How Should Cities and Counties Invest GO Bond Proceeds?

Cities and counties that issue general obligation bonds invest the proceeds fund by fund: a construction or project fund spent down on a draw schedule, debt service accounts matched to principal and interest within each bond year, and a debt service reserve held long term.

The MSRB glossary defines a general obligation bond as typically payable from the issuer's general funds, with the source and priority of payment varying under state or local law, and it notes that most GO bonds are said to entail the issuer's full faith and credit and, in many cases, its taxing power.

This page is the cities and counties entry in mGIC's issuer sectors series: how these issues are structured, which funds hold the money, which products are bid for it, and where the private use lines sit.

How are city and county projects typically financed?

City and county GO bonds are typically payable from the issuer's general funds, with the source and priority of payment varying under state or local law, as the MSRB glossary describes.

Most general obligation bonds are said to entail the full faith and credit of the issuer, and in many cases its taxing power, depending on applicable state or local law.

Local GO bonds are often payable from ad valorem taxes, while state GO bonds are often payable from legislative appropriations.

That repayment source separates a GO issue from a revenue bond, which the same glossary defines as payable from a specific source of revenue, and mGIC covers the split in its GO and revenue bonds guide.

For investing, the structural point inside a GO issue is that the MSRB notes many governmental issues, especially GO bonds, may not use an indenture.

GFOA's best practice on the investment and management of bond proceeds cites the GO bond as its example of an issue with no indenture and says the investment policy should then list permitted investments, which may be a subset of those allowed for operating funds.

Where a city or county GO issue has no indenture, the investment policy rather than indenture sections carries the permitted-investment list, and mGIC's investment policy guide covers what such a policy can address.

Which funds hold GO bond proceeds, and what are their draw profiles?

The funds GFOA's best practice lists for a bond financing are a construction or project fund, a capitalized interest fund, debt service accounts and, on some issues, a debt service reserve fund.

For a GO issue meant to be tax-exempt, the federal arbitrage rules reach the proceeds in each of them, since section 103(b)(2) of the Internal Revenue Code denies the interest exclusion to any arbitrage bond and Treasury Regulation §1.148-1(b) defines gross proceeds as any proceeds and replacement proceeds of an issue.

Sale proceeds are amounts actually or constructively received from selling the issue, including amounts used to pay the underwriters' discount or compensation and accrued interest other than pre-issuance accrued interest.

Investment proceeds are amounts received from investing proceeds, net sale proceeds subtract the portion invested in a reasonably required reserve or replacement fund and the minor portion, and transferred proceeds, defined in Treasury Regulation §1.148-9, are proceeds of a refunded issue that become proceeds of the refunding issue.

The fund types a GO issue can create, from the construction fund to the rebate fund, are covered in mGIC's funds guide.

For sizing the investments, GFOA's best practice lists typical horizons by fund.

GFOA presents these as typical ranges rather than rules and points issuers to their advisory team and investment policy.

GFOA recommends keeping the investment duration no longer than the expected drawdown schedule and revisiting the draw schedule periodically as the project advances.

The same best practice suggests staging bond issues over the construction period rather than issuing well before spending begins, to limit arbitrage liability and negative arbitrage.

On records, GFOA describes the retention period as typically the life of the bonds plus three years, and mGIC's compliance file guide covers what the transaction file itself should hold.

Debt service accounts have a federal definition of their own.

Treasury Regulation §1.148-1(b) treats a fund as a bona fide debt service fund when it is used mainly to match revenues with principal and interest within each bond year and is depleted at least once each bond year, except for a reasonable carryover amount not exceeding the greater of the prior year's earnings on the fund or one-twelfth of the prior year's principal and interest payments.

mGIC's debt service fund guide covers what follows from that definition, and the temporary periods guide covers how long proceeds in some funds can be invested above the bond yield.

Which reinvestment products fit city and county bond funds?

The products mGIC evaluates and competitively bids for bond proceeds are guaranteed investment contracts, full-flex repurchase agreements and structured portfolios of U.S. Treasury securities, and its stated priorities across the three are safety first, then liquidity, then yield.

Structured Treasury portfolios are matched to anticipated cash needs and can carry a money-market allocation for faster-than-expected spend-down.

mGIC's guide to reinvestment products covers each in detail, and the side-by-side comparisons sit on their own pages, such as a GIC against a full-flex repo.

Non-marketable SLGS securities are a further option, and Treasury limits who can buy them.

SLGS may be purchased only with an eligible source of funds, and 31 CFR 344.1 lists the categories.

They are gross proceeds of tax-advantaged bonds or amounts reasonably expected to become gross proceeds; amounts released from gross-proceeds status by the universal cap in Treasury Regulation §1.148-6(b)(2); amounts held with gross proceeds in a refunding escrow, defeasance escrow, parity debt service reserve fund or commingled fund; proceeds of a non-tax-advantaged issue that refunds, or is refunded by, a tax-advantaged issue; and other amounts subject to yield limits.

Whether any particular city or county fund is an eligible source of funds is a question for bond counsel, and mGIC's SLGS guide covers the mechanics.

Treasury also reserves the right, under the SLGS regulation, to change or suspend the terms of the offering when the Secretary determines that issuance of obligations sufficient to conduct the orderly financing operations of the United States cannot be made without exceeding the statutory debt limit, under 31 CFR 344.2(l).

During such a contingency, Treasury may move unredeemed demand deposits into special 90-day certificates of indebtedness that earn simple interest at the daily factor in effect when demand deposit issuance was suspended and roll over if the contingency continues, under 31 CFR 344.7(b).

For a debt service reserve fund, the MSRB glossary describes a related instrument: a forward, also called a forward delivery agreement or forward purchase contract, may provide for the delivery of specific types of securities on specified future dates at fixed yields for the purpose of optimizing the investment of a debt service reserve fund.

mGIC's forward delivery agreement guide and debt service reserve fund guide cover that fit, and whether a particular forward's tax treatment follows the guaranteed investment contract rules is a question for tax counsel.

One naming trap matters to treasurers who also watch pension portfolios.

In retirement plans, stable value contracts are bank or insurer wrap guarantees that pay plan participants at book value if a stable value fund's market value falls short, as the CFTC and SEC described in a 2011 release on their Dodd-Frank study of the contracts.

That is a different product and regulatory setting from the investment agreements bid for bond proceeds.

Where do private use and other compliance lines sit for GO proceeds?

For a tax-exempt issue, the arbitrage rules reach city and county GO proceeds through the gross proceeds definition, and the private use line runs through section 141 of the Internal Revenue Code.

Under section 141(b)(1), an issue meets the private business use test if more than 10 percent of the proceeds are to be used for any private business use, and section 141(b)(2) applies the same 10 percent threshold to the private security or payment test.

Section 141(b)(3) sets a 5 percent threshold for private business use that is unrelated or disproportionate to the governmental use, and private business use means use in a trade or business by a non-governmental person, not counting use as a member of the general public, under section 141(b)(6)(A).

Section 141(b)(4) adds a limit for certain output facilities that these rows do not carry.

A city lending program that makes or finances loans to non-governmental persons is the kind of arrangement that test measures, and section 141(c)(1) applies it when proceeds to such loans exceed the lesser of 5 percent of proceeds or $5 million, with section 141(c)(2) excepting certain loans for general-application taxes or assessments and nonpurpose investments.

These tests can come up when a facility financed with GO proceeds carries a private use, for example space leased to a private tenant, and whether a particular issue meets them is a determination for bond counsel.

mGIC's private activity bond guide covers the qualified bond categories.

The construction spending rules add an ownership condition that matters for GO-financed public works.

Treasury Regulation §1.148-7(f)(1) defines a construction issue as a non-refunding issue where the issuer reasonably expects, as of the issue date, that at least 75 percent of the available construction proceeds will be allocated to construction expenditures for property owned by a governmental unit or a 501(c)(3) organization, and any private activity bonds in the issue must be qualified 501(c)(3) bonds or private activity bonds financing such property.

Under Treasury Regulation §1.148-7(j), an issuer may elect to treat the construction portion as a separate issue.

The 2-year construction spending exception page carries the full spending tests, and bond counsel applies them to the issue.

What are mGIC's representative transactions?

mGIC's representative transactions span transportation, public power, aviation, higher education and water, from Pocahontas Parkway and the Grand River Dam Authority to Birmingham Water Works and OSU Village F student housing.

Each is listed by name, and each name has its own page in mGIC's case studies.

mGIC was founded in 2002 and is based in Scottsdale, Arizona; its record covers more than $60 billion in bond proceeds invested and swap notional executed across more than 1,000 transactions for issuers in more than 40 states, and Robert Rasmussen has been its Managing Director since 2002.

mGIC works as an independent, SEC-registered municipal advisor and Bidding Agent; it does not sell a proprietary investment product, does not act as principal in the investments it evaluates, and owes its municipal entity clients a fiduciary duty.

Its documentation and settlement work delivers Bidding Agent and provider certifications to bond counsel and closes each transaction with a compliance file; mGIC describes the file as reviewed by a nationally recognized compliance agent.

For a second look at how a city's or county's construction fund, debt service accounts and reserves are positioned, talk to mGIC about a free, no-obligation reinvestment review.

Final legal and tax conclusions on any city or county issue belong to 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.