What Should a Bond Proceeds Investment Policy Include?

A bond proceeds investment policy is the written document that states an issuer's objectives for its bond funds, lists what each fund may hold, and fixes who invests, who reports and how often the governing body reviews results.

GFOA's best practice on the investment and management of bond proceeds, approved March 4, 2022, recommends an investment policy with specific provisions for bond proceeds, so that legal and regulatory requirements are met, fair market value bids are received when required by tax law and state or local laws, and the issuer's objectives are attained.

Objectives

The objectives section should rank safety of principal, liquidity and yield for each fund the issue maintains and state an investment horizon for each one.

Texas Government Code §2256.006(a) puts the three in that order for Texas investing entities, the state's policy must emphasize safety of principal and liquidity under §2256.005, and the safety, liquidity and yield guide owns the ranking question.

GFOA's best practice lists typical horizons by fund, 12 to 36 months for a construction fund, 6 to 18 months for a capitalized interest fund, usually 6 months for an interest account and usually 12 months for a principal account, with an escrow horizon keyed to its redemption date and a debt service reserve fund long term, ranges GFOA presents as typical rather than as rules.

GFOA also recommends planning and recording the drawdown of proceeds, keeping the investment duration no longer than the expected drawdown schedule, revisiting the draw schedule periodically, and staging bond issues over the construction period rather than issuing well before spending begins, as the draw schedule guide shows for a construction fund.

Permitted investments

The permitted investments section lists what each fund may hold, and where there is no indenture, as on a general obligation bond, GFOA says the policy should carry that list, possibly as a subset of the operating list.

The permitted investments guide covers where those lists come from.

Texas writes the policy into its chain of authority: Texas Government Code §2256.0208 lets an 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 issue and the investment policy adopted for that issue.

Michigan sets a floor for the section: MCL 129.95 requires the governing body, in consultation with the investment officer, to adopt a policy covering at least purpose, scope and objectives, delegation of authority, authorized instruments, and safekeeping, custody and prudence.

Where repurchase agreements are on the list, GFOA's 1986 statement on repos calls them an integral part of public investment programs, says over-collateralization, commonly called haircuts, or marking-to-market practices should be mandatory procedures, recommends master repurchase agreements, and notes that delivery or safekeeping of the underlying securities with the purchaser's custodian significantly reduces risk, as the repo collateral page describes.

Where a local government investment pool is on the list, GFOA 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, so its guidance calls for confirming eligibility and reading the pool's documents first, as the investment pool guide details.

Procurement

The procurement section should state how the issuer solicits, receives and compares bids, so its file shows fair market value bids were received where tax law and state or local laws require them.

New Jersey writes a competitive-basis requirement into statute: N.J.S.A. 40A:5-14, as amended by P.L.2018, c.40, requires a cash management plan approved each year by a majority of the governing body and provides that all investments be made "on a competitive basis insofar as practicable," a phrase the statute leaves undefined and that sets no number of bids.

Signatures attach to the document in Ohio, New Jersey and Texas: Ohio requires the brokers, dealers and institutions doing investment business with a subdivision to sign its investment policy under ORC §135.14(O), New Jersey requires the registered principal of a selling brokerage to sign an acknowledgment that the plan was reviewed, and Texas requires a written acknowledgment of the policy from a business organization, which §2256.005(k) defines as an investment pool or a discretionary investment management firm.

GFOA's best practice notes that under the SEC's municipal advisor rule, brokers that provide advice on investments of bond proceeds may be treated as municipal advisors.

It adds that governments may get broker-dealer advice through an RFP process or a retained independent registered municipal advisor, and that issuers may retain a registered investment adviser for more than de minimis investment advice.

On choosing the advisor itself, GFOA recommends selecting municipal advisors on merit through a competitive RFP or RFQ process, reviewing the relationships periodically, and requiring fees in a standard format with not-to-exceed amounts.

The bid specifications guide covers the solicitation document, and the choosing a reinvestment advisor guide covers selection.

Reporting

The reporting section should name who monitors the investments, what they report and to whom, when the policy is reviewed, and which records are kept.

Texas fixes the review cycle: "The governing body of an investing entity shall review its investment policy and investment strategies not less than annually" (Texas Government Code §2256.005).

California's parallel provision is permissive: under California Government Code §53646 the treasurer or chief fiscal officer may annually render a statement of investment policy and may give quarterly reports, any quarterly report due within 45 days after the quarter and stating whether the portfolio complies with the policy.

New Jersey's plan statute requires a monthly report to the governing body, puts the plan in the CFO's administration and subjects it to annual audit.

On records, GFOA recommends identifying what will be kept and for how long, a period it describes as typically the life of the bonds plus three years, and the compliance file guide lists what a bid adds to that file.

GFOA's post-issuance best practice recommends formal written compliance policies and procedures and a list of each issue's key documents at closing, the tax certificate, escrow documents and indenture among them, and notes that tasks such as arbitrage rebate can be outsourced while the government keeps ultimate responsibility, as the post-issuance compliance guide details.

The federal tax forms ask about the paperwork directly: Form 8038-G has the issuer check a box if it has established written procedures to monitor compliance with the arbitrage, yield restriction and rebate requirements of section 148, and line 43 asks the same about written procedures for timely remedial action on nonqualified bonds.

The form asks about the procedures rather than mandating them, and line numbers can change in revisions.

IRS Publication 4079 says issuers that adopt and follow comprehensive written monitoring procedures are generally less likely to violate federal tax requirements and more likely to find violations early, with early discovery a factor in VCAP resolutions, though the publication is not official guidance.

Texas requires a local government's treasurer, chief financial officer and investment officer to complete at least 10 hours of PFIA training within 12 months after taking office and 10 hours in each two-fiscal-year period after that, or 8 hours for school districts and municipalities, from an independent source the governing body or investment committee approves (Texas Government Code §2256.008).

Florida requires local officials responsible for investment decisions, or the CFO, to complete 8 hours of investment continuing education each year, with auditors reporting on compliance with the section (Fla. Stat. §218.415(14), (22)).

Florida's required investment policy does not apply to funds related to the issuance of debt where other existing policies or indentures govern those funds (Fla. Stat. §218.415(1)).

Template outline

A workable template runs from scope to records in this order.

1. Purpose and scope: the funds the issue maintains and the bond documents that govern each.
2. Objectives: the priority order for safety, liquidity and yield, and a horizon per fund.
3. Permitted investments: the instrument list per fund, with maximum maturities where state law requires them.
4. Financial institutions and advisors: approved firms, required signatures, and how advisory services are selected.
5. Procurement and bidding: the competitive process, bid specifications, and who runs the bid.
6. Custody and settlement: safekeeping and delivery-versus-payment, which Texas requires except for pool and mutual fund investments (§2256.005(b)(4)(E)).
7. Reporting: what is reported, to whom, and on what cycle.
8. Review: who reviews the policy and each fund's strategy, and on what cycle; Texas sets not less than annually.
9. Records and compliance: retention periods, key closing documents, and post-issuance duties.
10. Training and delegation: who may invest, and the training they hold.

What do state laws add to the template?

Several states write the policy's contents or handling into statute, so a template is checked against the state's law.

Those rows cover the policy document and its administration, not which instruments a fund may hold, which the bond proceeds by state pages take up.

What should a template say about refunding escrows?

Refunding escrows get a section of their own, and GFOA's refunding best practice supplies the pieces.

It defines current refundings as within 90 days and advance refundings as more than 90 days out through an irrevocable escrow, notes that the 2017 tax law ended tax-exempt advance refundings of tax-exempt debt while governments may still advance refund with taxable debt, and cautions that alternative structures may carry added risks and reduced savings.

Its threshold examples include minimum net present value savings of 3% or 5% of refunded par and a cap on negative arbitrage at a percentage of NPV savings, examples rather than requirements.

It also names three escrow roles: the escrow agent, typically a commercial bank, holds the investments, the verification agent, typically a CPA firm, confirms the escrow is sufficient and, where yield is limited, that escrow yield does not exceed the permitted yield, and an escrow bidding agent solicits bids for open-market escrow securities, a role GFOA says a municipal advisor may be able to fill, and the refunding escrow guide covers the structure.

mGIC is an independent, SEC-registered municipal advisor and Bidding Agent that helps issuers structure, competitively bid and close investments of bond proceeds, selling no product, acting as no principal, and paid by the winning provider rather than the issuer.

Issuers drafting a first policy, or testing one against a new issue's bond documents, can talk to mGIC about a free, no-obligation reinvestment review.

Whether a draft satisfies a state statute or a bond contract, and which spending exceptions an issue can use, are conclusions for its 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.