(The Center Square) – The Bossier Parish School District unintentionally made too much investment earnings in recent years from a federally-backed loan program and will need to repay the government a portion.
School board trustees on Jan. 12 approved a $49,039 “bond arbitrage” payment that stems from an IRS rule that prevents local governments from netting excessive returns off federally subsidized bonds.
The rule restricts municipalities from exploiting generous federal loan rates – borrowing at a tax-exempt rate and investing the funds at a higher rate. When this occurs, excess returns are given back to the IRS.
The district’s investment earnings are small relative to the massive bond ask but the process shines a light on a widely unknown 1986 rule that, if violated, carries IRS penalties, including the loss of tax-exempt status in extreme cases. Congress established the rule in the 1980s because local governments were exploiting tax-exempt loans to generate returns.
The IRS describes the arbitrage rule as highly technical and formula-driven. Bossier did not violate it but it did collect a return above the bond yield and sent those funds back to the federal government. To ensure compliance, the district enlisted the help of The Arbitrage Group, a Texas-based financial services firm.
In 2012, Bossier Parish voters approved a $210 million bond referendum to build new schools and improve existing ones, scheduled in two phases over a decade, according to the district’s website. General obligation bonds are used to raise money for capital projects and repaid through an annual property tax levy.
“That’s too much to spend at one time. The final bond issue for $25 million was in 2020, and that’s the amount that became part of the calculation,” said Nicia Bamburg, the district’s chief financial officer.
When general obligation bonds are issued to construct a project, the proceeds have to be deposited in the bank until construction bills are due and all the money is spent. While in the bank, that money earns interest. “Any interest over a certain amount must be returned in the form of a rebate,” explained attorney Mike Busada, who represents the school board.
The money invested in their bank gained about $323,202 in interest. The district was allowed to keep $274,163 to pay project costs or to reduce how much tax money is needed from property owners.
The arbitrage – interest earnings of $49,039 – had to be given back. Because Bossier’s bond project was rolled out in phases, the arbitrage trigger was unavoidable, Bamburg said.
Governments self-report these bond proceeds on five-year cycles. The issuer monitors the proceeds and when “earnings exceed permitted yields, self-report and rebate excess amounts to the IRS,” according to the IRS.
