Kansas Department of Administration, Office of General Services
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Accounts and Reports

DATE:  April 11, 2003
SUBJECT: Expenditure Sub-object Code for reporting arbitrage rebate expense
EFFECTIVE DATE:   July 1, 2003
A & R CONTACT: Financial Integrity Team:
Brett Bauer     (785) 296-4903     (brett.bauer@da.state.ks.us)
APPROVAL: Approved by Dale Brunton
SUMMARY: Establishment of additional expenditure sub-object code for Arbitrage Rebate Expense on Revenue Bond Debt

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/.