Should Bond Proceeds Go Into a Local Government Investment Pool?

Whether bond proceeds should go into a local government investment pool is a question of authorization and fit, not habit.

A pool takes a deposit and credits each participant its share; the trade is the pool's withdrawal terms, the pool's yield, and whatever part of the arbitrage recordkeeping the pool does not provide.

This page takes the four questions in order, within the wider set of reinvestment products for bond proceeds.

What is a local government investment pool?

In the MSRB glossary's definition, an LGIP is an investment pool established by a state or local governmental entity or instrumentality as a vehicle for investing public funds of participating governmental units, whose participants buy shares or units, often in a trust.

GFOA's best practice separates state-sponsored pools from joint powers pools, and constant-NAV pools seeking a $1.00 share price from variable-NAV pools.

The same practice notes that pools are not registered with the SEC, that investments in them are not insured or guaranteed, and that "substantial losses have occurred in the past."

Oversight varies: TexPool, organized in 1989, is overseen by the Texas Comptroller of Public Accounts, with Federated Hermes managing the assets under a contract with the Comptroller, while Georgia's pool is administered by its state treasurer under State Depository Board policy (O.C.G.A. §36-83-8).

Reporting and rating status differ pool by pool:

The amortized-cost option traces to GASB Statement No. 79, issued December 23, 2015, which lets qualifying external investment pools measure investments at amortized cost and lets pool participants report on that basis; it is an accounting status, not securities registration.

What makes rebate tracking harder in a pooled fund?

The difficulty starts with definitions: 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.

Where a given pool sits in that definition is a determination for tax counsel; the mechanics live in the arbitrage rebate rules.

One payoff is computational: Treas. Reg. §1.148-5(e)(2)(ii) counts all reasonable administrative costs, including indirect costs, as qualified administrative costs for publicly offered regulated investment companies and widely held external commingled funds.

"Widely held" requires, among other tests, more than 15 unrelated investors on average, at least 16 of whom hold at least the lesser of $500,000 or 1% of the fund, and whether an LGIP meets it is fact-specific.

What the pool itself does for bond proceeds varies as much as the accounting does:

• TexSTAR lists "Bond Proceeds Management" and "Arbitrage Rebate Services" among specialized services offered through HilltopSecurities and JP Morgan, and its page does not describe their terms, cost or scope.
• PSDLAF markets a "Bond Proceeds Investment" program with third-party arbitrage rebate monitoring at no cost, without describing the scope or provider.
• Texas CLASS keeps it outside the trust: bond-proceeds investment services are a separate offering of the administrator's affiliate, PMA Securities, LLC.
• TexPool's FAQ lists bond proceeds among the asset types invested, next to operating cash and state aid; the reviewed documents describe no arbitrage reporting service, and a list of asset types says nothing about rebate treatment.
• LAIF opens dedicated bond proceeds accounts on a one-time deposit with no cap and a monthly drawdown schedule, and its Information Digest says nothing about arbitrage yield restriction or rebate.
• STAR Ohio allows multiple accounts for the segregation of specific funds, though its booklet does not describe them as bond-proceeds accounts.

GFOA's diligence list follows: confirm the pool is an eligible investment, read its offering statement, investment policy and audited financials, check whether it seeks a constant or fluctuating NAV, and expect that large deposits or withdrawals may require advance notification.

GFOA also recommends seeking the highest-rated pools where possible and lists "arbitrage accounting for bond funds" among possible pool services.

Oregon puts the burden in writing: its LGIP Information Statement says Treasury and its agents "make no representations as to whether the pool complies with Section 148 of the Internal Revenue Code," that the pool "may not be appropriate for the investment of bond proceeds," and that participants should discuss arbitrage rebate and yield restriction with bond counsel first.

The same statement warns that bond covenants may preclude the pool, its own question on the permitted investments page.

How does an LGIP's yield compare with a competitively bid agreement?

A pool's rate is a portfolio figure the pool reports; a competitively bid agreement produces a rate struck for one fund on terms matched to its draw schedule.

STAR Ohio quotes current yields net of expenses online, and Washington's statute directs the treasurer to invest its pool "to effectively maximize the yield to the investment pool" (RCW 43.250.040).

A pool is not a money market fund: GFOA's best practice notes that pools are not registered with the SEC, and 17 CFR 270.2a-7(d)(4)(ii)-(iii) bars a money market fund from buying a non-daily-liquid asset if that would leave less than 25% of assets in daily liquid form, or a non-weekly-liquid asset if that would leave less than 50% in weekly liquid form, with the daily minimum inapplicable to tax-exempt funds.

The same rule caps a money market fund's instrument maturities at 397 calendar days; a pool's rules come from its own authorizing documents, as when LAIF states it is not a 2a7-like pool and New Jersey's P.L.2017, c.310 defines an eligible pool as one run under GASB principles, rated in the highest category, with no liquidity fees or redemption gates (the money market fund page covers the fund side).

A guaranteed investment contract or a full-flex repurchase agreement is bid for the fund itself, and for a guaranteed investment contract the fair-market-value safe harbor prescribes how the solicitation must run for its purchase price to be treated as fair market value; whether a particular repo falls within the GIC definition in Treas. Reg. §1.148-1(b) is a determination for bond counsel.

When does an LGIP make sense for bond proceeds?

A pool is the workable choice where the state authorizes it for the issuer's funds, the bond documents admit it, the pool's withdrawal and notice terms match the draw schedule, and the issuer can produce the arbitrage records the pool's documents do not cover.

Authorization is the gate, and it reads differently in each state (the state-by-state pages carry the full lists):

Three conditions sit on top of the statute:

• The pool must be a permitted investment under the bond documents: Georgia's pool statute accepts funds "not required by law or by any covenant or agreement with bondholders or others to be segregated and invested in a different manner" (O.C.G.A. §36-83-8(d)(1)), and Oregon's statement warns that covenants may preclude its pool.
• The pool's withdrawal and notice terms have to line up with the draw schedule: GFOA warns that large deposits or withdrawals may require advance notification, and Washington's treasurer sets investment periods and withdrawals by rule.
• The accounting side needs an owner: whether a participant reports at amortized cost or fair value follows the pool's GASB status, and the rebate records remain the issuer's unless the pool's documents provide otherwise.

Issuers already holding proceeds in a pool can test it against the fund's objectives in a review of the existing investment.

Where a construction fund or a reserve fund is large enough to carry its own investment, the alternative is a competitively bid agreement, and an issuer can have mGIC bid it through a free, no-obligation reinvestment review.

Which investments an issue may use, and how the arbitrage rules treat them, are determinations for bond counsel and tax counsel.

Last updated 2026-10-06.

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.