Investing Bond Proceeds for Public Power and Utilities

Public power and utility issuers invest bond proceeds by matching each fund to its job: construction funds are invested against draw schedules GFOA puts at 12 to 36 months typically, reserve funds have long-term horizons, and a bona fide debt service fund under section 1.148-1(b) is depleted each bond year apart from a limited carryover, all inside the federal arbitrage rules on gross proceeds.

mGIC publishes one of these guides for each issuer sector it covers; this one takes municipal electric utilities and other public power issuers, alongside water, sewer and other utility systems.

The federal arbitrage definitions are written for issues: section 1.148-1(b) defines gross proceeds as any proceeds and replacement proceeds of an issue, and the definition says nothing about the issuer's line of business; what differs here is the shape of the funds, because a revenue-financed capital program typically works through a project fund, a capitalized interest fund and a reserve, and each balance has its own horizon and constraints.

What financing structures do public power issuers use?

The structure this page starts from is the revenue bond, which the MSRB glossary defines as a bond payable from a specific source of revenue and one for which, generally, no voter approval is required before issuance.

The glossary lists possible revenue sources: pledged revenues may come from project operations, grants, or excise or other non-ad-valorem taxes.

For a municipal electric or water system, a pledge of the system's own revenues falls under project operations in that list.

The glossary's voter-approval point comes with a caveat: voter-approval rules vary by state.

The difference between general obligation and revenue bonds is treated on its own page; here the revenue structure decides where the cash sits.

Which funds do utility capital programs create, and how fast do they draw?

A utility capital program typically works through a construction or project fund, a capitalized interest fund, a debt service fund and a debt service reserve fund, and GFOA's listed horizons for those funds run from about six months to long term.

GFOA's best practice on the investment and management of bond proceeds lists typical horizons by fund:

GFOA presents those figures as typical ranges rather than rules and points issuers to their advisory team and investment policy for the expectations that govern an issue.

The construction fund carries the sector's draw profile: GFOA's 12 to 36 month range is the typical horizon for a construction fund.

The capitalized interest fund pairs with it: the MSRB glossary defines capitalized interest as a portion of the proceeds of an issue set aside to pay interest on the securities for a specified period, commonly used during construction of a revenue-producing project so that debt service doesn't begin until the project is expected to be operating, and GFOA's typical horizon for the fund is 6 to 18 months.

The debt service fund is where one federal definition binds directly: Treasury Regulation section 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 it must be depleted at least once each bond year, except for a carryover no larger than the greater of the prior year's earnings on the fund or one-twelfth of the prior year's principal and interest.

Matching rate revenues collected through the year to principal and interest paid within the bond year is the use that definition describes, and the debt service fund page works through it.

The reserve is different in kind: GFOA lists the debt service reserve fund horizon as long term.

Each fund type has its own page in the site's fund types guide.

Which reinvestment products fit utility funds?

The reinvestment products this page surveys are the three mGIC evaluates and competitively bids, guaranteed investment contracts, full-flex repurchase agreements and structured Treasury portfolios, alongside SLGS and forward delivery agreements in particular funds.

The SEC has described guaranteed investment contracts, repurchase agreements and forward purchase agreements as products typically tailored to meet municipalities' specific collateral and spend-down needs.

The MSRB's definition is the glossary's general one, and bond-proceeds agreements often carry flexible draw schedules rather than a single fixed maturity; what the arbitrage definition adds is that a guaranteed investment contract includes any nonpurpose investment with specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate.

SLGS carry a federal eligibility condition: 31 CFR 344.1 allows subscriptions only from an eligible source of funds, and the regulation's categories 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 section 1.148-6(b)(2);
• amounts held with gross proceeds in a refunding escrow, defeasance escrow, parity reserve fund or commingled fund;
• proceeds of a non-tax-advantaged issue that refunds, or is refunded by, a tax-advantaged issue;
• other amounts subject to yield limits.

Whether a particular fund qualifies is a question for bond counsel; this page does not characterize any fund as eligible.

The window can also close: 31 CFR 344.2(l) reserves Treasury's right to change or suspend the SLGS offering whenever the Secretary determines that issuing obligations sufficient to conduct the orderly financing operations of the United States cannot be made without exceeding the statutory debt limit.

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

For a reserve fund, the MSRB glossary's forward entry is to the point: a forward 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.

The tax characterization is a separate question: the arbitrage regulations' definition of a guaranteed investment contract includes agreements to supply investments on two or more future dates, such as a forward supply contract, under section 1.148-1(b); that conclusion belongs to tax counsel.

One term is worth keeping at arm's length: 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 joint request for comment on the Dodd-Frank study of whether those contracts are swaps.

That is a different product and regulatory setting from the investment agreements bought with bond proceeds, a distinction the GIC page also draws.

What sector-specific compliance issues apply, such as private use?

The sector-specific compliance line is private use: whether a utility facility ends up serving private business is what the private activity bond tests measure, and that determination belongs to bond counsel.

Section 141(a) makes an issue a private activity bond if it meets both the private business use test and the private security or payment test, or if it meets the private loan financing test.

The private business use test is met when more than 10% of proceeds pay for use in a trade or business by a non-governmental person, the private security or payment test uses the same 10% line, and a 5% threshold applies to private business use that is unrelated or disproportionate to the governmental use, under section 141(b)(1) through (3).

Section 141(b)(4) adds a separate limit for certain output facilities, which this page does not cover and which bond counsel applies to a particular issue.

The loan test is met when proceeds finance loans to non-governmental persons beyond the lesser of 5% of proceeds or $5 million, under section 141(c).

Use as a member of the general public does not count as private business use, under section 141(b)(6)(A).

The measure the tests use is the share of an issue's proceeds used for the private use, checked against the 10% and 5% lines, and how those lines land on a particular utility's service and sales arrangements is a private activity bond question for bond counsel; that page carries the topic further.

Private use questions sit next to the arbitrage rules, which reach an issue's proceeds and replacement proceeds.

Gross proceeds, the amount those rules measure, means any proceeds and replacement proceeds of an issue under section 1.148-1(b).

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

Investment proceeds are the amounts received from investing proceeds, and net sale proceeds are sale proceeds minus the amounts placed in a reasonably required reserve or replacement fund and the minor portion.

The spending exceptions then apply specially modified definitions of gross proceeds, which the site's spending exceptions page works through.

State law adds a second layer this page does not generalize: each state's investment statute is its own entry in the site's state by state guide.

Which public power and utility transactions can be named?

mGIC's representative transactions include two power-sector names, the Grand River Dam Authority in Oklahoma and the Prairie State Energy Campus, and a water utility, Birmingham Water Works.

Each has its own case page: Grand River Dam Authority, Prairie State Energy Campus and Birmingham Water Works; the case studies hub collects the full set.

This page adds nothing to the names; deal terms belong to the case pages.

mGIC itself is an independent, SEC-registered municipal advisor with a duty of care to act in the issuer's best interest; it sells no proprietary investment product and does not act as principal in the investments it evaluates.

Its fee on a bid is paid by the winning provider, not the issuer, sits equal to or below the safe-harbor maximum in the Treasury arbitrage regulations, and is disclosed.

Its reinvestment advisory reviews fund objectives, permitted investments, projected draw schedules, credit parameters, market conditions and timing.

Its Bidding Agent work covers bid specifications, soliciting qualified providers, managing questions, and comparing bids on rate and non-rate terms; its documentation and settlement work ends with certifications delivered to bond counsel.

The priorities it applies are safety first, then liquidity, then yield, and its record since its founding in 2002 is more than $60 billion in bond proceeds invested and swap notional executed combined, across more than 1,000 transactions for issuers in more than 40 states.

If a utility fund is heading to bid, or an existing investment has drifted from its draw schedule, you can talk to mGIC about a free, no-obligation reinvestment review.

Final conclusions about an issue's funds, its private use and its arbitrage position belong to the issuer's 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.