Because yield restriction starts later in the life of a bond issue, and at the end of the various temporary periods (3 years after the issue date of the bonds for project funds is the most common), the potential for a mismatch in rates is higher than for arbitrage rebate. For example, if an issuer issued bonds in 2021, at a very low rate, prior to when the Fed began raising interest rates, and has a large balance still invested after the temporary period at high investment rates, it is very likely that the issuer will incur a yield restriction liability. Furthermore, because arbitrage rebate and yield restriction apply to similar, but not the exact same proceeds, and for differing periods of time, it is possible for an issuer or borrower to not have positive arbitrage rebate yet still incur a positive yield restriction liability.

The nuances noted above, coupled with the fact that yield restriction has not been a concern for issuers and borrowers for almost 15 years, make this area of tax compliance especially tricky to navigate. Additionally, increased IRS enforcement in this area is expected. To help prepare for potential yield reduction payments and IRS scrutiny, issuers and borrowers of tax-exempt debt should ensure that they are current on their arbitrage rebate and yield restriction analyses, especially for bonds that were issued in the 2019 – 2022 timeframe.

Alan Bond, with over 32 years of public finance experience, serves as Managing Director of BLX’s New York office. In addition to overseeing the day-to-day activities of the BLX professionals located in New York, Alan is responsible for BLX’s post-issuance tax compliance practice area which includes private business use analyses, IRS Schedule-K (Form 990) preparation, management contract review, and policy and procedure development.

Sandee Stallings is BLX’s Chief Operating Officer. A senior member of BLX’s management team with 35 years of public finance experience, she heads BLX’s Compliance Practice, which encompasses arbitrage rebate and yield restriction compliance, post-issuance compliance, secondary market disclosure, and program administration services. Sandee is responsible for all aspects of project management, client services, work quality, and the overall operations of our compliance and consulting services nationwide. She oversees production in the Los Angeles, Phoenix, Dallas, and New York offices.