Investing Bond Proceeds in Alabama: Permitted Investments and Rules

Alabama counties and municipalities may invest funds not presently needed for use in the sinking-fund obligations allowed by Code of Alabama 11-81-19, plus the list in Code of Alabama 11-81-21: U.S. Treasury obligations, full-faith-and-credit agencies, deposits at qualified public depositories, conditioned pre-refunded municipal obligations, certain pooled funds, commercial paper carrying a top rating and bankers' acceptances.

Alabama is one page in the permitted investments by state set, which carries the cross-state patterns; this page works through the Alabama statute and the federal rules on top of it.

Which Alabama statute governs bond-proceeds investments?

The governing statute for idle funds of Alabama counties and municipalities is Code of Alabama 11-81-21, which permits funds not presently needed for use to be invested in the obligations allowed for sinking funds under 11-81-19 plus the investments 11-81-21 itself lists.

Section 11-81-21(b) defines the reach broadly, covering funds that "shall include all general, special, permanent, trust, and other funds, regardless of source or purpose, held or administered by any county, city, or town."

Sinking funds follow their own line in 11-81-19: a sinking fund goes into local, state, county or municipal bonds, or bonds of the United States, or interest-bearing bank deposits, and "the proceedings authorizing any funding or refunding bonds may prohibit the investment of the sinking fund for such bonds."

Reports showing how the sinking fund is invested are filed with the municipal clerk or the county probate judge, and 11-81-20 similarly limits funds received to the credit of a sinking fund.

Many Alabama issuers are public corporations or authorities holding investment authority in their own enabling acts, which this page does not cover, so whether 11-81-21 reaches a particular issuer is a determination for bond counsel.

What is on Alabama's permitted investment list?

Section 11-81-21(a) permits the instruments in the table below, and the section attaches a condition to several of them.

Underneath the list, the idle-funds rule reaches back to 11-81-19, so the bonds and interest-bearing deposits that section allows for sinking funds are also within reach of a covered fund.

For a specific bond issue, the operative list can be narrower or different, because 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."

That contract often sits in an indenture, which the MSRB glossary defines as a contract between the issuer and a trustee for the bondholders' benefit, setting out the parties' rights, duties and remedies and the exact nature of the security for the bonds; the glossary notes many governmental issues, especially general obligation bonds, may not use an indenture.

What are Alabama's rules for investment agreements, GICs and repos?

Section 11-81-21 does not name guaranteed investment contracts or investment agreements among the investments it lists, and repurchase agreements appear in the section only as holdings of a pooled vehicle.

Other statutes or an enabling act may grant separate authority, and whether an agreement is available for a particular issue is a determination for bond counsel.

Where a fund's documents admit one, the guaranteed investment contract guide covers how the structure works.

Within the pooled-vehicle line, 11-81-21(a)(5) lets a common trust fund, collective fund or registered investment company hold "repurchase agreements fully collateralized by obligations, securities, or investments otherwise authorized under this subdivision, so long as the common trust fund ... takes possession and delivery of the collateral."

Subdivision (a)(5)a. requires at least 65% of such a fund to sit in the items (1) through (4) list, which leaves 35% or less for FNMA and FHLMC and other agency obligations, mortgage-related securities, and the fully collateralized repurchase agreements.

Federal rules ride on top of the state list: IRS Publication 5005 notes that fees a conduit issuer charges can raise the effective yield on a conduit loan, a purpose investment, and section 148 of the Internal Revenue Code generally limits purpose-investment yield to the bond yield plus a permitted spread; the yield restriction guide covers yield limits on reinvested funds.

What rating and collateral requirements attach in Alabama?

The rating conditions in 11-81-21 attach to the instruments that carry them: pre-refunded municipal obligations must be escrowed, verified by a CPA and rated in the top category by both S&P and Moody's, and the commercial paper the section allows carries a top rating.

Inside the pooled-vehicle line, the collateral condition attaches to the fund's repurchase agreements, which must be fully collateralized by otherwise-authorized investments, with the fund taking possession and delivery of the collateral.

Custody has its own line: "Any obligation purchased pursuant to this section may be deposited for safekeeping with any bank, trust company, or savings association," and the section reaches institutions chartered in Alabama or the United States.

A bank that invests in a fund it is affiliated with must disclose its fee basis, under 11-81-21(a)(5)b. and (c).

Where a fund's documents admit an investment agreement, 11-81-21 sets no terms for it, and the GIC credit protection guide covers how downgrade and collateral terms are built.

Is there a state investment pool for Alabama issuers?

The sections this page covers name no Alabama state investment pool; the pooled vehicles 11-81-21 lists are certain bank collective funds and funds registered under the Investment Company Act of 1940, subject to the (a)(5) conditions.

A local government investment pool, as the MSRB glossary defines it, is a pool set up by a state or local governmental entity to invest the public funds of participating governmental units, with participants buying shares or units, often in a trust; the local government investment pool guide explains how pools work.

The state pool versus GIC comparison frames the pool-versus-bid tradeoff.

Whether Alabama pool authority exists outside the sections cited here, and whether a given fund may use it, is a determination for bond counsel.

What procurement rules apply to an Alabama bond-proceeds investment?

Section 11-81-21, as this page covers it, lists the permitted investments themselves, and the bidding conditions discussed here come from the federal tax regulations.

Under Treasury Regulation 1.148-5(d)(6)(iii), the purchase price of a GIC, or of an investment bought for a yield-restricted defeasance escrow, is treated as fair market value if all of the safe harbor's requirements are met, and one of them is a bona fide solicitation: written bid specifications sent to potential providers on a timely basis, all material terms included, meaning any term that may directly or indirectly affect the yield or the cost of the investment, and only commercially reasonable terms, with electronic specifications permitted.

For yield-restricted defeasance escrows, the same regulation adds a timing condition: the hold-firm period must be no longer than reasonably required.

That solicitation is one piece of the fair market value safe harbor, and the bid specifications guide takes the document apart.

Refunding escrows add three roles GFOA describes:

• An escrow agent, typically a commercial bank, holds the escrow investments.
• A verification agent, typically a CPA firm, confirms the escrow is sufficient and, where yield is limited, that the escrow yield does not exceed the permitted yield.
• An escrow bidding agent solicits bids for the escrow's securities, a role GFOA notes a municipal advisor may be able to fill.

Those roles sit inside the wider refunding escrow structure and the escrow work a Bidding Agent carries.

On the state side, 11-81-19 keeps a filing requirement in place: reports showing how the sinking fund is invested go to the municipal clerk or the county probate judge.

Which representative transactions has mGIC worked on in Alabama?

Birmingham Water Works is the Alabama name in mGIC's representative transaction list, which the firm publishes by name only, without deal terms, on its Birmingham Water Works transaction page.

Behind that list is a record of 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, with a reinvestment focus since 2002.

Its work spans reinvestment advisory, Bidding Agent services, and documentation and settlement across the guaranteed investment contracts, full-flex repurchase agreements and structured Treasury portfolios it evaluates and bids without selling.

It is an independent, SEC-registered municipal advisor with a duty of care to act in the issuer's best interest, it sells no proprietary investment product, and its fee is paid by the winning provider rather than the issuer, at or below the safe-harbor maximum in the Treasury arbitrage regulations, with the fee disclosed.

For a free, no-obligation look at how a fund's investments line up with 11-81-21, the bond documents and the arbitrage rules, mGIC offers Alabama reinvestment help.

Final determinations about what an Alabama fund may hold, and how the federal tax rules treat its yield, belong to 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.