West County Wastewater faces $1.7m IRS arbitrage rebate on bond proceeds

West County Wastewater faces $1.7m IRS arbitrage rebate on bond proceedsWest County Wastewater has provisionally identified a $1.7 million arbitrage-rebate obligation arising from investment earnings on the West County Facilities Financing Authority's 2021 wastewater revenue bonds. Staff said the payment would still leave the utility with positive net interest earnings from the bond proceeds.

The district earned approximately $6 million in net interest on bond proceeds, creating an estimated $1.7 million federal arbitrage-rebate obligation.

The bonds had a $79.6 million par value and generated about $90 million in proceeds because they were sold at a premium.

Staff expects the final rebate calculation later in October and said the required IRS filing is due by November 30, 2026.

The committee asked staff to return with the final payment amount and moved the item toward consideration by the full board.

West County Wastewater expects to pay the Internal Revenue Service about $1.7 million under federal bond-arbitrage rules after earning approximately $6 million of interest on proceeds from the West County Facilities Financing Authority's 2021 wastewater revenue bonds. The Finance & Administration Committee reviewed the preliminary obligation on 8 October and directed staff to take the matter forward for full-board consideration, subject to confirmation of whether it should be considered by the wastewater board or the financing authority. Staff expects the final calculation later in October and said the required filing is due by 30 November 2026. Finance manager Maria Bagley told the committee that the tax-exempt bonds had a $79.6 million par value, while their premium sale generated approximately $90 million of proceeds. The district initially invested unused proceeds in Treasury bills and money-market accounts while funds were awaiting use. Under tax-exempt bond rules, investment earnings are limited relative to the borrowing cost; earnings above the permitted level must be rebated to the IRS. The weighted borrowing cost was cited as 1.58%, while returns on the district's short-term investments rose from about 0.16% in September 2021 to a peak of 3.65% in 2023. Bagley said the higher market returns generated the estimated rebate obligation, but stressed that the district had earned substantially more interest than the anticipated payment. To prevent further liability, staff said the district moved investments into State and Local Government Series securities, known as SLGS, in approximately June 2024. The final rebate amount may differ from the preliminary $1.7 million estimate. Committee members asked staff to make the compliance basis clearer in the eventual board report, including the relevant legal reference, and to explain arbitrage in plain language. The chair also requested that the presentation connect the transaction to the district's fiscal-stability and fiduciary-responsibility objectives. No payment was approved at the committee meeting. Staff said it could return in November with the final figure for approval.