How Should School Districts Invest Their Bond Proceeds?

A school district invests its bond proceeds fund by fund, matching each fund's purpose, draw schedule and tax constraints to the investments its bond documents or investment policy permits.

This page is the school district entry in mGIC's issuer sectors series: how district issues are structured, which funds hold the money, which products are bid for it, and where the compliance lines sit.

How are school district bond issues typically structured?

A district issue's structure starts from its repayment source, and the MSRB glossary's general obligation bond is defined by one: typically payable from the issuer's general funds, with the source and priority of that payment varying under state or local law.

The glossary adds that most GO bonds are said to entail the issuer's full faith and credit and, in many cases, its taxing power.

The same entry describes local GO bonds as often payable from ad valorem taxes and state GO bonds as often payable from legislative appropriations.

Whether a particular district's bonds carry those characteristics, and what state or local law requires around them, is a determination for bond counsel.

The difference between that structure and a revenue bond, which the MSRB glossary defines as payable from a specific source of revenue, is covered in mGIC's GO versus revenue bond guide.

On the refunding side, when proceeds of a refunded issue become proceeds of the refunding issue, Treasury Regulation §1.148-9 defines them as transferred proceeds.

Where there is no indenture (GFOA's example is a GO bond), GFOA's best practice on the investment and management of bond proceeds recommends an investment policy with specific provisions for bond proceeds: the policy should list permitted investments, which may be a subset of those allowed for operating funds.

GFOA also says those provisions should ensure legal and regulatory requirements are met, that fair market value bids are received when required by tax law and state or local laws, and that issuer objectives are attained.

mGIC's investment policy guide covers what those provisions address.

Which funds hold a school district's bond proceeds, and what are their draw profiles?

A district issue creates a set of separate funds, and the federal arbitrage rules measure amounts in them as gross proceeds of the issue.

Treasury Regulation §1.148-1(b) defines gross proceeds as any proceeds and replacement proceeds of an issue.

Sale proceeds are the 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 are defined in Treasury Regulation §1.148-9.

The fund types an 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 investment horizons by fund.

GFOA presents these as typical ranges, not rules, and points issuers to their advisory team and investment policy.

A district construction fund falls under GFOA's 12 to 36 month construction fund range, the longest typical horizon among the funds that spend down on a draw schedule.

The debt service side has its own definition.

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.

That definition matters because amounts in a bona fide debt service fund qualify for a 13-month temporary period under Treasury Regulation §1.148-2(e)(5)(i), while other replacement proceeds generally get 30 days from the date they first become replacement proceeds.

If only part of a fund qualifies as a bona fide debt service fund, only that part gets the 13 months.

mGIC's debt service fund guide covers the definition and what follows from it, and matching an investment term to a draw schedule is covered in the construction fund and draw schedule guides.

Which reinvestment products fit school district bond proceeds?

mGIC helps issuers evaluate and competitively bid three products for bond proceeds: guaranteed investment contracts, full-flex repurchase agreements and structured portfolios of U.S. Treasury securities.

Structured Treasury portfolios are matched to anticipated cash needs and can carry a money-market allocation for faster-than-expected spend-down, with the stated priorities of safety first, then liquidity, then yield.

mGIC's guide to reinvestment products covers each in detail, and the head-to-head comparisons sit on their own pages, including a GIC against a full-flex repo and a GIC against a Treasury ladder.

For a debt service reserve fund that will be funded and held, forwards come up: the MSRB glossary notes that 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.

mGIC's forward delivery agreement guide covers the structure.

For parts of a program that will sit still, 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: 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 district fund is an eligible source of funds is a question for bond counsel, and mGIC's SLGS guide covers the mechanics.

Availability can also change: the SLGS regulation reserves Treasury's right to change or suspend the offering when the Secretary determines that issuance of obligations sufficient to conduct orderly financing operations cannot be made without exceeding the statutory debt limit, and 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.

One naming overlap is worth flagging for district officials: a stable value contract in an employee retirement plan is a different product and regulatory setting from the investment agreements bid for bond proceeds.

The joint CFTC and SEC release on the study of stable value contracts describes them as components of stable value funds that sponsors or managers purchase from banks and insurers as a guarantee, or wrap, to pay plan participants at book value.

mGIC's GIC guide covers what a bond-proceeds guaranteed investment contract is.

What compliance rules are specific to school district bond proceeds?

Two federal frameworks matter most for district issues: the private activity bond tests in section 141 and the small issuer exception's school construction provision in section 148.

Under 26 U.S.C. 141(a), a bond is a private activity bond if its issue 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 if more than 10 percent of proceeds are used for private business use, the private security or payment test uses the same 10 percent threshold, and a 5 percent threshold applies to private business use that is unrelated or disproportionate to the governmental use.

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.

Whether any arrangement that puts district facilities to private use counts under these tests is a factual determination for bond counsel.

The private loan financing test has exceptions of its own under §141(c)(2), including loans for certain general-application taxes or assessments and nonpurpose investments.

On the rebate side, section 148(f)(4)(D) treats the rebate requirement as met for an issue of a governmental unit with general taxing powers when no bond is a private activity bond, 95 percent or more of net proceeds go to the unit's local governmental activities, and the unit reasonably expects to issue no more than $5 million of tax-exempt governmental bonds in the calendar year.

The statute increases those $5 million amounts by the lesser of $10 million or the bonds attributable to public school facility construction, which the Form 8038-T instructions summarize as a $15 million ceiling after 2001, provided no more than $5 million finances non-school purposes.

Those dollar amounts are fixed in the statute rather than indexed, and an issuer whose taxing power depends on another unit's approval does not have general taxing power for this test.

IRS Publication 4079 notes the exception runs to rebate only: yield restriction still applies, a qualifying issuer still needs a temporary period for project funds, and any reserve fund must still be shown to be reasonably required.

The small issuer exception guide covers the aggregation and refunding rules in the same subsection.

What does mGIC's representative record show for school districts?

None of the representative transactions mGIC names on its site is a school district issue; the published case studies span transportation, public power, aviation, higher education and water.

The named transactions include Birmingham Water Works, Prairie State Energy Campus and OSU Village F student housing, and each is listed by name only, with its own page carrying the detail.

mGIC's record since 2002 is 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, led by Managing Director Robert Rasmussen.

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

Its three services are bond-proceeds reinvestment advisory, Bidding Agent services and documentation and settlement, finishing with Bidding Agent and provider certifications delivered to bond counsel.

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.

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

Final legal and tax conclusions on any district 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.