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I <br /> 34 Construction Fund Loan Program Performance Audit-September 1998 <br /> Thirty-Year Lending Rates <br /> Colorado Water Conservation Board <br /> Type of Loan 1973-1992 1993-1995 1996 1997 1998 <br /> Agricultural 5.00% 4.00% 4.25% 3.75% 4.00% 1 <br /> Municipal-Low* 5.00% 4.00% 4.25% 3.75% 4.00% <br /> Municipal-Medium* 5.00% 5.00% 5.25% 4.75% 5.00% <br /> Municipal-High* 5.00% 5.50% 5.75% 5.25% 5.75% <br /> Commercial 5.00% 5.50% 5.75% 5.25% 6.25% 1 <br /> Source: Colorado Water Conservation Board. <br /> * Note: Low, medium, and high designations are based on the median <br /> household income in the project sponsor's service area. <br /> In 1993 the Office of the State Auditor recommended that the Board establish <br /> guidelines to tie its lending rates to market conditions. Before 1993 the Board <br /> charged all borrowers a flat 5 percent interest rate according to the statutory <br /> minimum that existed at the time. The Board has complied with this <br /> recommendation by establishing and adhering to a process that ties loan interest rates <br /> to the long-term municipal bond market. In addition, in March 1998 the Board <br /> decided that it will attempt to maintain an overall,long-term rate of return on loans <br /> of no less than 4 percent based on the aggregate amount of loans and grants made <br /> through the Fund. The purpose of this policy is to maintain the integrity of the Fund <br /> and to offset the long-term impacts of inflation on this funding source. <br /> The Board's Lendin g Policy Polic Does Not <br /> Systematically Assess the Relative Risk of <br /> Individual Loans <br /> We believe that linking interest rates to the bond market is a good way to ensure that <br /> g g Y <br /> the State is getting a fair return on the money it loans for water projects. Setting a <br /> goal for the overall return on the Board's loan portfolio is also a sound management <br /> decision. However, further improvements are needed in the Board's processes for <br /> making key lending decisions. Specifically, the Board's current lending policy <br /> focuses primarily upon determining the borrower's need and its ability to access other <br /> forms of funding. For example, current policy states that agricultural and low- <br /> income municipal borrowers will receive lower interest rates and higher percentages I <br /> I <br />