As 2019 commences, there is no consensus on exactly where investment yields are headed. If short-term investment yields rise above the prevailing bond yields, issuers may see something on their balance sheets they haven’t seen in 10 to 15 years: arbitrage liabilities. If short-term investment yields remain below the prevailing bond yields, any preventative actions taken by issuers can be viewed as a reinforcement of their current post issuance compliance policies and procedures.


The IRS requires a calculation to be performed called Yield Restriction. This calculation encourages issuers of new money project issues to spend their proceeds within three years of the date of issuance. If there are unspent proceeds at the end of the three-year period, the Yield Restriction calculation kicks in and starts with a beginning zero balance (regardless of any negative Rebate or Yield Restriction generated during the first three years). In a rising investment rate environment, if an issuer has unspent proceeds at the end of the three-year period and the investment rates are above the issue’s bond yield, a Yield Restriction liability may be generated and a payment may need to be made.

PREVENTATIVE ACTION: Monitor and focus on spending new money proceeds within three years of the date of issuance.


From a Rebate standpoint, the IRS allows issuers to earn and retain a profit on investing new money project proceeds if they are spent quickly enough to meet a spending exception. The spending exception time periods are 6, 18, and 24 months. The 18- and 24-month exceptions have semiannual interim spending benchmarks that must be met. If an issuer misses a benchmark, their spending exception is permanently lost for that issue.

PREVENTATIVE ACTION: Monitor your investment rates and bond yields by issue. Focus on spending the new money proceeds and monitor the benchmarks for compliance.

The past 10-15 years have lulled issuers into a state of comfort when it comes to not worrying about Yield Restriction and Rebate liabilities. Issuers need to be monitoring investment yields and be comparing them to their bond yields. Unless issuers are proactively monitoring and spending project proceeds, they may be sending a portion of their investment earnings to the U.S. Treasury.