Palm Bay to mail IRS arbitrage rebate after bond investments outpaced spending

Palm Bay City Council voted April 6 to approve returning arbitrage earnings tied to prior bond proceeds to the U.S. Treasury, a required step under federal tax rules when investment yields on bond proceeds exceed allowable thresholds.

Finance staff said the issue stems from investment yields on bonds issued for road paving in 2021. Finance Director Larry Wojciechowski explained the federal arbitrage rules require a calculation after certain periods; a consultant’s analysis showed the city had earned more interest than permitted and needed to remit a rebate. City staff said a check had already been cut and must be mailed promptly to meet federal timing.

City Manager Morton underscored the legal obligation. “I’ve already signed the check. It’s in the mail because I’m not going to federal prison,” he said, a remark made during the council discussion to underscore the statutory requirement.

Councilmembers asked whether the rebate could instead be redirected (for example, back to residents); staff explained tax‑exempt bond rules constrain where the money may be applied and that the IRS requires the payment. A member of the public, Bill Batten, read the rebate amount aloud ($2,054,398) and commended staff’s investing performance despite the required payment.

Deputy Mayor Jaffe moved approval of the payment; Councilman Johnson seconded. The motion passed unanimously, 5‑0.

What’s next: staff will complete the payment to the IRS and said they will evaluate arbitrage calculations on a more frequent schedule going forward and examine spend‑down strategies to reduce future rebate exposure.