To ensure that any future decisions to enter into interest rate swaps are carefully considered, the city should develop and follow a process that thoroughly analyzes the risks and benefits of the potential swap transaction.
The City has revised its Investment Policy, effective October 2016, to address the parameters of allowable hedgable transactions and the assessment process that must be followed when examining the potential benefits and risks that may exist. The policy dictates that, prior to entering into any new third party agreement, City Council shall be briefed with the proposed investment options along with staff recommendations. Overall, the City has taken a conservative approach with swap transactions. The updated policy details the wide range of considerations associated to swap contracts and is designed to provide distinct guidelines that allow staff to assess all aspects properly and make the most informed decision possible.
It should also be noted that the City's holdover swap agreements related to energy supply were successfully retired in July 2015 as part of bond refunding.
The City will update the Budget Policies and Procedures manual to document the steps taken prior entering into future interest rate swaps. These steps will include financial analysis, risk and benefits, legal review, and approval from City council prior to entering into a transaction.
On February 4, 2014, the City Council adopted the Budget Policies and Procedures Manual, which contains a section specifically addressing investments and examination/analysis of swap transactions. (See page 5 of Budget Policies and Procedures Manual.)
The city's policy addresses existing interest rate swaps, but our recommendation is that the city develop a process to ensure that it thoroughly analyzes the risks and benefits of any future interest rate swaps.
On May 7, 2013, as part of the first of three public City Council study session meetings for the proposed 2013-2014 fiscal year budget, the Finance Director provided an up-to-date analysis of the City's debt structure. The Finance Director is currently evaluating a comprehensive debt policy to be proposed to City Council that includes: (1) prohibition of swap transactions for speculative purposes; (2) full presentation to City Council prior to entering into any future swap transactions; and (3) retention of all supporting documentation and reference material during the life of the swap agreement.
The city indicates that by the May 7, 2013 city council meeting, a risk/reward analysis process regarding potential swap transactions will be part of the comprehensive debt policy and include prohibition of swap transactions for speculative purposes, full presentation to the city council prior to entering into any future swap arrangements, and retention of all supporting documentation and reference material during the life of the swap agreement.
The city did not address this recommendation in its August 2012 response. (See 2013-406, p. 198)
†Response Type refers to the interval in which the auditee is providing the State Auditor with their status in implementing recommendations made in an audit report. Auditees must submit a response regarding their progress in implementing recommendations from our reports at three intervals from the release of the report: 60 days, six months, and one year or subsequent to one year.
*Agency responses received after June 2013 are posted verbatim.