Report of the State Auditor 1993

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. ' 24 Water Conservation Board Construction Fund Performance Audit-February 1993 We recognize it was the Legislature's intent to provide subsidized interest rates. Also, the Board had the latitude to set interest rates at no less than 5 percent. However, the Board had the option to charge interest at a higher level and still provide a subsidized rate to project sponsors. As a result, cash inflows to the Construction Fund were reduced resulting in fewer funds available for other projects. Entities Involved in Similar Activities Set Loan Rates That Reflect Market Rates The U.S. Bureau of Reclamation is empowered to construct a system that will store and develop water in the western United States. The Bureau operates a loan program to construct water projects. The Bureau has developed cost recovery guidelines, which include guidelines for charging interest on its loans. The interest rates charged by the Bureau reflect the current rates of long-term government obligations. The rates are reassessed at least annually. For example, the current interest rate is 7-3/8 percent on loans of 30 years or longer. Additional Cash Inflows to the Fund Could Have Been Significant There are various ways the Board Loan interest rates could be sub. could have set loan interest rates to sidized and still reflect market rates. reflect market conditions. We prepared an analysis to determine the potential impact to the fund. We developed a reduced or subsidized interest rate that was linked to both market rates and the minimum of 5 percent in the statute. We obtained the average tax-exempt municipal bond rates for new issues with a maturity date of 20 or more years. We developed an "alternative rate" of interest using the tax-ex.empt municipal rates. The rate is 5 percent plus half of the difference between the market rate and the Board's 5 percent interest rate. This alternative rate reflects the market while still providing a subsidy. Thus, the alternative rates ranged from about 6 percent to less than 9 percent. We applied the alternative rate and Board rate of 5 percent to loans for 70 projects with a contract date between Fiscal Years 1982 and 1990. Contracts executed in FY 1991 and 1992 were not included because loan repayments may not have started. We then determined the amount' of repayments for these loans during Fiscal Year 1992 using the two different interest rates. Total repayments for our sample using the Board's rate were about $2.1 million. However, loan repayments for the same contracts using the alternative interest rate were about $2.6 million.