Salt Lake City must return a small amount of interest earned on bond investments to the federal government under the 1986 Tax Reform Act, and city officials are complaining that taxpayers will be the losers.

The city must return only $3,174 to the Internal Revenue Service, but Finance Director Lance Bateman said the requirement is a disincentive for local governments to make intelligent investments.Under the act, if a local government issues bonds at a given rate and then invests the money borrowed at a higher rate, the city must return the difference between the two rates of return - called the arbitrage - to the federal government.

Salt Lake City has only issued eight bonds affected by the act since it was passed into law in 1986, said Deputy Treasurer Daniel Mule. The rebate totals must be calculated yearly and returned to the IRS five years after the bond is issued, Mule said.

Although the current impact is relatively minor, Bateman said that in the future the measure could cost city taxpayers millions of dollars.

For example, the city was able to borrow less money to pay for the $30 million restoration of the City-County Building, knowing it could make money from investing some of the unused bond money.

"We were able to save the taxpayers $4 million," Bateman said.