Investment of Escrowed Bond Proceeds

The objective in any refunding of a School Facilities Construction Commission - assisted bond issue is to maximize savings to the borrower(s). The ultimate savings are significantly impacted by the method used in investing bond proceeds. The SFCC expects fiscal agents to assess investment opportunities and select vehicles that accomplish the most savings for school districts and the SFCC.

The SFCC regards the following four investment methods as acceptable:

  • State and Local Government Series – When positive arbitrage is apparent, SLGS offer the most efficiency.
  • Open Market Securities
    • Direct obligations (including obligations issued or held in book entry form) of the United States of America; and
    • Pre-refunded municipal obligations as follows:

      Any bonds or obligations of the Commonwealth of Kentucky or its agencies and instrumentalities which are not callable by the obligor; and

      • Are rated, based upon the related escrow, in the highest rating category by a nationally recognized rating agency; and
      • Are fully secured as to principal, interest, and redemption premium, if any, by a fund consisting only of cash or obligations described in paragraph (i), which may be applied to the payment of such principal, interest, and redemption premium.

    Should it be determined that negative arbitrage will exist with SLGS and that investment in open market securities will achieve significantly higher yields, the fiscal agent is to obtain at least three competitive bids from firms recognized as having competent government bond desks.

  • Bank certificates of deposit – Some SFCC-assisted refundings are relatively small and the escrows do not lend themselves to competitive bids by major government bond houses. If bank certificates of deposit are used, the fiscal agent must receive at least three competitive bids from Kentucky banks for the escrow account. All bank certificates of deposit must be 100% collateralized by full faith and credit securities of the United States Government. The securities collateralizing the certificates of deposit must be marked to market on a quarterly basis to ensure that the market value of the securities pledged are at least equal to the amount of funds escrowed.

    The certificates of deposit must be held in a separate identifiable account on the bank’s books, an approved correspondent bank, or by the Federal Reserve Bank for the credit of the escrowed bond issue.

    All bank certificates of deposit must be collateralized by obligations of, or guaranteed by, the United States Government to the full extent of the principal and interest requirements.

  • Fully collateralized repurchase agreements

    Repurchase agreements fully collateralized by full faith and credit obligations of the United States Government may be competitively bid by at least three Kentucky banks. The collateral requirements for repurchase agreements will be the same as with the certificates of deposit.

Investment of Escrowed Bond Proceeds