Report 2011-131 Recommendation 38 Responses

Report 2011-131: City of Vernon: Although Reform Is Ongoing, Past Poor Decision Making Threatens Its Financial Stability (Release Date: June 2012)

Recommendation #38 To: Vernon, City of

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.

Annual Follow-Up Agency Response From October 2016

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.

  • Completion Date: October 2016

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented


Annual Follow-Up Agency Response From October 2015

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.

  • Estimated Completion Date: July 2016

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented


Annual Follow-Up Agency Response From July 2014

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.)

  • Completion Date: February 2014

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

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.

  • Auditee did not address all aspects of the recommendation

1-Year Agency Response

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.

  • Estimated Completion Date: September 2013
  • Response Date: July 2013

California State Auditor's Assessment of 1-Year Status: Partially Implemented


6-Month Agency Response

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.

  • Response Date: January 2013

California State Auditor's Assessment of 6-Month Status: No Action Taken


60-Day Agency Response

The city did not address this recommendation in its August 2012 response. (See 2013-406, p. 198)

  • Response Date: August 2012

California State Auditor's Assessment of 60-Day Status: No Action Taken


All Recommendations in 2011-131

Agency responses received after June 2013 are posted verbatim.


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