(a) The principal proceeds from the sale of any general obligation refunding bonds shall be applied only as follows, either to the:

(1) Immediate payment and retirement of the obligations being refunded; or

(2) Extent not required for the immediate payment of the outstanding obligations being refunded, the proceeds of the general obligation refunding bonds shall be deposited in escrow with a bank or trust company either located in the State of Tennessee or regulated by a federal entity to provide for the payment of the outstanding obligations and to pay any expenses incurred in connection with the refunding, and may also be used to pay interest on the general obligation refunding bonds prior to the retirement of the outstanding obligations.

(b) Money in any such escrow fund may be invested in:

(1) Direct obligations of, or obligations, the principal of and interest on which are guaranteed by, the United States;

(2) Obligations of any agency or instrumentality of the United States;

(3) Certificates of deposit issued by a bank or trust company located in the state of Tennessee; provided, that such certificates shall be secured by a pledge of any of the obligations referred to in subdivisions (b)(1) and (2) having an aggregate market value, exclusive of accrued interest, equal at least to the principal amount of the certificates of deposit so secured; or

(4) Obligations which are rated in either of the top two (2) highest rated categories by a nationally recognized rating agency of such obligations and whose interest income is exempt from tax by the United States, which are direct general obligations of the state or a political subdivision thereof or obligations guaranteed by the state, to the payment of the principal of and interest on which the full faith and credit of the state are pledged or obligations of any other state or political subdivision or instrumentality thereof; provided, that approval of the comptroller of the treasury or the comptroller's designee is first obtained.

(c) The bank or trust company holding the proceeds of such general obligation refunding bonds in escrow shall deliver to the local government official designated by law as custodian of local government funds, a copy of the document evidencing each transaction relating to the escrow fund, or a report thereof, as each transaction occurs. On or before August 1 of each year, a report of the financial condition of the escrow fund as of June 30 of that year, and an operating statement for the escrow fund for the year ending June 30 of such year, shall be delivered to the custodian. However, at the discretion of the escrow agent, the report of the financial condition of the escrow fund may be made on a more frequent basis. Nothing herein shall be construed as a limitation on the duration of any deposit in escrow for the retirement of obligations being refunded but which shall not have matured and which shall not be presently redeemable or, if presently redeemable, shall not have been called for redemption.