Debt Management Function (1502-8) Department-wide Report Introduction This report was prepared for the Transportation Commission, TxDOT Administration and Management. The report presents the results of the Debt Management Function Audit which was conducted as part of the Fiscal Year 2009 Audit Plan. The objective of the audit was to determine if the debt management function is being performed in compliance with the applicable requirements and if there are any opportunities for improvement. Scope Audit team included Dennis Olson (Staff Auditor) with Raymond Martinez (Auditor-in-Charge) providing oversight for the audit. The audit work was conducted during the period of December 2008 through June 2009. All work was performed in accordance with the International Standards for the Professional Practice of Internal Auditing of The Institute of Internal Auditors. Audit work included interviews with employees in the Finance Division and the Administration; reviews of various documents including the laws, policies, financial statements for TxDOT, Texas Mobility Fund and CTTS (Central Texas Turnpike System), Master Resolution for Commercial Paper and the Master Secured Loan Agreement for the TIFIA (Transportation Infrastructure Finance and Innovation Act) Loan; the development of flow charts of the bond and commercial paper issuance and payment processes; and the examination of a sample of bond transactions, various bond related reports and a sample commercial paper note. Background The debt management function includes the department s authorization to issue bonds, notes and other obligations for several financing programs including the Texas Mobility Fund (TMF) bonds, State Highway Fund (SHF) bonds and short term obligations. The TMF and SHF bond proceeds may be used to fund state highway improvement projects. The TMF bonds are payable from certain revenues deposited into the Texas Mobility Fund and the SHF bonds are payable from revenues deposited into the State Highway Fund. Commercial paper notes are used to carry out the department s functions and are payable from the State Highway Fund as appropriated by the Legislature. The TIFIA Loan is a form of credit assistance and one was obtained to help finance the CTTS. This loan was obtained from the federal government. The debt management function is managed by the Debt Management Section of the Finance Division (FIN). There are six full-time equivalent (FTE) employees in the Debt Management Section. Other offices involved with this function include the Cash Forecasting, Voucher Processing and Financial Reports Sections. The Commission approves the projects to be funded with the bond proceeds. Report 1502-8 1 of 5 July 16, 2009
This audit focused on the bond programs (i.e. the TMF, SHF and CTTS bonds) and other debt programs (i.e. the commercial paper notes and TIFIA Loan for the CTTS). Opinion Overall, we think the debt management function is being performed in compliance with the applicable requirements. We think the department is doing a good job managing its bond programs and other debt programs and we identified some opportunities for improvement. In addition, we think the current staffing level of six FTEs for the Debt Management Section is adequate to perform the necessary functions associated with the programs that we reviewed. Results We selected several requirements associated with the bond programs, the commercial paper program and the TIFIA Loan for the CTTS to determine compliance and found that those programs are being conducted in compliance with the selected requirements and in accordance with the flow charts that were developed. We reviewed various reports associated with the TMF and SHF bonds and found that those reports contain consistent figures. In addition, our review of these programs did not identify any issues regarding the current staffing level of the Debt Management Section. The opportunities for improvement and the best practice that were identified during this audit are discussed below. Opportunities for Improvement Debt Management Section (name changed to Debt and Portfolio Management) No. 1: The department hasn t developed written procedures and a system of controls for its investment activities as required by the Commission s Investment Policy. The Debt Management Section Director indicated that the staff aren t currently conducting investment activities for the bond programs but that draft procedures are being developed. Recommendation: The Debt Management Section should either finish developing the written procedures and system of controls for the department s investment activities or modify the Investment Policy if the staff aren t expected to conduct any investment activities. The department has very limited statutory investment authority, with the Texas Mobility Fund and the Central Texas Turnpike System offering the department the ability to direct investments. For the Texas Mobility Fund, staff has analyzed the benefits of self directing investment of bond proceeds and the general account monies and has concluded that utilizing the Treasury Pool is a more effective means of investing those funds. Therefore no self directed investments are anticipated for the Mobility Fund. For the Central Texas Turnpike System, at the time of initial bond issuance in 2002, an investment policy was developed and investment strategy was Report 1502-8 2 of 5 July 16, 2009
implemented for bond proceeds dependent upon their use and timing of need. Therefore, during the construction and completion of the project, which lasted approximately five and one-half years, the investment of bond proceeds was substantially taken care of. When the project became fully operational, that triggered a shift of investment strategy from bond proceeds to operating revenues and reserves. That occurrence, plus the perceived opportunity to increase the return on the rate stabilization fund (which is used to make debt service payments), led staff to embark upon the development of the internal procedures and controls to self direct investments as contemplated by the investment policy. Prior to the project reaching the operating phase, there was no practical need, nor opportunity to self direct investments. The written investment procedures and controls under development will be completed. Responsible Party: Debt and Portfolio Management Director or FIN Director (if Debt and Portfolio Management Director position hasn t been filled) Implementation Date: Nov. 2010 No. 2: The Chief Financial Officer (CFO) and the FIN Deputy Director are the only employees designated to authorize the issuance and payment of commercial paper. This designation was established when the program was initiated in 2005, which was before the current FIN Director and Debt Management Section Director assumed their positions. The Debt Management Section Director indicated that they plan to address this at the next Transportation Commission Meeting. Recommendation: The Debt Management Section should follow through in the appropriate manner to update the department s designation to authorize the issuance and payment of commercial paper. The authority to act in an official capacity in regard to the execution of the commercial paper program was internally determined to be too narrow. Therefore, the minute order that was adopted by the Commission in the July 2009 meeting contained a provision to expand the execution authority to include the Chief Financial Officer, Director of the Finance Division, and Deputy Director of the Finance Division. Administration/Financial Reports Section/Debt Management Section No. 3: The Administration developed a plan for using the remaining SHF bond proceeds but that plan may not be clearly established. The plan isn t posted where it can be easily accessed by the employees or the public. In addition, the Assistant Executive Director for Engineering Operations (AEDEO) may be the only one who understands the details of the plan. Recommendation: FIN should work with the CFO and the AEDEO to make the plan for using the remaining SHF bond funds more accessible, clear and well documented. Report 1502-8 3 of 5 July 16, 2009
The plan for using remaining SHF bond proceeds was detailed in Minute Order 111890 adopted by the commission at the July 20 th, 2009 meeting. No. 4: The accounting transactions to set up and change the obligation amounts for the TMF and SHF bonds in FIMS (Financial Information Management System) aren t always reviewed by another person. The Director of Accounting Management indicated that the set ups and changes of the obligation amounts for the preliminary engineering, right of way, construction and construction engineering functions are reviewed by the employee who input the transaction. In addition, the right of way transactions may be reviewed by the Right of Way Division, the construction transactions are reconciled by FIN Accounting staff and the project managers may review the information if they are familiar with the related FIMS reports. Recommendation: The Financial Reports Section should implement a process that provides a consistent review of the obligation transactions for the bond programs by someone other than the person who input the transaction to ensure the accuracy and reasonableness of the transactions. In addition to the controls listed above, the FIN Ledgers area does a bond reconciliation which reconciles the DCIS estimate to the FIMS initial set up to ensure the initial set up is correct. Also, as stated in Chapter 2, Section 3 of the Finance Manual under Accuracy of Costs, "The manager of each project, job, or account is the primary person responsible for ensuring that its cost records are correct," and "Each month, account managers are responsible for and should review the applicable FIMS reports for their accounts to ensure that all transactions are accurate and appropriate. We believe these reviews are sufficient. Implementation Date: N/A No. 5: The department s file retention requirements for records associated with the bond programs may not be up to date. The Records Retention Schedule for Finance doesn t appear to address the accounting records associated with the bond programs. In addition, the file retention requirement for the debt management records (after closed plus 5) is shorter than the requirement for the SHF bond arbitrage computation records in the bond covenants (after discharge plus 6). The Accounting Management and Debt Management Directors indicated that they have initiated discussions with Bond Counsel about the retention requirements. Recommendation: The Financial Reports and Debt Management Sections should continue to work with Bond Counsel to review the Records Retention Schedule and submit any necessary updates to ensure that it addresses all the pertinent records associated with the bond programs. In addition, any discrepancies between the Records Retention Schedule and the bond covenants should be addressed. Report 1502-8 4 of 5 July 16, 2009
Subsequent to the audit work, Debt Management staff reviewed bond covenants and the schedule to ensure that the schedule accurately reflects what the bond documents require. More recently, we received guidance on IRS requirements for Build America Bonds (BABs) issues. We have reviewed the retention schedule along with Accounting Management staff and have revised the schedule accordingly. Best Practice The Debt Management Section analyzes the bond market and reviews post-evaluations of bond transactions to help make the best decisions for the department regarding its obligations. For example, the department recently issued some non-callable SHF bonds instead of callable bonds and this resulted in a large cost savings for the department. Closing Comments The results of this audit were discussed with the FIN Director in an exit conference held on July 15, 2009. The results were also provided to the CFO and the AEDEO on July 15, 2009. We thank those contacted during this audit for their assistance and cooperation. Report 1502-8 5 of 5 July 16, 2009