The federal arbitrage restrictions are among the most complex aspects of the U.S. tax code and the arbitrage rebate requirement is perhaps the most costly provision of the 1986 Tax Reform Act for state and local governments.
To comply with various arbitrage rebate rules, issuers are required to perform numerous tests and calculations for each of their outstanding bond issues. This process diverts staff resources from important governmental activities. Furthermore, governments must undertake significant ongoing expenditures for legal advice, investment advice, computer and accounting support, record storage, and general management oversight.
A survey released in 1999 by GFOA and NACo found that average staff time spent complying with the arbitrage rebate mandate was 303 hours, with the highest number of hours reported at 3,360, equivalent to 1.5 full-time positions. Average annual costs were $33,305 and the highest was $490,000. What’s more, 70 percent of the bonds from jurisdictions with the highest compliance costs had no rebate due.