WASHINGTON -- Municipal bond issuers that make final arbitrage rebate payments to the federal government early should get the same benefit as those that wait, an arbitrage consultant told the Treasury recently.

Terence P. Burke, a vice president at First Southwest Co. in Dallas, said in a recent letter to the Treasury that rebate rules allow issuers making their final payments after bonds mature to ignore interest earned during the 60 days between the arbitrage computation and payment dates.

Issuers that make their final payment before the bonds mature, however, get no such benefit and have to take into account the interest earnings on the arbitrage during that 60-day period, he said. The interest earnings during that period are then compounded until the bonds mature.

"It's just a technical thing, but depending on the size of the rebate, it can be quite significant for an issuer," Mr. Burke said in a recent interview.

In his letter to David A. Walton, the Treasury's attorney-adviser for tax-exempt bonds, Mr. Burke cited but did not identify a client that made an early final rebate payment and had to pay the Treasury $17,000 extra in interest earnings on arbitrage between the computation and payment dates. The issuer would have owed $29,000 in interest from that 60-day period over the life of the bonds, but First Southwest was able to reduce the amount to $17,000 by taking the present value of the $29,000.

"Since the Treasury has already said you don't have to worry about interest earnings during the final 60-day period, why not provide the same benefit to issuers who want to settle up early," he said in the interview.

First Southwest does annual rebate calculations for some 650 bond issues. Mr. Burke said many of the company's clients would like to make their final rebate payments early because it allows them to avoid having to track earnings over a period of years, he said. It also allows issuers to determine their rebate liability with certainty for annual financial statements, he said.

"We believe that the Treasury Department did not contemplate the desire of issuers to remit all of the rebatable arbitrage earlier than the final maturity date. However, this preference is more widespread than we though would occur," he told Mr. Walton.

Mr. Burke recommended two alternative courses of action to correct this discrepancy among issuers or to at least make compliance easier for issuers that wnat to make their final arbitrage rebate payments to the Treasury early. The first proposal would be to modify the rules so that if an issuer remitted 100% of its arbitrage rebate payment, the payment would be considered to be made on the computational date rather than on the actual disbursement date, which could be 60 days later.

The second course of action -- which would apply if the Treasury insisted that issuers making early final rebate payments have to pay interest during that 60-day period -- would be to agree that no further rebate payments would need to be made thereafter.

"They'd pay the interest during the 60-day period and then that would stop them from having to make any future payments," said Mr. Burke.

Under the rebate requirements, which became effective on Aug. 31, 1986, for most new governmental issues, arbitrage must be computed at least every five years for fixed-rate issues. At least 90% of the rebatable arbitrage must be paid to the federal government within 60 days of those fifth-year anniversary computational dates. The remaining 10% can be paid later.

The Treasury revised the rebate rules earlier this year to allow issuers making final arbitrage rebate payments after bonds mature to ignore the earnings on the arbitrage during the 60-day period between the computation and the payment.

Mr. Burke told Mr. Walton that "the practical application of the rule should be the same in the event the issuer elects to pay all of the rebatable arbitrage prior to the final maturity date," Mr. Burke told Mr. Walton.

If the Treasury were to adopt such a policy, he said, issuers probably would make earlier final arbitrage rebate payments.

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