THE SHORT ANSWER
A rebate fund is the fund a bond issue uses to hold arbitrage rebate amounts until they are paid to the U.S. Treasury. Its size follows the rebate calculation, installments of at least 90 percent come due on computation dates set at least every five years, and the final 100 percent is due within 60 days after the final computation date, so investing the fund is a liquidity exercise against dates the rules fix.
A rebate fund is the fund a bond issue uses to hold arbitrage rebate amounts until they are paid to the U.S. Treasury, so investing it is a liquidity exercise: the amount and the payment dates both come from the rebate rules.
The funds overview maps it alongside the construction, debt service and debt service reserve funds.
Why indentures create a rebate fund
An indenture creates a rebate fund because the arbitrage rebate requirement of section 148(f) leaves the issuer owing the Treasury a measured, dated amount separate from the project and its debt service.
The amount is the excess of the future value of all receipts on nonpurpose investments over the future value of all payments on them, compounded at the bond yield (26 U.S.C. 148(f)(2); Treas. Reg. §1.148-3(b)-(c)).
Producing that number is the work of the rebate calculation guide; the fund holds cash against the dates the rules fix.
IRS Publication 5271 (which states it is not formal guidance) explains why a diligent issuer can still owe it: bonds are tested under both the yield restriction rules of 148(a) and the rebate rules of 148(f), and failing either set makes them arbitrage bonds.
"The yield restriction rules may allow the issuer to earn the arbitrage, but the rebate rules may not allow the issuer to keep the arbitrage." (IRS Publication 5271)
Setting cash apart for those earnings is the function the fund performs.
How much to set aside and when
The set-aside follows the rebate calendar: installments of at least 90 percent of the running rebate amount at computation dates no more than 5 years apart, then a final payment that brings cumulative payments to 100 percent (148(f)(3); Treas. Reg. §1.148-3(f)(1), (f)(2), (g)).
How often the calendar turns is a choice: a fixed-yield issue may treat any date as a computation date, while a variable-yield issue must, after the first required payment date, consistently use either the end of each bond year or the end of each fifth bond year (Treas. Reg. §1.148-3(e)(1)).
The computation also builds in a credit: on the last day of each bond year with rebate-subject gross proceeds and on the final maturity date, the issuer takes a computation credit treated as a payment, $1,400 for bond years ending in 2007 and indexed for years ending after 2007 (Treas. Reg. §1.148-3(d)(1)(iv), (d)(4)).
The indexed amount for a current bond year is not a figure this page states: the regulation fixes only the 2007 amount and the indexing method.
Exceptions shrink the amount: the 6-month exception treats an issue as meeting the rebate requirement when its gross proceeds, as specially defined, are spent on the governmental purpose within 6 months of the issue date (148(f)(4)(B); Treas. Reg. §1.148-7(c)), the 18-month exception sets spending tests at 6-month intervals for an issue whose gross proceeds all qualify for the 3-year capital-project temporary period (Treas. Reg. §1.148-7(d)(1)), each of those two leaving rebate due on amounts not required to be spent, and the 2-year construction exception treats a construction issue's available construction proceeds as meeting the rebate requirement if they are spent on its 6-month-interval schedule (148(f)(4)(C)(ii); Treas. Reg. §1.148-7(e)(1)).
The spending exceptions guide compares those schedules and the 2-year construction exception carries the construction detail.
A construction issue has a further option: the issuer may elect on or before the issue date, irrevocably, to pay a penalty in place of rebate on available construction proceeds, at 1.5 percent of the underexpended amount for each 6-month period that misses the 2-year schedule (148(f)(4)(C)(vii); Treas. Reg. §1.148-7(k)).
| Payment | What the fund covers | Deadline | Rule |
|---|---|---|---|
| Installment | Cumulative payments of at least 90 percent of the rebate amount, measured at future value | First computation date no later than 5 years after the issue date, each later one no later than 5 years after the previous | 148(f)(3); §1.148-3(f)(1) |
| Final payment | Enough to bring cumulative payments to 100 percent of the rebate amount | No later than 60 days after the final computation date | §1.148-3(f)(2), (g) |
| Penalty in lieu of rebate, if elected | 1.5 percent of underexpended available construction proceeds, per 6-month period that misses the schedule | Within 90 days after the period, on Form 8038-T | 148(f)(4)(C)(vii); §1.148-7(k) |
| Refund claim, if overpaid | Amounts paid above the final rebate amount | No later than 2 years after the final computation date | §1.148-3(i) |
Investing amounts owed to the Treasury
Investing money owed to the Treasury means having the full amount available on dates the rules fix, which puts liquidity ahead of term.
Treasury's State and Local Government Series (SLGS) securities are non-marketable obligations offered so issuers of tax-advantaged bonds have investments that help them comply with the Internal Revenue Code (31 CFR 344.0(a)).
They may be bought only with an eligible source of funds, which 31 CFR 344.1 defines mainly as gross proceeds of tax-advantaged bonds, amounts held alongside them in refunding or defeasance escrows, parity reserve funds or commingled funds, and other yield-restricted amounts; whether a particular fund's balances qualify is a question for bond counsel.
They come in two types, Time Deposits and Demand Deposits (31 CFR 344.0(b)); Time Deposit certificates of indebtedness run from 15 days (non-interest-bearing) or 30 days (interest-bearing) to one year, notes to 10 years, bonds to 40 years (31 CFR 344.4(a)); the SLGS guide covers subscriptions, lead times and the daily rate table.
mGIC evaluates bond-proceeds investments safety first, then liquidity, then yield, and a fund scheduled to pay the Treasury draws on the first two; the safety, liquidity and yield guide explains the ordering.
When a date arrives, the payment is made on Form 8038-T, one form per issue, with the check payable to United States Treasury; the same form carries yield reduction payments, the penalty in lieu of rebate and late-payment penalties and interest (Instructions for Form 8038-T).
What happens if the fund is short or holds more than the final amount?
A late or short payment makes the bonds arbitrage bonds unless the failure was not due to willful neglect and the issuer promptly pays a penalty plus interest (26 U.S.C. 148(f)(7); Treas. Reg. §1.148-3(h)), and an overpayment is reclaimed on Form 8038-R (Treas. Reg. §1.148-3(i)); the arbitrage rebate guide sets out both rules in full.
GFOA recommends formal written post-issuance compliance policies that list the key documents at closing, and notes that governments may outsource tasks such as arbitrage rebate but keep ultimate responsibility for seeing the procedures are met; the post-issuance compliance guide collects the closeout tasks.
mGIC is an independent, SEC-registered municipal advisor and Bidding Agent that helps issuers structure, competitively bid and close investments of bond proceeds; it sells no investment product, does not act as principal, and is paid by the winning provider rather than the issuer.
For an independent look at whether a fund's investments line up with the dates and amounts the rebate rules set, mGIC offers a free reinvestment review, and the conversation starts on the contact page.
Which exceptions, computation dates and investments apply to a given issue are determinations for bond counsel and tax counsel.
Frequently asked questions
Does an issue that meets a spending exception still keep a rebate fund?
It may hold less. An issue that meets the 6-month exception, or the 18-month exception (which also requires all gross proceeds to qualify for the 3-year capital-project temporary period), owes rebate on amounts not required to be spent, and a construction issue that meets the 2-year schedule is treated as meeting the rebate requirement for its available construction proceeds. Whether an exception applies is a determination for bond counsel.
What does the 1.5 percent election change about the fund?
It replaces rebate on available construction proceeds with a penalty of 1.5 percent of the underexpended amount for each 6-month spending period that misses the 2-year schedule, due within 90 days after each period. The election is made on or before the issue date and is irrevocable.
How often can computation dates be set?
A fixed-yield issue may treat any date as a computation date. After the first required payment date, a variable-yield issue must consistently use either the end of each bond year or the end of each fifth bond year (Treas. Reg. §1.148-3(e)(1)).
Are the 2026 proposed regulations changing rebate refunds?
Treasury and the IRS proposed regulations on March 12, 2026 that would clarify the time and manner for requesting refunds of rebate overpayments. As proposed, most provisions would apply to bonds sold on or after 90 days after final regulations are published, and the current regulation, §1.148-3(i), sets the two-year claim deadline.
Sources
- 26 CFR 1.148-3, General arbitrage rebate rules
- 26 CFR 1.148-7, Spending exceptions to the rebate requirement
- 26 U.S. Code § 148, Arbitrage bonds
- IRS Publication 5271, Complying with Arbitrage Requirements
- Instructions for Form 8038-T
- Federal Register public inspection, Doc. 2026-04798
- GFOA, Post-Issuance Policies and Procedures
- 31 CFR Part 344, State and Local Government Series Securities
- 26 CFR 1.150-1, Definitions
- 31 CFR 344.4, Time Deposit securities
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.
