What Are the Types of Bond Refundings? Current, Advance and Crossover

A bond refunding is a new bond issue whose proceeds pay the principal, interest or redemption price of bonds already outstanding, which is how 26 CFR 1.150-1(d)(1) defines a refunding issue, subject to exceptions in (d)(2) for certain interest payments and for issues with different, unrelated obligors.

The types are the current refunding, the advance refunding and the crossover refunding, and this page also covers the taxable advance refunding that remains available after the 2017 tax law, along with the tender offer as a separate transaction.

What is a current refunding?

A current refunding is a refunding issue issued not more than 90 days before the last expenditure of its proceeds to pay the prior issue, and 26 CFR 1.150-1(d)(3) and (d)(4) make any other refunding issue an advance refunding.

GFOA's best practice, Refunding Municipal Bonds, describes the other side of that line: an advance refunding is issued more than 90 days ahead, with the proceeds placed in an irrevocable escrow until the prior bonds are paid.

The definitions differ outside federal tax law as well: the MSRB glossary notes that refundings of less than 90 days may still count as advance refundings under state law or bond contracts.

Which arbitrage rules attach to refunding issues?

Refunding proceeds get their own temporary periods: 30 days for a refunding issue generally (other than transferred proceeds), and 90 days for a current refunding issue, or at most 30 days where the refunding issue's original term is 270 days or less, under 26 CFR 1.148-9(d)(2)(i) and (ii).

Transferred proceeds follow separate temporary period rules in §1.148-9(d)(2)(iii), and the temporary periods page covers the full set.

The Form 8038-T instructions state that the only spending exception applicable to refunding issues is the 6-month exception, and a refunding issue cannot be a construction issue, which 26 CFR 1.148-7(f)(1) defines as a non-refunding issue whose issuer reasonably expects at least 75% of available construction proceeds to be spent on construction expenditures for property owned by a governmental unit or 501(c)(3) organization.

The spending exceptions page lists what the other issue types can use.

What is an advance refunding after the 2017 tax law?

An advance refunding is any refunding issue that is not a current refunding, so its proceeds are set aside more than 90 days before the prior bonds are paid.

The set-aside is the refunding escrow, which 26 CFR 1.148-1(b) defines as one or more funds established as part of a single transaction or a series of related transactions, containing proceeds of a refunding issue and any other amounts to provide for payment of principal or interest on one or more prior issues.

How an escrow is sized, funded and verified is its own subject, covered on the refunding escrow page.

Under 26 U.S.C. 149(d)(1), interest on any bond issued to advance refund another bond is not exempt from federal income tax, a rule added by Pub. L. 115-97 §13532 that applies to advance refunding bonds issued after December 31, 2017.

Section 149(d)(2) treats a bond as issued to advance refund another bond when it is issued more than 90 days before the refunded bond is redeemed, so the 90-day threshold appears in both the refunding definitions and the repeal's own classification rule.

The repeal reached the exemption rather than the transaction: current refundings and taxable advance refundings remain available, and GFOA notes governments may still issue taxable debt to advance refund tax-exempt debt, though it says the higher interest cost relative to tax-exempt bonds should be considered and evaluated.

For the bonds sitting in the escrow, the MSRB glossary distinguishes escrowed to maturity, where the escrow pays the refunded bonds on their original schedule, from prerefunded, where the escrow runs only to a call date and the refunded issue is redeemed at that time.

Inside the escrow, the MSRB says advance refunding proceeds are generally invested in Treasury or federal agency securities, and that SLGS are most commonly used for deposit in an escrow account in connection with the issuance of refunding bonds.

SLGS carry an eligibility gate of their own: 31 CFR 344.1 allows their purchase only with an eligible source of funds, mainly gross proceeds of tax-advantaged bonds and amounts held with them in refunding or defeasance escrows, parity reserve funds, commingled funds and other yield-restricted amounts, and whether a particular fund qualifies is a question for bond counsel.

Whether the escrow buys SLGS from Treasury or securities in the open market changes the bidding work: GFOA notes that funding an escrow with open market securities may require an escrow bidding agent that solicits bids for securities used in the escrow, and SLGS vs open-market compares the two routes.

Pre-2018 tax-exempt advance refunding escrows still outstanding remain subject to the arbitrage rules, under which 26 CFR 1.148-2(d)(2)(ii) treats a yield on investments in a refunding escrow or allocable to replacement proceeds as materially higher than the bond yield once it exceeds it by one-thousandth of 1 percentage point, and whether a given escrow is yield-restricted is a question for bond counsel.

GFOA describes the supporting roles: an escrow agent, typically a commercial bank, holds the escrow investments, and 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.

What that reviewer checks is covered on the escrow verification page.

Open-market bidding is also where the SEC described yield burning in the context of pre-2018 tax-exempt advance refundings: overcharging by dealers for open-market escrow securities in a positive-arbitrage advance refunding diverts tax arbitrage to the dealer at the U.S. Treasury's expense, which the SEC has called illegal, while in a negative-arbitrage escrow overcharges take money from the issuer by reducing its present value savings dollar for dollar.

On April 6, 2000, the SEC announced 10 actions against 10 entities and one individual over refunding offerings, including a settlement in which Dain Rauscher agreed to pay about $13 million to the U.S. Treasury and certain issuers, and Dain Rauscher settled without admitting or denying the findings.

The yield burning page follows those cases in detail.

What is a crossover refunding?

A crossover refunding is an advance refunding in which the original revenue stream keeps paying the refunded bonds until they mature or are called and then crosses over to the refunding bonds, as the MSRB glossary describes the structure.

While both issues are outstanding, debt service on the refunding bonds is paid from interest earnings on the invested proceeds of the refunding bonds.

That revenue split separates a crossover from other advance refundings, where the escrow rather than the original revenue stream provides for the refunded bonds' payments.

The MSRB entry does not address the tax treatment of crossover refundings, so how a particular crossover interacts with the advance refunding rules is a determination for tax counsel.

Taxable advance refundings and tender offers

A taxable advance refunding is an advance refunding sold with taxable bonds, and a tender offer is a proposal to purchase outstanding bonds rather than a refunding issue at all.

GFOA notes governments may still issue taxable debt to advance refund tax-exempt debt, while cautioning that the higher interest cost relative to tax-exempt bonds should be considered and evaluated and that alternative structures developed since the 2017 law may carry added risks and reduced savings.

To size the economics, GFOA's best practice lists sample policy thresholds governments may set when they decide whether to undertake a refunding, offered as examples rather than requirements.

• a minimum NPV savings of 3% or 5% of refunded par, or graduated thresholds such as 4% where 9 or more years remain to maturity after the call and 1% at 2 years;
• a minimum dollar NPV, where GFOA's examples include $100,000 or twice the costs of issuance;
• a guideline that negative arbitrage in an advance refunding escrow come in below a set percentage of NPV savings;
• a refunding-efficiency test based on the value of the call option.

The MSRB glossary defines a tender offer as a proposal by an issuer or another party offering to purchase all or a portion of outstanding bonds of an issue, or one or more maturities of an issue, over a specified period.

The sources behind this page describe tender offers on their own terms and do not address them as an advance-refunding alternative, so how a tender fits with new bonds is a question for the issuer's financing team and bond counsel.

Across all the types, the classification drives the tax treatment, the temporary periods and the shape of the escrow, and the determinations that matter for a given issue belong to bond counsel and tax counsel.

Where a refunding escrow will be funded with open-market securities, an independent Bidding Agent can bid your escrow alongside the financing team.

For a read on how a refunding in progress lines up with these rules, mGIC offers a free, no-obligation reinvestment review.

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.