Investing Bond Proceeds for Hospitals and Health Systems

Hospitals and health systems invest bond proceeds by matching each fund's investment to its draw schedule and horizon, and by keeping every fund inside the arbitrage, private use and conduit rules that attach to the sector's financings.

This guide covers the financing structures the sector uses, the funds and draw profiles a hospital issue creates, the products that fit those draws, the private use, qualified bond and conduit yield rules that attach to 501(c)(3) conduit financings and mGIC's representative transactions, and it sits alongside mGIC's other issuer sector guides.

What financing structures do hospitals and health systems use?

A conduit financing is the MSRB glossary's term for a structure in which a governmental issuer issues bonds to finance a project used mainly by a third party, the conduit borrower, who is liable for making debt service payments on the bonds, and the glossary lists qualified 501(c)(3) bonds among the common conduit financing types.

Industrial development bonds and multifamily housing revenue bonds are among the glossary's other common conduit financing types.

SEC Rule 15Ba1-1 under the Securities Exchange Act defines a municipal entity to cover any state, political subdivision or municipal corporate instrumentality, along with its agencies, authorities, plans, programs or pools and any other issuer of municipal securities, and it defines an obligated person as a person committed by contract to support payment on the securities.

A nonprofit hospital that borrows through a conduit issue is an obligated person rather than a municipal entity where it is committed by contract to support payment on the securities, and where an advisor's client is an obligated person, the MSRB's standards of conduct for municipal advisors impose a duty of care rather than the statutory fiduciary duty that 15 U.S.C. 78o-4(c)(1) deems to run to municipal entities.

mGIC's conduit issuer guide covers the issuer's side of these structures, and the private activity bond guide covers how use by a nongovernmental borrower brings the section 141 tests into play.

Which funds hold hospital bond proceeds, and what horizons do they carry?

A hospital issue uses the standard fund types, which include a construction or project fund, a capitalized interest fund, debt service accounts and, on a refunding, an escrow, and GFOA's typical investment horizons for them run from about six months for an interest account to 12 to 36 months for a construction fund.

GFOA presents these figures as typical ranges rather than rules, notes that expectations vary, and directs issuers to their advisory team and investment policy.

A capitalized interest fund holds capitalized interest, which the MSRB glossary describes as bond proceeds set aside to pay interest for a set period and commonly used during construction of a revenue-producing project so debt service does not begin until the project is expected to be operating.

The arbitrage rules attach to gross proceeds, which Treasury Regulation §1.148-1(b) defines as all proceeds plus all replacement proceeds of an issue.

Within that term, sale proceeds are amounts actually or constructively received from selling the issue, including amounts used to pay the underwriters' discount and accrued interest other than pre-issuance accrued interest, and investment proceeds are the amounts received from investing proceeds.

Transferred proceeds, the proceeds of a refunded issue that become proceeds of the refunding issue, are defined separately in Treasury Regulation §1.148-9.

Debt service accounts carry a definition of their own: Treasury Regulation §1.148-1(b) treats a fund as a bona fide debt service fund where it is used mainly to match revenues with principal and interest within each bond year and is depleted at least once each bond year, apart from a reasonable carryover not exceeding the greater of the fund's prior-year earnings or one-twelfth of the prior year's principal and interest.

How a spending plan gets built from those draws is the subject of the draw schedule guide.

Which reinvestment products fit hospital draw schedules?

The reinvestment products issuers evaluate for hospital proceeds come in three families, guaranteed investment contracts, full-flex repurchase agreements and structured portfolios of U.S. Treasury securities, plus Treasury's State and Local Government Series (SLGS) securities where the fund is an eligible source.

Guaranteed investment contracts and full-flex repos are contracts with a provider, and mGIC's GIC and full-flex repo guides cover the structures, including how withdrawals work when draws run ahead of or behind the schedule.

Structured Treasury portfolios are owned securities rather than provider contracts, and they can carry a money-market allocation for faster-than-expected spend-down, which the Treasury portfolio guide describes.

31 CFR §344.1 limits SLGS purchases to an eligible source of funds, a term that mainly covers gross proceeds of tax-advantaged bonds, amounts held with such proceeds in refunding or defeasance escrows, parity reserve funds or commingled funds, and other yield-restricted amounts.

Whether a particular hospital fund qualifies as an eligible source is a question for bond counsel, and the SLGS guide covers the subscription mechanics.

The MSRB glossary describes a local government investment pool as a pool set up by a state or local governmental entity to invest the public funds of participating governmental units, and the LGIP guide covers whether bond proceeds belong in such a pool.

When a fund could take either a provider contract or an owned portfolio, the trade-offs are set out in mGIC's GIC versus repo and GIC versus Treasury ladder comparisons.

mGIC's ordering of priorities is safety first, then liquidity, then yield, a sequence explained in the priorities guide, and how provider contracts are competitively bid is covered in the bidding guides.

What sector-specific compliance rules apply to hospital issues?

The rules that attach to hospital financings are the private activity bond tests in section 141 of the Internal Revenue Code, the qualified bond conditions in section 141(e), and the conduit loan yield limits IRS Publication 5005 describes.

Section 141(b) treats the private business use test as met when more than 10 percent of an issue's proceeds are to be used for private business use, applies the same 10 percent threshold to the private security or payment test, and sets a 5 percent threshold for private business use that is unrelated or disproportionate to the governmental use.

Private business use means use in a trade or business by a nongovernmental person, and use as a member of the general public does not count under section 141(b)(6)(A).

Hospital campuses raise these questions wherever space in a financed facility is used or operated in a trade or business by a nongovernmental person, and the full accounting of private use across the financed facilities is a determination for bond counsel.

If the tests are met, the issue is a private activity bond, and it can still be tax-exempt only as a qualified bond under section 141(e), a list that includes qualified 501(c)(3) bonds alongside exempt facility, qualified mortgage, qualified veterans' mortgage, qualified small issue, qualified student loan and qualified redevelopment bonds, provided the issue also meets the applicable volume cap under section 146 and the requirements of section 147.

IRS Publication 4078 notes that qualified private activity bonds generally must use 95 percent or more of net proceeds for the qualified purpose, and that arbitrage rules apply to private activity bonds as well, with some differences.

On the conduit side, IRS Publication 5005 notes that fees the conduit issuer charges can raise the effective yield on the conduit loan, and because the loan is a purpose investment, section 148 generally limits purpose investment yield to the bond yield plus a permitted spread.

The spread for program investments is 1.5 percentage points under Treasury Regulation §1.148-2(d)(2), and for investments that paragraph does not otherwise describe, materially higher means one-eighth of 1 percentage point.

The yield restriction and arbitrage guides cover the machinery behind those limits, and final determinations on any of these questions belong to bond counsel and tax counsel.

Which representative transactions involve hospitals and health systems?

None of mGIC's named representative transactions is a hospital deal, and the named transactions cover the transportation, public power, aviation, water and higher education sectors.

The case studies hub lists them by name, including Birmingham Water Works, Prairie State Energy Campus and OSU Village F student housing.

Behind those names is a record of 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, in a reinvestment practice that has run since mGIC's founding in 2002.

As an independent municipal advisor, mGIC sells none of the products it evaluates and does not act as principal, and its fee is paid by the winning provider rather than the issuer, at or below the safe-harbor maximum in the Treasury arbitrage regulations and disclosed.

To talk to mGIC about a free, no-obligation reinvestment review of a hospital fund or about Bidding Agent services for an upcoming issue, visit the contact page.

Final legal and tax conclusions on anything described here 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.