What Happens When Projects Spend Faster or Slower Than Planned

A spend-down mismatch is the gap between the draws a project actually makes and the draw schedule its investments were sized to, and it runs in both directions: cash leaving faster than the investment planned to release it, or proceeds still invested long after the plan said they would be spent.

GFOA recommends making certain that the drawdown of proceeds is planned and recorded, and that the investment duration is no longer than the expected drawdown schedule; the pages on the draw schedule and the construction fund cover how that schedule is built.

What is a spend-down mismatch?

A spend-down mismatch is any drift between the project's actual spending pace and the schedule the investments were written against, in either direction.

It starts with ordinary project events: change orders, construction that runs ahead of plan, permits or utility relocations that slip, weather, retainage released on its own calendar, and grant reimbursements that arrive late.

The place it shows up first is the balance under investment, which is the deposit minus the draws actually paid, set against the deposit minus the draws the schedule expected.

The two directions call for different tools, because faster spending is a liquidity question about the terms of the investment, while slower spending is a timing question about the arbitrage rules that attach to unspent proceeds.

Faster spending: liquidity sleeves and flex terms

Faster spending turns the mismatch into a liquidity problem: the fund needs cash ahead of the calendar the investment was sized to.

The instruments used for bond proceeds are built to be shaped around that: the SEC has described municipal reinvestment products as financial instruments tailored to meet municipalities' specific collateral and spend-down needs, such as guaranteed investment contracts, repurchase agreements and forward purchase agreements (SEC Litigation Release No. 22183).

Where the flexibility lives in a guaranteed investment contract is the withdrawal provisions: Treasury Regulation §1.148-1(b) includes within its guaranteed investment contract definition any nonpurpose investment with specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate, and the withdrawal provisions page explains how those terms work.

The regulation says the definition "includes" those agreements and is not exhaustive, so whether a particular agreement falls within it is a determination for bond counsel.

The second lever is the shape of the portfolio: the structured Treasury portfolios mGIC bids are matched to anticipated cash needs with a money-market allocation for faster spend-down, so the near-term draws come out of cash-like holdings and the term securities cover the later part of the schedule.

A full-flex repurchase agreement is written the same way, with the withdrawal and reinvestment provisions negotiated to the issue's spend-down schedule.

Cash parked in SLGS can be reached early as well, subject to holding periods and notice: under 31 CFR 344.6(a) and (c), a Time Deposit note or bond can be redeemed no sooner than 30 days after issue, a certificate of 30 days or more no sooner than 25 days after issue, and Treasury must receive the redemption request 14 to 60 days before the redemption date.

For subscriptions made on or after October 28, 1996, 31 CFR 344.6(d) discounts the remaining interest and principal payments of a Time Deposit redeemed before maturity by the current Treasury borrowing rate for the remaining term to maturity, which the regulation says may result in a premium or a discount to the issuer.

Zero-interest Time Deposits are the exception, redeemed at principal with no market charge.

The redemption certification that comes with an early redemption bars reinvesting those proceeds above the yield used to price the redemption (31 CFR 344.2(e)(2)(ii)).

Slower spending: reinvestment and the temporary period

Slower spending leaves proceeds invested past the schedule, and the constraint that tightens is the temporary period: when a period ends, proceeds still unspent generally may not be invested at a yield materially higher than the bond yield.

Net sale proceeds and investment proceeds reasonably expected to be spent on capital projects get a 3-year temporary period from the issue date under Treasury Regulation §1.148-2(e)(2)(i), and it applies only if the issuer reasonably expects to satisfy the expenditure test, the time test and the due diligence test.

The expenditure test asks for at least 85% of net sale proceeds to be allocated to capital project expenditures by the end of the 3-year period, and it is measured on the issuer's reasonable expectations at issuance (§1.148-2(e)(2)(i)(A)).

The time test asks for a substantial binding obligation to a third party, incurred within 6 months of the issue date, to spend at least 5% of net sale proceeds, and an obligation subject to contingencies within the issuer's or a related party's control is not binding (§1.148-2(e)(2)(i)(B)).

For capital projects with substantial construction expenditures, §1.148-2(e)(2)(ii) substitutes a 5-year period where both the issuer and a licensed architect or engineer certify that the longer period is necessary.

The capital project periods do not apply to refunding issues, which §1.148-2(e)(1) carves out.

The 13-month period in §1.148-2(e)(3)(i) belongs to proceeds reasonably expected to be allocated to working capital expenditures within 13 months, and whether an issue's proceeds fall in that category, or whether capitalized interest can be treated as part of the capital project as the regulation's cross-reference allows in some cases, is a determination for bond counsel.

Those clocks answer yield restriction, not rebate: under §148(f)(4)(B) and Treasury Regulation §1.148-7(c), an issue is treated as meeting the rebate requirement when its gross proceeds, as specially defined, are allocated to expenditures for the governmental purpose within 6 months of the issue date, with rebate paid on amounts not required to be spent, and §148(f)(4)(B)(ii) allows one year for up to 5% of the proceeds of certain governmental issues.

The spending exceptions page lists the full set, and reserve fund earnings remain subject to rebate.

Slower spending also carries a cost known as negative arbitrage: the shortfall between the yield earned on invested proceeds and the yield paid on the bonds.

Once the period ends, proceeds still unspent generally become subject to the yield restriction rules, which means a yield not materially higher than the bond yield, unless an exception applies.

Treasury Regulation §1.148-5(c) lets an issuer satisfy yield restriction for certain investments through yield reduction payments to the United States instead of restricting the actual investment rate, and the eligible categories include investments of proceeds that qualified for the capital project temporary period and investments bought while SLGS sales are suspended (§1.148-5(c)(3)(viii)), with eligibility for a particular issue a determination for bond counsel.

One of the standard resting places can also close: the SLGS regulation reserves Treasury's right to change or suspend the offering at any time the Secretary determines that issuing obligations sufficient to conduct orderly financing operations would exceed the statutory debt limit, and during such a contingency Treasury may move unredeemed Demand Deposits into special 90-day certificates of indebtedness (31 CFR 344.2(l), 344.7(b)).

The suspension is not hypothetical: Treasury suspended SLGS issuance with Secretary Yellen's May 1, 2023 debt-limit letter to Congress, and its January 17, 2025 Description of the Extraordinary Measures lists suspending SLGS sales as a measure, noting that no statute requires Treasury to issue SLGS and that some issuers will have to invest proceeds in alternative assets instead.

Renegotiation: which terms move when the schedule changes

Renegotiation runs through the terms the documents make negotiable: the withdrawal and reinvestment provisions and the rate on an agreement, and the maturity and reinvestment decisions on a portfolio of owned securities.

A change to an agreement's terms is a negotiation with the provider, because those provisions are the specifically negotiated terms the tax definition turns on, and a price settled with the incumbent is not the same thing as a competitively bid one.

The discipline the market applies is competitive: the SEC's description of these products notes that the most common way to establish fair market value is competitive bidding run by bidding agents, and that is the kind of solicitation the fair-market-value safe harbor for guaranteed investment contracts describes.

An independent Bidding Agent can run it: writing the bid specifications, soliciting qualified providers, managing questions and comparing the bids on rate and non-rate terms.

Timing is its own question, and the page on when to bid covers the calendar for a solicitation.

GFOA recommends revisiting the drawdown schedule periodically, and each revision is the point at which the investments actually held get compared to the draws actually expected.

Records hold the file together: GFOA recommends keeping records for the required period, which it describes as typically the life of the bonds plus three years, and the compliance file page lists what belongs in it.

If the draws and the investments on a fund you oversee have come apart, you can talk to mGIC about a free, no-obligation reinvestment review covering the fund's objectives, permitted investments, draw schedules, credit terms and timing.

Final conclusions about an issue's temporary periods, spending exceptions and tax position rest with 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.