What Investments Are Permitted for Bond Proceeds? Indenture, State Law and Policy

A permitted investment for bond proceeds is an instrument that the bond contract, the state's statute and the issuer's investment policy allow, and the binding definition can come from any one of the three.

The MSRB glossary defines permitted investments as "the instruments in which bond proceeds or other funds may be invested pursuant to the provisions of the bond contract," which is why the bond documents are the first place to look.

How that definition shapes the choice among reinvestment products is a separate question that this page sets up but does not answer.

Where are permitted investments defined?

Permitted investments are defined in up to three places, the bond documents, state statute and the issuer's investment policy, and any one of the three can be the binding limit for a given fund.

The MSRB glossary describes a bond indenture as a contract between the issuer and a trustee for the bondholders' benefit, one that sets out the parties' rights, duties and remedies and the exact nature of the security for the bonds.

Many governmental issues, general obligation bonds in particular, may not use an indenture at all, as the same glossary notes.

Where there is no indenture, the GFOA best practice on the investment and management of bond proceeds says the investment policy should list the permitted investments for proceeds, which may be a subset of the investments allowed for operating funds.

GFOA's core recommendation is that a policy's bond-proceeds provisions ensure legal and regulatory requirements are met, fair market value bids are received when required by tax law and state or local laws, and issuer objectives are attained.

State law sits alongside those documents, and its treatment of bond proceeds varies from pointing back at the bond documents to shutting out everything but a statutory list, as the state-by-state section below shows.

What are the typical categories?

The categories the statutes quoted here name are government securities, bank deposits and certificates of deposit, money market funds, repurchase agreements, state investment pools and public-entity obligations, and Georgia and New Jersey set theirs out as closed lists.

Georgia's O.C.G.A. §36-82-7 ends its list with "and no others," and New Jersey's N.J.S.A. 40A:5-15.1(a) likewise allows only the security types it enumerates, and then only when a cash management plan approved under 40A:5-14 authorizes them.

None of the statutes behind this table names a guaranteed investment contract, which is one reason whether a GIC fits a given issue is a determination for bond counsel rather than a reading of the list alone.

What rating requirements apply?

Some statutes screen their lists through ratings tests and others through maturity or structure limits, so the rating requirement depends on the instrument and the state.

Georgia's §36-82-7(3) admits agency and instrumentality obligations only if they are rated in "at least one of the three highest rating categories" and have a national market.

Massachusetts sets its screen at the fund level: c.44 §55(5) allows only 2a-7 money market funds with a top rating.

New Jersey's stated conditions for agency obligations are maturity and rate rather than a rating: N.J.S.A. 40A:5-15.1(a)(3) requires maturity within 397 days and a fixed rate "not dependent on any index or other external factor."

For pools, GFOA recommends seeking the highest-rated local government investment pools where possible, after confirming the pool is an eligible investment and reading its offering statement, investment policy and audited financials.

GFOA's guidance also refers to an S&P weekly index of 7- and 30-day pool yields, but that reference dates from the guidance's October 2008 approval, so it reads as history rather than as a description of what is published today.

How do you read the definition before bidding?

The definition reads as a stack of questions: which document controls the fund, what the state statute adds, and what federal tax rules add on top of both.

California splits the controlling-document question by who holds the money.

Under Government Code §53601(m), money held by a trustee or fiscal agent and pledged to bonds, lease or installment-sale obligations or certificates of participation may be invested under the statute governing the issue or, where that statute is silent or to the extent consistent with it, under the ordinance, resolution, indenture or agreement providing for the issue.

Government Code §5922(d) works in the same direction: proceeds of bonds and money pledged to secure them "may be invested in securities or obligations described in the ordinance, resolution, indenture, agreement, or other instrument providing for the issuance of the bonds or the contract."

Where §53601 itself applies, it carries a default five-year maturity limit unless the legislative body has granted express authority, that authority must come no less than three months before the investment, and the current version of the section is scheduled to repeal itself on January 1, 2031.

Texas runs the other way.

Section 2256.0208(a) of the Government Code lets a local government's investment officer invest bond proceeds or pledged revenue only to the extent the Public Funds Investment Act permits, in accordance with the statute governing the debt and the investment policy for that issue, and this provision, unlike California's trustee carve-out, does not let the indenture override the statute.

The PFIA's own reach is set by §2256.024(a), which says the subchapter adds to authority in other law: it does not prohibit an investment other law specifically authorizes and does not authorize one other law specifically prohibits.

Florida takes a third route: §218.415(1) provides that the required investment policy does not apply to funds related to the issuance of debt where other existing policies or indentures are in effect for those funds.

Permission to buy an instrument is not the same as a determination of how federal tax law treats its yield.

Section 148(b)(1) of the Internal Revenue Code defines "higher yielding investments" as investment property producing a yield over the term of the issue materially higher than the yield on the issue, and investment property reaches any security, any obligation, any annuity contract and any investment-type property.

Whether an investment is permitted under the indenture or state law is therefore a separate question from how the federal arbitrage rules treat its yield, and the arbitrage guides cover that second question.

The permitted list also does not settle purchase price.

Where a certificate of deposit is a permitted investment, Treasury Regulation §1.148-5(d)(6)(ii) treats the purchase price of a fixed-rate CD with a fixed payment schedule and a substantial early-withdrawal penalty as fair market value if its yield is not less than the yield on reasonably comparable direct obligations of the United States and not less than the provider's highest published yield on comparable public CDs, the certificate-of-deposit branch of Treasury's fair market value safe harbor.

Pools need their own documents read as well.

GFOA recommends confirming a pool is an eligible investment, reading its offering statement, investment policy and audited financials, and checking whether it seeks a constant or fluctuating net asset value, and it notes that deposits or withdrawals may require advance notification, especially if they are large.

Oregon's LGIP information statement shows why those documents matter: it states that Treasury makes no representation that 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, and it notes that bond covenants may preclude the pool as a permitted investment.

That caution is Oregon's own statement about Oregon's pool, not a description of pools generally.

If the mapping between an issue's permitted list, its draw schedule and its bid timeline needs a second read, mGIC offers a no-obligation reinvestment review.

How do the rules differ state by state?

The structural difference is who decides: some states point parts of the question at the bond documents, while Georgia and New Jersey keep it inside a closed statutory list.

Five of these rows deserve their caveats spelled out.

New Jersey's section has no bond-proceeds carve-out and does not mention investment agreements or GICs; its repo paragraph requires maturity of 30 days or less, collateral moved to a third-party custodian, securities bought through a public depository and a signed master repurchase agreement, a paragraph that a long-dated full-flex repo for a construction fund does not fit as written.

New Jersey purchases must also settle delivery-versus-payment, and except when buying directly from the issuer, a qualifying fund, a pool or the state Cash Management Fund, they must run through an in-state bank, a broker-dealer registered for at least two years with at least $25 million in capital, or a primary dealer.

Pennsylvania's §8224(b) names neither GICs nor repos; it points bond funds at the securities the Commonwealth itself may invest in and adds that stricter requirements in the contract with the bondholders control.

California's provisions are easy to overstate: §53601 does not list GICs by name, §5922 does not use the phrase "guaranteed investment contract," and the trustee carve-out in §53601(m) covers money held by a trustee or fiscal agent, not every dollar of proceeds the agency's own treasurer holds.

Massachusetts' list expressly reaches proceeds, but its Treasury and agency line runs only to maturities of one year or less from purchase and GICs are not on the list.

New York's §165.00 points investment of proceeds at General Municipal Law §11 rather than at the indenture, and GML §11 requires obligations bought with bond or note proceeds to be payable or redeemable at the owner's option within two years of purchase.

Because the controlling layer moves this much from state to state, the permitted investments by state pages carry the statute-by-statute detail for each state.

When a permitted list does allow a competitively bid investment, the bid itself is the next exercise, and issuers that want an independent Bidding Agent on that step can have mGIC bid it.

Which instruments a particular issue may hold, and whether a product fits within them, are determinations for the issuer's 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.