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Bond Accountability Commission 2 Recommendations Page 126

less than the net interest cost to CMSD of either BABs or even RZEDBs even after the federal subsidy payments. In addition, regardless of whether the direct subsidy or credit option is chosen, CMSD would have the opportunity to make annual sinking fund deposits for the QSCBs or QZABs that could be invested at a rate that may be higher than any borrowing cost actually incurred by CMSD. Of course, the amounts of those bonds that can be issued are limited and the uses for which the proceeds can be spent are more limited than the uses available for the other types of bonds. In addition, it should be noted that ARRA specifically requires that the Davis-Bacon labor standards apply to projects financed with QSCBs, QZABs, and RZEDBs. Therefore, according to the Labor Department, any contract for construction, alteration, or repair using proceeds from any of these types of bonds must incorporate the Davis-Bacon contract clauses stated in 29 CFR 5.5(a)(1) through (10). These standards include, among others, a prevailing wage requirement that may result in a higher cost of facilities that could be obtained using financing vehicles that did not implicate the Davis-Bacon rules. The federal tax law imposes “arbitrage” restrictions on all these types of bonds. In general, the arbitrage rules limit the ability of CMSD to invest amounts that are proceeds of the bonds or that are expected to be used to repay or secure the bonds at yields in excess of the yield on the bonds. There are many exceptions to these rules that allow, for example, the construction fund and a reasonably required reserve fund to be invested without regard to yield. However, as a general matter, even if the construction fund can be invested at a yield in excess of the yield on the bonds, any “arbitrage profits” must be

BAC2 Recomendations Final 04062010  
BAC2 Recomendations Final 04062010  
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