearranged price, which New York Fed researchers describe as economically resembling a collateralized loan, with the excess of collateral value over the cash called the haircut.
Collateral and margin mechanics in a bond-proceeds repo are covered in the repo collateral guide.
GFOA's 1986 statement on repurchase agreements says delivery or safekeeping of the underlying securities with the purchaser's custodian significantly reduces risk, and it recommends over-collateralization or marking-to-market as mandatory procedures.
In an owned portfolio, custody takes the place of collateral as the standing question: the issuer owns the securities, and the trustee under the bond contract, described in the MSRB glossary as a financial institution with trust powers that acts as fiduciary for bondholders, often also serves as custodian.
How any state treats collateral and custody for the two routes is its own rule set, collected on the state rules page, and what a particular issue needs is a bond counsel question.
Liquidity: withdrawal flexibility
Liquidity is written into the contract on one route and taken from the market on the other.
An agreement's flexibility is whatever its negotiated withdrawal and reinvestment provisions allow, which is what lets a contract follow a draw schedule instead of a single maturity date (Treasury Regulation §1.148-1(b)).
The glossary's general definition describes a fixed maturity, while bond-proceeds contracts often carry flexible draw schedules rather than one fixed maturity.
The mechanics of contract withdrawals are covered in the GIC withdrawals guide.
A portfolio pays when its securities pay: securities held to maturity pay on their stated dates, and an early draw is met by selling a security at fair market value, which the Treasury regulations define as the price a willing buyer would pay a willing seller in a bona fide arm's-length transaction (26 CFR 1.148-5(d)(6)(i)).
In the portfolio structure mGIC bids, a money-market allocation sits alongside the Treasuries for faster-than-expected spend-down.
Yield: typical spread and why
This page quotes no typical spread, because an agreement and a portfolio are priced differently, and the gap between them is set deal by deal on the day each is priced.
An agreement's rate is a specifically negotiated interest rate (Treasury Regulation §1.148-1(b)), arrived at through the bid, and the SEC has said the most common way to establish fair market value for these products is competitive bidding run by bidding agents (SEC Litigation Release No. 22183).
A portfolio's return is assembled from the market prices of the securities bought and what maturing pieces earn when their payments are reinvested before the proceeds are spent.
The reason the two can price differently is structural: an agreement bundles one provider's credit and its promise to pay a negotiated rate across a schedule, while a portfolio's earnings come from whatever the owned securities pay in the market.
Both routes can produce what the Internal Revenue Code calls higher yielding investments, meaning investment property that produces a yield over the term of the issue materially higher than the yield on the issue (section 148(b)(1)), so the arbitrage rules reach either structure in the same way.
When proceeds are yield restricted, which Treasury Regulation §1.148-1(b) defines as required to be invested at a yield not materially higher than the issue yield, the same ceiling applies to either route, and the yield restriction guide covers when that applies.
What proceeds earn below the bond yield is the mirror-image problem, covered in the negative arbitrage guide.
This page quotes no rates because the MSRB's advertising rule for municipal advisors bars advertisements from predicting or projecting performance or making exaggerated or unwarranted forecasts, while allowing hypothetical illustrations of mathematical principles.
Where the rates stand now is a daily question: mGIC's rate updates carry Treasury yields, SOFR and SLGS links each business day.
Compliance and procurement differences
Federal tax law reaches both routes, and the bidding rules apply a different winning-bid test to each.
Investment property includes any security, any obligation, any annuity contract and any investment-type property (section 148(b)(2)), so an owned portfolio and a negotiated agreement sit in the same framework.
Investment-type property, defined in Treasury Regulation §1.148-1(e), generally includes property held principally as a passive vehicle for the production of income, and that production of income includes any benefit based on the time value of money.
Whether an investment is permitted for a particular fund under the indenture or state law is a separate question from federal tax law, and it belongs to bond counsel; the permitted investments guide collects how that list is set.
The bidding rules price the two routes differently: for a GIC, the winning bid must be the highest-yielding bona fide bid determined net of any broker's fees, while for other investments, such as escrow securities, it must be the lowest-cost bona fide bid including broker's fees and no more than the cost of the most efficient all-SLGS portfolio when bids are due, a comparison the rule does not require if SLGS sales are suspended that day (26 CFR 1.148-5(d)(6)(iii)(C)).
The conditions a negotiated purchase must meet for the fair-market-value safe harbor are on the fair-market-value safe harbor page.
Owned securities can be bought through a solicitation under the same winning-bid rule, as escrow securities can be, or by subscription to the SLGS offering, which continues until the Secretary terminates it (31 CFR 344.0(a), 344.0(d)).
The advisory duty runs across both routes: the MSRB's standards of conduct for municipal advisors require an advisor that recommends a transaction or product to have a reasonable basis to believe it is suitable for the client, to give the client its evaluation of the material risks and benefits and the basis for suitability, and to say whether it considered other reasonably feasible alternatives.
An issuer asking this page's question is asking what that paragraph describes, because the choice between agreements and owned securities is exactly the kind of alternatives comparison the rule addresses.
Decision table
The table collects the differences between the two routes for a given fund.
| Investment agreement | Owned securities portfolio | |
|---|---|---|
| What the issuer holds | An investment secured by a contract with a financial institution that guarantees a fixed rate of return and, in the general definition, a fixed maturity (MSRB glossary) | Securities the issuer owns, from marketable Treasuries to non-marketable SLGS |
| How the rate is set | A specifically negotiated interest rate, awarded through bidding (Treasury Regulation §1.148-1(b)) | Market prices on the purchase dates, plus what reinvested payments earn |
| Where flexibility comes from | Specifically negotiated withdrawal or reinvestment provisions written to the draw schedule | Stated payment dates, sales at market prices, and a money-market allocation for faster spend-down |
| Credit and collateral | The provider's promise, with terms set contract by contract; a repo economically resembles a collateralized loan with a haircut | No provider promise to monitor; SLGS are non-marketable Treasury securities offered to issuers of tax-advantaged bonds |
| Custody | Contract terms and state law | The trustee under the bond contract often also serves as custodian (MSRB glossary) |
| Procurement | Competitive bidding under the fair-market-value rules; the winning GIC bid is the highest yield net of broker's fees (26 CFR 1.148-5(d)(6)(iii)(C)) | Competitive bidding for securities such as escrow securities, where the winning bid is the lowest-cost bona fide bid not above the all-SLGS cost (a comparison not required if SLGS sales are suspended that day), or an SLGS subscription |
| Federal tax frame | A nonpurpose investment, with the investment-type property definitions applying (Treasury Regulation §1.148-1(e)) | Any security falls within investment property (section 148(b)(2)) |
Neither route is the automatic fit; the draw schedule, the permitted-investment list, the credit and collateral terms available, and the compliance work each route carries decide the comparison fund by fund.
mGIC evaluates and competitively bids guaranteed investment contracts, full-flex repurchase agreements and structured Treasury portfolios, sells none of them, and as an independent Bidding Agent it can compare bids on your proceeds across both routes in a free, no-obligation reinvestment review.
Final determinations about which structure an issue may use, and how each route is treated under the arbitrage rules, belong to bond counsel and tax counsel.
Frequently asked questions
Is an investment agreement the same thing as a GIC?
Not exactly. The securities-law definition of a guaranteed investment contract covers any investment with specified withdrawal or reinvestment provisions and a specifically negotiated or bid rate, and the SEC rule limits it to contracts that relate to investments of proceeds of municipal securities or municipal escrow investments. Both definitions also cover agreements to supply investments on two or more future dates, such as forward supply contracts, and the tax definition speaks of nonpurpose investments with specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate.
Does the bidding safe harbor price agreements and securities the same way?
No. Under 26 CFR 1.148-5(d)(6)(iii)(C), a GIC's winning bid must be the highest-yielding bona fide bid determined net of any broker's fees, while for other investments, such as escrow securities, it must be the lowest-cost bona fide bid including broker's fees and no more than the cost of the most efficient all-SLGS portfolio when bids are due, a comparison not required if SLGS sales are suspended that day.
Are owned securities investment property under the arbitrage rules?
Yes. Section 148(b)(2) includes in investment property any security, any obligation, any annuity contract and any investment-type property, so an owned portfolio and a negotiated agreement sit inside the same arbitrage framework. Whether an investment is permitted for a fund under the indenture or state law is a separate question.
Who decides whether a fund may use an agreement or owned securities?
The bond documents and state law set the permitted-investment list, and bond counsel makes the determination for the issue. Federal tax rules reach both routes, and an advisor recommending one structure owes the client a reasonable-basis suitability analysis under the MSRB conduct rule, including whether it considered other reasonably feasible alternatives.
Can a fund hold an agreement and owned securities at the same time?
mGIC evaluates and bids guaranteed investment contracts, full-flex repurchase agreements and structured Treasury portfolios, so both routes sit in the products it handles, and its portfolio structure pairs Treasuries with a money-market allocation for faster-than-expected spend-down. Which combinations a fund's documents allow is a bond counsel determination.
Sources
- eCFR 26 CFR 1.148-1, Definitions (GIC, yield restricted, investment-type property)
- eCFR 26 CFR 1.148-5, Yield and valuation of investments (winning-bid rules)
- 15 U.S. Code § 78o–4 (Exchange Act Section 15B)
- 26 U.S. Code § 148 (investment property and higher yielding investments)
- MSRB Rule G-42, Standards of Conduct for Municipal Advisors
- MSRB Rule G-40, Advertisements by Municipal Advisors
- eCFR, 31 CFR Part 344 (State and Local Government Series securities)
- MSRB Glossary (2013), Guaranteed Investment Contract (GIC); Trustee
- SEC Litigation Release No. 22183, SEC v. Wachovia Bank, N.A. (Dec. 8, 2011)
- Copeland, Duffie, Martin & McLaughlin, "Key Mechanics of the U.S. Tri-Party Repo Market," FRBNY Economic Policy Review (2012)
- GFOA, "Repurchase Agreements" (June 1986)
- GFOA, "Investment and Management of Bond Proceeds" (approved Mar. 4, 2022)
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.
