The authority should reduce its current cash balance by continuing to make disbursements to hospitals while refraining from requesting additional bond sales. If the authority believes it needs to retain a portion of its cash balance as a contingency reserve for unforeseen circumstances, it should perform and document an analysis demonstrating the appropriateness of the reserve level it adopts.
The Authority has determined that no contingency reserve or percentage margin will be required due to the new system of issuing commercial paper, rather than utilizing upfront general obligation bond sales.
By continuing to make disbursements to hospitals while refraining from receiving additional bond proceeds, fund cash available to the Authority for Proposition 61 grants has been reduced to $33.2 million, and fund cash available to the Authority for Proposition 3 grants has been reduced to $22 million as of June 30, 2013.
As mentioned in the Authority's 60-day response, the Authority asked its financial advisor, Sperry Capital, Inc. (Sperry), to help determine an appropriate reserve for the two children's hospital programs. Sperry concluded, and the Authority concurs, that a fixed reserve does not fit the dynamics of the program, in which disbursement amounts and timing vary widely and without a pattern. Instead, Sperry recommended a contingency margin (perhaps 10 percent initially) in the Authority's funding requests to the Department of Finance. However, rather than a fixed reserve amount or the contingency margin recommended by Sperry, the Authority will evaluate whether a specific dollar amount margin is needed at the time of each funding request in light of currently-identified uncertainties and conditions at the time of the request. Because the Authority will be able to tap the State's $1.6 billion commercial paper program for quick access to funding in the event of a shortfall in available funds, this approach seems most prudent.
As noted above, the authority indicates that it has not requested additional bond funds, and that it continues to process requests for disbursements of grant funds received from hospitals. The authority reports it has undertaken an analysis with its financial advisor to identify an appropriate reserve level, and expects to report on the results of this analysis and the resulting implementation plans in its six-month response. (See 2013-406, p. 89)
†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.