(A) The Tax Reform Act of 1986 (26 U.S.C. §§ 149 et seq.) places limitations on the town’s yield from investing certain tax-exempt general obligation and revenue bond proceeds, debt service funds and reserve funds. These arbitrage rebate provisions require that the town compute earnings on investments from certain issues of bonds on a periodic basis to determine if a rebate is required.
(B) To determine the town’s arbitrage position, the town is required to calculate the actual yield earned on the investment of the funds and compare it to the yield that would have been earned if the funds had been invested at a rate equal to the yield on the applicable bonds sold by the town. The rebate provisions state that periodically, not less than every five years, and not later than sixty days after maturity of the bonds, the town is required to pay the U.S. Treasury a rebate of any excess earnings. These restrictions require extreme precision in the monitoring and record-keeping of investments, particularly in computing yields to ensure compliance. Failure to comply can dictate that the bonds become taxable, retroactively from the date of issuance.
(C) The town’s investment position relative to the arbitrage restrictions is to continue pursuing the maximum yield on applicable investments while ensuring the safety of capital and liquidity. It is a fiscally sound position to continue maximization of yield and to rebate excess earnings, if necessary.
(Res. 2009-01, passed 3-7-2009)