What Should You Know About Arbitrage Rebate?

Background and considerations issuers should understand

Arbitrage is earned when proceeds of a tax-exempt or tax-advantaged bond issue are used to acquire investments that earn a yield more than the bond yield (or arbitrage yield), the average yield issuers pay to their bond holders. Liabilities are measured by computing the excess amount earned on investments over the amount that would have been earned if proceeds were invested at the bond yield.

Unless the issuer can apply for an exception or exemption, the excess earnings must be rebated to the Internal Revenue Service (IRS).

Arbitrage rebate and yield restriction rules are rooted in IRS and U.S. Treasury Regulations. Originally addressed in the Internal Revenue Code of 1954, the rules exist to curb abuses and to provide financial disincentives meant to prevent the issuance of “arbitrage bonds.” Violations of the rules could cause bonds to be treated as arbitrage bonds — meaning they could be treated as taxable bonds.

The timeline for arbitrage rebate compliance begins prior to issuance with timing, project draw schedule, identifying investment options, and evaluating available exceptions and elections. During issuance, considerations include investing proceeds, establishing fair market value of purchased securities, and draw schedule revisions.

Post-issuance considerations are monitoring investments and the draw schedule, record retention, and arbitrage reporting, among others.

PFM Asset Management* (PFMAM), the program administrator to the Michigan Liquid Asset Fund Plus (MILAF+), offers arbitrage rebate compliance services1 for bond proceeds invested with MILAF+. In additional to the MILAF+ and Michigan Term portfolios, investors also have access to Bond Account Management1 and Laddered Portfolios1 through PFMAM for the investment and management of bond proceeds.

To learn more, visit us at booth #301 at the MSBO Annual Conference & Exhibit Show.

* PFM Asset Management is a division of U.S. Bancorp Asset Management, Inc., which serves as administrator and investment adviser to MILAF+.

1 Products authorized by the MILAF+ Board of Trustees and administered by its investment adviser.

U.S. Bancorp Asset Management, Inc., does not provide tax or legal advice, and appropriate professionals should be consulted if such issues are involved. A copy of our Form ADV, Parts 2A & 2B is available upon request.

This information is for institutional investor use only, not for further distribution to retail investors, and does not represent an offer to sell or a solicitation of an offer to buy or sell any fund or other security. Investors should consider the investment objectives, risks, charges and expenses before investing in any of the Michigan Liquid Asset Fund Plus’ (“MILAF+” or the “Trust”) series. This and other information about the Trust’s series is available in the Trust’s current Information Statement, which should be read carefully before investing. A copy of the Trust’s Information Statement may be obtained by calling 1-877-GO-MILAF or is available on the Trust’s website at www.milaf.org. While the Cash Management Class, MAX Class and GovMIC Class seek to maintain a stable net asset value of $1.00 per share and the Michigan Term series seeks to achieve a net asset value of $1.00 per share at its stated maturity, it is possible to lose money investing in the Trust. An investment in the Trust is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Shares of the Trust are distributed by U.S. Bancorp Investments, Inc., member FINRA (www.finra.org) and SIPC (www.sipc.org). PFM Asset Management is a division of U.S. Bancorp Asset Management, Inc., which serves as administrator and investment adviser to the Trust. U.S. Bancorp Asset Management, Inc. is a direct subsidiary of U.S. Bank N.A. and an indirect subsidiary of U.S. Bancorp. U.S. Bancorp Investments, Inc. is a subsidiary of U.S. Bancorp and affiliate of U.S. Bank N.A.

What Should You Know About Arbitrage Rebate?

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