Safety, Liquidity, Yield: The Three Objectives of Reinvesting Bond Proceeds

The three objectives of reinvesting bond proceeds are safety, liquidity and yield, and the order that governs them in the Texas and Florida statutes cited here is safety first, then liquidity, then yield.

Texas sets that order expressly: §2256.006(a) of the Texas Government Code makes the overall order safety, then liquidity, then yield.

Florida's statute reaches the same sequence from the policy side: Fla. Stat. §218.415 requires a Florida local government's investments to follow a written investment plan its governing body adopts (or else the narrower alternative investment list in subsection (17)), requires the plan to give the highest priority to safety of principal and liquidity, and lists the objectives in §218.415(2) in order as safety of capital, liquidity and investment income.

Florida's order has a scope limit for bond proceeds: under §218.415(1), the required policy does not apply to funds related to the issuance of debt where other policies or indentures in effect already govern those funds.

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

This page takes each objective in that order and then looks at where the objectives genuinely trade against each other.

Safety first: provider and collateral

Safety of principal is the first objective, and this page reads it through two practical anchors: the credit of the provider standing behind the investment, and the collateral or contractual protections attached to it.

Texas requires each investing entity to adopt a written investment policy and a separate written investment strategy for each fund or group of funds, to review both at least annually, and to have the policy emphasize safety of principal and liquidity (§2256.005(a), (b), (d) and (e)).

The strategy list in §2256.005(d) ranks six priorities in order, and yield is sixth.

For a provider obligation such as a guaranteed investment contract, that means the provider's credit standing and the credit protections the agreement provides.

How those protections are built is the subject of the guide to credit protections.

For repurchase agreements, GFOA's position statement (which dates to 1986) calls repos an integral part of public investment programs and says over-collateralization, commonly called haircuts, or marking-to-market should be mandatory procedures.

The same GFOA statement recommends master repurchase agreements, notes that delivery or safekeeping of the underlying securities with the purchaser's custodian significantly reduces risk, and lists the provisions governments should add when adapting the PSA prototype agreement, covering delivery, substitution, margin maintenance, margin amounts, seller representations and governing law.

For local government investment pools, GFOA's guidance is direct: pools are not registered with the SEC, investments in them are not insured or guaranteed, and substantial losses have occurred in the past.

Its recommendations follow from that: confirm a pool is an eligible investment, read the pool's offering statement, investment policy and audited financials, check whether the pool seeks a constant or fluctuating net asset value, and seek the highest-rated pools where possible.

Which protections fit a particular issue is determined by the issuer's policy and bond documents, and the final legal conclusions belong to bond counsel.

Liquidity: access at par

Liquidity is the second objective, and the working test this page uses is whether proceeds can be converted to cash at par in the amounts and on the dates the spending schedule actually requires.

GFOA frames this as a duration recommendation for bond proceeds: make certain the investment duration is no longer than the expected drawdown schedule, and revisit the draw schedule periodically.

GFOA lists typical investment horizons by fund, presenting them as ranges rather than rules and noting that expectations vary, so issuers should consult their advisory team and investment policy.

Where proceeds sit in a money market fund, Rule 2a-7 sets the fund's liquidity floor: a fund may not buy a non-daily-liquid asset if that would leave it with less than 25% of total assets in daily liquid assets, and may not buy a non-weekly-liquid asset if that would leave it with less than 50% in weekly liquid assets (17 CFR 270.2a-7(d)(4)(ii) and (iii)).

The daily minimum does not apply to tax-exempt funds, no instrument may have a remaining maturity over 397 calendar days, weighted average maturity may not exceed 60 days and weighted average life may not exceed 120 days, and the 25% and 50% levels are the post-2023 figures.

The SEC's money market fund reforms adopted July 12, 2023 raised minimum liquidity requirements, removed the ability to impose redemption gates, and require institutional prime and institutional tax-exempt funds to charge a liquidity fee when daily net redemptions exceed 5% of net assets, unless the fund's liquidity costs are de minimis.

The mandatory fee requirement does not reach government money market funds, and the related form amendments took effect June 11, 2024.

GFOA notes that pools may limit deposits and withdrawals, and that deposits or withdrawals may require advance notification, especially if they are large.

Yield: competed, never chased

Yield is the third objective, and the way it is pursued is competition: bids compared on rate and non-rate terms together, not a rate reached for past the first two objectives.

Texas places yield last in both places: §2256.006(a) sets the overall order, and the §2256.005(d) strategy list puts yield sixth, after suitability, preservation and safety of principal, liquidity, marketability and diversification.

GFOA gives competition its policy job: the policy should ensure fair market value bids are received when required by tax law and state or local laws, alongside meeting legal and regulatory requirements and attaining issuer objectives.

How a competitive yield is produced, through bid specifications, solicitation and bid comparison, is a process of its own.

Who gives the advice matters as well: GFOA notes that under the SEC's Municipal Advisor Rule, brokers may be considered municipal advisors if they provide advice on investments of bond proceeds to governments, and that governments may obtain broker-dealer advice through an RFP process or when they have retained an independent registered municipal advisor.

Refunding escrows have their own version of this step: GFOA describes an escrow bidding agent who solicits bids for open-market escrow securities, a role a municipal advisor may fill when engaged.

Yield has a floor problem as well as a ceiling one: GFOA suggests staging bond issues over the construction period and not issuing well before spending begins, to limit both arbitrage liability and negative arbitrage.

As Bidding Agent, mGIC receives and compares bids on rate and non-rate terms, sells none of the products it evaluates, and is paid by the winning provider rather than the issuer.

Real trade-offs

The trade-offs are real, but the order disciplines them: the choice is not safety against yield, it is how far to reach toward a later objective without weakening the one before it.

Term against flexibility is the clearest: a commitment that outruns the draw schedule becomes a liquidity problem the rate cannot fix, which is why GFOA says to revisit the schedule periodically rather than stretch the investment past it.

Provider credit against rate is the second: bids carry provider credit, collateral and withdrawal terms alongside the rate, so the comparison runs on rate and non-rate terms together rather than on the rate line alone.

Pool access against bid competition is the third: a local government investment pool offers a different access model with its own diligence burden, while a competed investment is the route GFOA's best practice describes for receiving fair market value bids when required by tax law and state or local laws.

Documentation is the quiet fourth: GFOA recommends keeping records for the required period, which it describes as typically the life of the bonds plus three years.

Where a particular issue's priorities land, and which investments its bond documents permit, are determinations for the issuer's governing body with its bond counsel and tax counsel.

If you want an independent read on how a current or planned investment lines up with this order, you can talk to mGIC about a no-obligation reinvestment review.

The review covers fund objectives, permitted investments, draw schedules, credit terms, market conditions and timing.

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.