HomeMy WebLinkAboutIR 7791 INFORMAL REPORT TO CITY COUNCIL MEMBERS No.
.$I T 4 4,4 January 18, 1994
"aE10PP To the Mayor and Members of the City Council
Subject: Investment of Bond Proceeds and Arbitrage Rebate
When the City sells bonds, the proceeds are deposited in the City's consolidated bank
account,becoming part of the City's investment pool, and are recorded as a revenue to a
Capital Projects Fund in the City's accounting system. All of the City's cash, including
bond proceeds, is invested in a portfolio of U. S. Treasuries, U. S. Agencies and TexPool
(the State's overnight investment pool). The interest earned from these investments is
allocated among the various City funds based on each fund's equity (or ownership)
position in the portfolio.
Interest earnings on the General Purpose Capital Projects Funds are transferred to the
General Debt Service Fund and used to make the interest payments on the outstanding
General Purpose bonds. In other words, the interest earned on the bond proceeds is
used to cover the interest owed on the outstanding bonds; thereby, reducing the taxes
that must be collected for debt service. For example, the FY 1993-94 Budget anticipates
$4,625,000 in interest earnings will be used in financing the FY 1993-94 debt service
payments. If the interest earnings were retained in the capital projects funds,another 30
would need to be added to the existing 95o tax levy to fund the debt service payments.
Since 1986, the Federal tax laws have required the rebate of arbitrage interest earnings
on tax-exempt bond proceeds. Arbitrage is the difference (i.e. the profit) earned from
investing low-yielding tax-exempt bond proceeds in higher-yielding taxable securities.
The general rule is that a municipal issuer may not "profit"by investing the proceeds of
a bond issue at a yield (i.e. interest rate) which exceeds the yield on the bonds. If the
issuer does profit,the "profits"must be paid to the Federal government.
Annually, the City's financial advisor, First Southwest Company, calculates the
arbitrage liability for each bond issue by comparing the actual interest earnings on the
proceeds with the allowable interest earnings. Earnings in excess of the allowable
earnings are set up as a liability in the Debt Service Fund, and five years after the date of
the bond issue,a check for the arbitrage liability is sent to the IRS.
In effect, the interest earnings on the $24,000,000 General Purpose Bond Issue, Series
1988, have been used to make the interest payments on the outstanding bonds or
rebated to the Federal government. Interest earnings are not available to fund the
additional$200,000 needed to complete the Southwest Recreation Center Gymnasium.
Bob Terrell
City Manager
BT:JRK:tm
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS