What is Yield Restriction?
In addition to the arbitrage rebate requirements, there is another set of separate and distinct rules known as yield restriction/yield reduction requirements.
Project Fund Yield Restriction
Yield restriction/yield reduction payments are required if project funds are invested above the materially higher bond yield (bond yield + .125%) during certain time periods. Yield restriction on the Project Fund is required if both of the following conditions exist:
- Project bond proceeds remain after the Temporary Period (normally 3 years after the delivery date) in excess of the minor portion (minor portion; the lesser of $100,000 or 5% of the sale proceeds of the issue).
- Project bond proceeds were invested above the materially higher yield.
Yield restriction calculations are initiated on day one of year four and continue until the project fund balance falls below the minor portion. The Project Fund (blue line) yields higher than the materially higher bond yield (red line) during years 4-5.
Refunding bonds can also have associated project funds that require yield restriction calculations by means of the remaining project funds of the refunded bonds. The IRS filing date for submitting a yield restriction payment is within 60 days of each of the 5th year anniversary dates and when the bonds mature.
Reserve Fund Yield Restriction
Reserve fund yield restriction/yield reduction regulations require that reserve funds be invested at or below the bond yield +.001% during certain time periods. Yield restriction is required; if both of the following conditions exist:
- The reserve balance has exceeded the lesser of the following ("three part test"):
- 10 percent of the principal amount of the issue;
- Maximum annual debt service on the issue;
- 125 percent of the average debt service on the issue;
- The reserve funds were invested above the bond yield + .001%.
The IRS filing date for submitting a reserve fund yield restriction payment is within 60 days of each of the 5th year anniversary dates and when the bonds mature.
Debt Service Fund Yield Restriction
The debt service fund contains a reserve portion unless the fund balance is depleted at least once each bond year, except for a reasonable carryover amount not to exceed the greater of:
The earnings on the fund for the immediate preceding bond year; or
One-twelfth of the principal and interest payments on the Debt Issuance or the immediately preceding bond year.
If the debt service does not satisfy at least one of the two conditions listed above than a portion of the debt service fund is considered to serve as a reserve and will be subject to reserve fund yield restriction regulations and possible arbitrage rebate.