The interest paid on most debt issued by state and local governments is
exempt from federal income tax. As a result, purchasers of state and municipal
debt are willing to accept lower interest rates than they would on taxable
debt. When state and local governments temporarily reinvest the proceeds of
such tax-exempt debt in materially higher-yielding taxable securities, the
federal tax code refers to this practice as arbitrage. In certain
specific situations known as "safe harbors", governments are
permitted to keep the extra earnings that result from arbitrage. Otherwise,
any excess earnings resulting from arbitrage must be rebated to the federal
government. The following new expenditure sub-object code under the category
of "Interest and Service Charges" has been established to record
payments remitted (rebated) to the federal government:
6195 Arbitrage Rebate Expense on Revenue Bond Debt Please note this new expenditure sub-object code should be used only for actual remittances to the federal government. It should not be used for transfers from the agency budgetary accounts into bond rebate accounts. This revision will be reflected in the Uniform Expenditure Classification of Expenditure Sub-object Codes filing (PPM No 7,002) on the Division of Accounts and Reports web site http://www.da.ks.gov/ar/ppm/. DB:sj
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