A Performance Audit
An Audit Report on The State Water Implementation Revenue Fund for Texas at the Water Development Board
The Water Development Board’s (Board) implementation of the State Water Implementation Revenue Fund for Texas (SWIRFT) and its provision of project financing through the State Water Implementation Fund for Texas (SWIFT) program substantially complied with state law, administrative rules, and Board policies and procedures.
Although the Board substantially complied with the requirements that auditors tested, it should improve certain controls and documentation for future rounds of SWIFT program funding.
The Board Developed Administrative Rules and Offered Financing Options in Accordance with Statutory Requirements
Texas Water Code, Section 15.439, required the Board to adopt administrative rules providing for the use of funds, including specifying the manner for prioritizing projects. In November 2014, the Board developed and adopted administrative rules for its prioritization of projects and use of SWIFT and State Water Implementation Revenue Fund for Texas (SWIRFT) funds, and those rules complied with the requirements in the Texas Water Code.
For the first round of funding through the SWIFT program, the Board offered financing options in accordance with requirements in Texas Water Code, Sections 15.435 and 15.474.
The Board Used a Financial Model to Assist in the Development and Implementation of the SWIFT Program; However, It Should Improve the Documentation of Its Planning Process
The Board contracted with external financial advisors that developed a financial model as a tool to assist in (1) implementing the SWIFT program, (2) achieving the SWIFT program’s objective of funding the state water plan in the next 50 years, and (3) determining whether the $2 billion SWIFT fund corpus (the amount initially placed into that fund) will be replenished over time.
The documentation the Board provided did not sufficiently demonstrate how it ensured that the financial model was reliable.
For future rounds of SWIFT program funding, the Board should implement a process to document the scenarios or inputs it uses in the financial model at key decision points.
The Board’s Review of SWIFT Program Applications Substantially Complied with Statutory and Board Requirements; However, the Board Should Strengthen Documentation and Certain Controls Over Its Application Review Process
The Board implemented a two-stage process to review applications for SWIFT program financing.
Auditors reviewed both stages of the Board’s application review process and determined that the Board had processes and related controls to prioritize and perform technical reviews of applications for SWIFT program financing in accordance with statutory and Board requirements. However, the Board did not consistently document those processes and controls. In addition, the Board should strengthen its supervisory reviews and written procedures for those processes.
The Board’s Issuance of SWIRFT Revenue Bonds and Related Processes Complied with Statutory and Board Requirements
Revenue bond issuance. The Board issued SWIRFT revenue bonds in accordance with requirements in the Texas Constitution, the Texas Water Code, Board policy, and the Board’s bond indentures.
Bond enhancement agreement. The Board directed the Texas Treasury Safekeeping Trust Company to enter into a bond enhancement agreement, which is a legal mechanism allowing for the transfer of funds from the SWIFT to the SWIRFT in support of the SWIRFT revenue bonds. The bond enhancement agreement complied with requirements in the Texas Constitution, the Texas Water Code, and the Board’s bond indentures.
Use of revenue bond proceeds. The Board’s use of revenue bond proceeds complied with requirements in the Texas Water Code, the Board’s administrative rules, and the Board’s bond indentures.
The Board’s Process for Releasing SWIFT Program Funds Substantially Complied with Board Requirements; However, the Board Should Strengthen Controls Over Its Review Process
Financing agreements. The Board had a process and related controls to ensure that SWIFT program financing agreements and local bond ordinances and resolutions included terms and provisions that conformed to the Board’s administrative rules and the Board’s authorizing resolution.
Closing and release of funds. The Board had a process and related controls to ensure that SWIFT program financing recipients substantially complied with requirements for closing and release of funds in the Board’s administrative rules and resolutions.
However, the Board did not have a process to ensure that financing recipients provided transcripts of closing proceedings within the 60-day time frame required by Title 31, Texas Administrative Code, Section 363.42(b).
Checklists. The Board did not have an adequate monitoring process to ensure that its review of compliance with SWIFT program closing and release of funds requirements was complete and accurate. Specifically, the Board requires staff to complete checklists in TxWISE to document that review; however, staff did not always complete those checklists or ensure that they completed all checklist items.
The Board Should Improve Certain Procedures for Financial Monitoring of SWIFT Program Financing Recipients
Financial monitoring procedures. The Board had documented procedures to conduct financial monitoring of the entities that receive funding from any Board financial assistance program. It asserted that it would follow those same procedures to monitor SWIFT program financing recipients. However, those procedures did not reflect the Board’s financial monitoring process. For example, those procedures described outdated processes related to an information system that the Board no longer used.
Borrower repayments. Auditors tested approximately $6.1 million in borrower repayments for 11 commitments associated with 9 borrowers that were due to the Board as of March 31, 2016. For those commitments, the Board provided evidence that SWIFT program financing recipients made payments in accordance with their debt service schedules. However, the Board did not have a process to monitor borrower repayments by reviewing bank statements and reports from its trustee.
The Board had information technology controls over its program and financial data; however, it should implement a process to update its information technology security policies and strengthen user access controls.
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