Investing Bond Proceeds in Minnesota: Permitted Investments and Rules

Minnesota government entities invest public funds, bond proceeds included, in the securities Minnesota Statutes §118A.04 lists and the contracts and agreements §118A.05 lists, on the conditions those sections attach.

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, so the statute sets the outer frame and the issue's bond contract sets the list that governs the fund.

Minnesota is one jurisdiction among many, and the permitted investments by state overview maps how other states route the same question.

What statute governs bond-proceeds investments in Minnesota?

Minnesota Statutes 118A.01 to 118A.06 govern how Minnesota government entities invest public funds, with §118A.04 listing the authorized securities and §118A.05 listing the authorized contracts and agreements.

Under §118A.02, the governing body may authorize the treasurer or chief financial officer to designate depositories and make investments, and an official acting under §§118A.04 and 118A.05 is not personally liable for a loss sustained from a deposit or investment made under those sections.

The former debt service fund investment statute, Minn. Stat. 475.66, was repealed in 1996 (1996 c 399 art 1 s 11), so debt service funds invest under chapter 118A rather than under a statute of their own.

Where an issue uses an indenture, the MSRB glossary defines it as a contract between the issuer of municipal securities and a trustee for the benefit of the bondholders that sets out the parties' rights, duties and remedies and the exact nature of the security for the bonds.

The MSRB also notes that many governmental issues, especially general obligation bonds, may not use an indenture, so which document carries the permitted-investment provisions varies by issue.

What may Minnesota bond proceeds be invested in?

The securities side of §118A.04 and the agreements side of §118A.05 authorize the instruments in this table, with each instrument's statutory conditions attached.

Section 118A.04 subd. 6 defines the high-risk mortgage-backed securities the U.S. government list excludes, including interest-only and principal-only strips and derivatives that fail the section's stated 300-basis-point shock tests.

Section 118A.04 subd. 8 lets a debt service fund purchase or redeem obligations payable from the fund, so the fund can buy back the issue it secures.

Chapter 118A covers public funds, bond proceeds included, so each fund's holdings, from a construction fund to a reserve, get checked against these lists and the bond documents.

What rules apply to GICs and repurchase agreements on Minnesota bond proceeds?

Section 118A.05 subd. 5 expressly authorizes guaranteed investment contracts and subd. 2 authorizes repurchase agreements, each with its own conditions.

For a guaranteed investment contract, §118A.05 subd. 5 limits eligible issuers to U.S. commercial banks, domestic branches of foreign banks, U.S. insurance companies, their Canadian subsidiaries, or domestic affiliates of any of these.

For a repurchase agreement, subd. 2 permits repos with qualified depositories, Federal Reserve members with $10 million or more in capital, primary dealers, or licensed broker-dealers with $40 million or more in capital.

Reverse agreements may run 90 days or less and only to meet short-term cash flow needs.

Beyond those statutory conditions, the full-flex repurchase agreement guide describes how a repo can be built to follow a construction draw schedule.

The statute sets no collateral or bidding requirement for GICs, which leaves the federal bidding rules as a separate layer the procurement section below takes up.

What rating and collateral requirements attach?

The credit conditions in §§118A.04 and 118A.05 are ratings on counterparties and funds rather than a collateral schedule: a GIC issuer must meet rating tests, a money market fund must be top-two rated, and the statute sets no collateral requirement for GICs.

Under §118A.05 subd. 5, the GIC issuer's or guarantor's short- and long-term unsecured debt must be rated in one of the two highest categories, and for a term of 18 months or less only a highest-category short-term rating is required.

The same subsection requires that the government entity have withdrawal rights if the issuer's or guarantor's credit quality is downgraded below "A", a statutory floor with any additional credit terms coming from the contract itself, which the GIC credit protection guide covers and the GIC withdrawal guide explains in operation.

On the funds side, §118A.05 subd. 4 requires Rule 2a-7 money market funds to be rated in the top two categories and admits certain highly rated 1940-Act funds with maturities of 13 months or less.

Can Minnesota bond proceeds go into a state investment pool?

Section 118A.05 subd. 4 authorizes Minnesota joint powers investment trust shares as an investment for government entities, alongside the money market funds and the shorter-maturity 1940-Act funds.

The section authorizes the trust by type and does not name a particular pool, so a participant reads the trust's own offering documents for its terms, and this page states no current yield, rating or balance for it.

The MSRB glossary defines a local government investment pool as a pool set up by a state or local governmental entity to invest the public funds of participating governmental units, in which participants buy shares or units, often in a trust.

Choosing between a pool and a bid agreement is the state pool or GIC comparison.

What procurement rules apply to a Minnesota bond-proceeds investment?

The state layer is thin on competition: §118A.05 subd. 5 sets no bidding procedure for GICs, and the statute's transaction rule this page covers, §118A.04 subd. 9, is a broker-acknowledgment requirement, so the operative competition rules for a bid investment come from the federal tax regulations and the contract documents.

Under §118A.04 subd. 9, a government entity may not enter into a transaction with a broker until the broker has provided a written agreement, and the entity must deliver an annual written statement of investment restrictions to each broker, with the broker's written acknowledgment, before any transaction.

The federal layer comes from Treasury Regulation §1.148-5(d)(6)(iii)(A): a bona fide solicitation of bids requires written bid specifications timely sent to potential providers, including all material terms and only commercially reasonable terms, and electronic form is permitted.

The regulation defines materiality broadly: "A term is material if it may directly or indirectly affect the yield or the cost of the investment."

For yield-restricted defeasance escrows, the regulation adds that the hold-firm period must be no longer than reasonably required, a point the refunding escrow guide develops.

The solicitation rules are one condition of the fair market value safe harbor, and the bid specifications guide covers what a specification set works through.

Where a refunding funds an escrow with open-market securities, GFOA describes an escrow bidding agent that solicits bids for the escrow securities and notes that a municipal advisor, if engaged, may be able to act in that role, which is the work a Bidding Agent performs on an investment agreement.

Fees carry their own federal limit: IRS Publication 5005 notes that conduit issuer fees can raise the effective yield on a conduit loan, which is a purpose investment, and §148 generally limits purpose-investment yield to the bond yield plus a permitted spread, a constraint the conduit issuer guide takes up.

Which mGIC services and transactions reach Minnesota issuers?

None of mGIC's representative transactions, listed by name on its transactions page, is a Minnesota deal, and this page does not recast that list as one.

mGIC is an independent, SEC-registered municipal advisor that sells no investment product and acts as no principal in the investments it evaluates, and as a municipal advisor it owes its municipal clients a fiduciary duty.

Its three services map onto the procurement path above: reinvestment advisory (fund objectives, permitted investments, draw schedules, credit parameters, market conditions and timing), Bidding Agent work (bid specifications, soliciting qualified providers, managing questions, receiving and comparing bids on rate and non-rate terms), and documentation and settlement (coordinating the provider's counsel and the financing team and delivering Bidding Agent and provider certifications to bond counsel).

The structures it evaluates and bids, while selling none of them, are guaranteed investment contracts, full-flex repurchase agreements and structured portfolios of U.S. Treasury securities, which sit on the Minnesota lists under §118A.05 subd. 5, §118A.05 subd. 2 and §118A.04 subd. 2 respectively.

Since 2002 it has invested more than $60 billion in bond proceeds and executed swap notional across more than 1,000 transactions for issuers in more than 40 states.

Its fee is paid by the winning provider rather than the issuer, at or below the safe-harbor maximum in the Treasury arbitrage regulations, and it is disclosed.

For a no-obligation review of how a fund's investments line up with §§118A.04 and 118A.05 and the issue's bond documents, mGIC offers Minnesota reinvestment help.

Final determinations about what chapter 118A permits for a particular issue belong to 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.