To ensure that any future decisions to enter into interest rate swaps are carefully considered, the city should specifically disallow the use of derivatives for speculative purposes and should require the retention of the documents and analyses that support the decision to enter into the swap.
In October 2016, the City revised its Investment Policy to address the considerations required when evaluating whether or not to enter into interest rate swaps. The City specifically disallows the use of derivatives for speculative purposes (as stated in Section 8.3), and requires the retention of the documents and analyses that support the decision to enter into a given swap contract (as stated in Section 8.4).
The City will add clarifying language in the Budget Policies and Procedures manual that that there will be no derivatives entered into for speculative purposes. The Budget Policies and Procedures manual will be updated to document the various steps taken prior entering into any future interest rate swaps. These steps will include financial analysis, risk and benefits, independent examination, and approval from City council prior to entering into a transaction. This will be presented to City Council as part of the annual update of the Budget Policies and Procedures manual.
On February 4, 2014, the City Council adopted the Budget Policies and Procedures Manual, which contains a debt management section that limits borrowing to use for capital improvements or projects that cannot be financed from current revenues. This section also provides guidelines for the issuance and repayment of debt. (See page 6 of Budget Policies and Procedures Manual.) Documents related to interest rate swaps are retained in accordance with the Citys Records Retention Policy (see pages 13-15), a copy of which is included.
Our review of the city's Budget Policies and Procedures Manual determined that the city has not implemented a policy that specifically disallows the use of derivatives for speculative purposes.
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. Further, the City Clerk's Office, in conjunction with the City Attorney's Office, is currently conducting a comprehensive review and proposed update of the City's Records Retention Schedule.
The city's response states that the finance director is currently evaluating a comprehensive debt policy to be proposed to the city council. According to the city, it plans to present the comprehensive debt policy in February 2014.
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.