Ampersand Explains: What is Arbitrage Rebate Compliance? 
Arbitrage rebate compliance (ARC) is a requirement of the Federal Tax Code of 1986. The IRS has a department dedicated to monitoring how earnings from investments made with tax-exempt bond proceeds are handled. Arbitrage occurs when an issuer uses the proceeds from a tax-exempt bond to buy investments that earn a higher yield than the bond itself. The excess earnings (or arbitrage profit) may need to be "rebated" to the federal government. 

For school districts, understanding and complying with these rules is critical. Failure to comply could result in penalties, fines, or even the loss of the bonds’ tax-exempt status. This could raise borrowing costs for future projects and create unnecessary financial strain, making compliance not just a regulatory requirement but a financial safeguard. 

Districts may qualify for exceptions, as defined by the IRS, from the arbitrage rebate calculation. Having a partner, like Ampersand, that can help navigate the complexities of arbitrage rebate compliance is crucial.  

Key Terms to Understand 
First, in order to fully understand arbitrage rebate compliance, it’s helpful to understand these key terms: 

• Tax-Exempt Bonds: Bonds issued by government entities or qualified organizations, where the interest earned by investors is not subject to federal income tax. These bonds often carry lower interest rates than taxable bonds. 

• Arbitrage: Occurs when the yield on investments made with bond proceeds is higher than the bond yield.   

• Arbitrage Rebate: Excess earnings that must be returned to the federal government to comply with IRS requirements. 

• Yield Restriction: A limit on the earnings that investments funded by bond proceeds can generate to prevent excessive arbitrage. 

How the Process Works: A School District Example 
Suppose a school district issues tax-exempt bonds to fund the construction of a new school. While the district waits to use all the bond proceeds for construction payments, the funds are invested in short-term securities. 

If these investments generate earnings exceeding the bond’s yield over the life of the issue, the district is required to calculate the excess earnings and potentially rebate the overage to the federal government. This involves: 

1. Tracking Earnings: Keeping detailed records of investment income and bond expenditures. 

2. Performing Calculations: Accurately determining whether the investment earnings exceed the bond yield. 

3. Making Payments: Rebating any required amounts to the IRS within specified deadlines. 

Compliance is crucial because missing deadlines or miscalculating rebate liabilities could lead to penalties or, worse, jeopardize the tax-exempt status of the bonds 

Why Work with a Partner? 
Navigating arbitrage rebate compliance is a complex and time-sensitive process. For school districts, partnering with a cash management expert offers significant advantages: 

• Expertise: Professionals understand the intricacies of IRS rules and can ensure compliance. Additionally, there are circumstances wherein interest earnings may be exempt from rebate status, and it’s important to understand how to best take advantage of these to optimize your referendum dollars.  

• Efficiency and Risk Mitigation: Working with experienced municipal financial advisors can ensure your bond proceeds are tracked correctly and efficiently, deadlines are met, and your liabilities are accurately calculated.  

Compliance with arbitrage rebate rules may seem daunting, but with the right partner, school districts can navigate these challenges effectively and confidently. As registered municipal advisors, our team at Ampersand is ready to help you handle your compliance needs so that you may focus on your number one priority: serving the students and their families of your community.  

Learn how Ampersand can help your organization manage bond proceeds. Contact Ampersand to get started.