Georgia State Financing and Investment Commission : requested information on general obligation bonds

Special Examination 11-41

January 2012

Georgia Department of Audits and Accounts
Performance Audit Operations
Russell Hinton, State Auditor Leslie McGuire, Director

Why we did this review
This special examination was conducted at the request of the Senate Appropriations Committee. The Committee requested that we determine the length of time between the authorization, issuance, and utilization of general obligation bonds, the efficiency of issuing bonds for distinct phases of construction, the process for redirecting unused funds from one project to another, and the value of the state's triple AAA bond rating.
Who we are
The Performance Audit Operations Division was established in 1971 to conduct in-depth reviews of state programs. The purpose of these reviews is to determine if programs are meeting their goals and objectives; provide measurements of program results and effectiveness; identify other means of meeting goals; evaluate the efficiency of resource allocation; and assess compliance with laws and regulations.
Website: www.audits.ga.gov Phone: 404-657-5220 Fax: 404-656-7535

Georgia State Financing and
Investment Commission
Requested Information on General
Obligation Bonds
What we found
In Georgia, the process of issuing general obligation (GO) bonds involves participation among many entities, including the General Assembly, Governor, Georgia State Financing and Investment Commission (GSFIC), Governor's Office of Planning and Budget, and state agencies. The General Assembly and the Governor are involved in authorizing GO bonds to finance capital outlay projects on an annual basis. GSFIC is responsible for selling GO bond packages, managing the state's bond portfolio and managing agencies' drawdown of GO bond proceeds. Agencies are responsible for managing bond-funded projects and may make requests to redirect GO bond proceeds to other projects under certain circumstances. GSFIC and OPB are primarily responsible for reviewing and approving requests to redirect the use of GO bond proceeds.
Georgia is one of eight states that has a triple AAA credit rating from the major bond rating agencies (Standard and Poor's, Moody's, and Fitch). The benefits of the state's credit rating include the positive perception of the state's finances, which allows Georgia the maximum flexibility in selling its GO bonds, and the ability to obtain the lowest possible interest rate cost for financing capital outlay projects. Our research indicates that the potential financial impact of a downgrade of the state's credit rating is difficult to isolate and, therefore, to estimate due to the number of market variables at play when bonds are sold. Based on Georgia's June 2011 bond issuance of approximately $560 million, if its rating was downgraded from triple AAA to triple AA the difference in the interest rate would have been 0.22%. The resulting increase in interest cost would be $736,854 annually and $14,737,085 over the life of the bonds. However, no state has been downgraded in unison by all three rating agencies.

The time it takes to authorize, issue, and use the proceeds from GO bonds is a function of: project readiness, the legislative calendar, the bond market, and legal requirements regarding the timeframe that tax-exempt bond proceeds must be spent. An analysis of bond authorizations from 2006-2011 found that the average length of time from authorization date to date of first expenditure of bond proceeds by GSFIC was 398 days. Within the 398-day time period, the average length of time between when bonds are authorized and issued was 164 days, while the average length of time between bond issuance and first expenditure of bond proceeds by GSFIC was 234 days. The date of first expenditure used in this analysis is the earliest date in which the agency received a draw-down of bond proceeds from GSFIC and is not the date the project was initiated.
Each bond issue (bond sale) is comprised of multiple individual authorizations that allow state agencies to finance capital projects. It should be noted that each bond issue (not individual authorizations) is subject to federal arbitrage requirements regarding the timeframes for the expenditure of bond proceeds. Because our time analysis was based on individual authorizations and not bond issues, the analysis above cannot be used to determine compliance with arbitrage requirements. GSFIC Finance manages the state's compliance with federal arbitrage requirements. These requirements state, for example, that 5% of proceeds from a single bond issue should be expended within 6 months, and GSFIC policy requires state agencies to meet this time frame. According to GSFIC, on average, 25% of proceeds were spent within 180 days following the bond sale.
The majority of bond-funded projects authorized in Georgia during fiscal years 2001 through 2011 had multiple authorizations for various project phases (i.e., design, construction). However, we did not find evidence that it is a common practice in Georgia or in six other triple AAA states to fund smaller, subphases of construction, such as foundation, roofing, etc. This practice may not be common because, by issuing bonds for sub-phases, the state would be assuming additional risk in the construction project. According to both GSFIC construction and other agency construction officials, the issuance of bonds for smaller components of construction has the potential to delay a project while waiting for bonds to be authorized or issued for the next sub-phase. The state would run the risk of projects being only partially developed or built if the bonds for subsequent phases are not authorized or if there is not another bond package ready to be issued when the money is needed. These delays could cause the construction process to become less efficient and more costly.
Due to general statutory language, bond proceeds may legally be redirected to other projects within the authorized agency. Bond funds are typically redirected under any one of the following scenarios: projects are completed under-budget and excess funds remain; projects are cancelled following the issuance of the bond; or to meet arbitrage requirements. Our review found that approximately $185 million (1.7%) of $11 billion in bonds have been redirected to other projects from 2001-2010. Requests by agencies to redirect bond funds to other projects are reviewed by GSFIC and approved by OPB. In limited instances, the General Assembly is involved in the redirect process.
In its response to the report, OPB expressed no major disagreements with the report. GSFIC did not express disagreement with the majority of the report's contents, with the exception of our analysis of the time it takes from authorization of projects by the General Assembly through utilization of bond proceeds by the agency. GSFIC's concerns with this methodology appear to be based primarily upon the presumption that the methodology should have included an analysis of the time taken to spend-down bond proceeds. While we recognize GSFIC's need to focus its activities on ensuring that spenddown occurs in compliance with federal requirements for tax-exempt bonds, this type of analysis was not required to answer the question posed by the Senate Appropriations Committee. We believe our methodology used the best information available and that it is appropriate to answer the question posed. Pertinent aspects of the agencies' responses are included throughout the report.

General Obligation Bonds
Table of Contents
Purpose of the Special Examination Background
State Constitution and Statutory Requirements Organization Bond Process Bond Purpose Federal Tax Implications Financial Information Bond Ratings Other States Requested Information Timeliness of Use
What is the length of time between the time bonds are authorized in the approprations act, issued through a bond sale and utilized by an agency? Are there best practices that can be adopted from other states to make the process more timely and efficient? Issuance of Bonds for Distinct Phases of Construction Please comment on the efficiency of issuing bonds for distinct phases of construction. Is issuing bonds for distinct phases of construction common in other states? Redirection Process What is the process of redirecting unused funds sold for one project for use in another project? How often does the process of redirecting unused funds sold for one project for use in another project happen and what is the average amount? What oversight of the process of redirecting unused funds sold for one project for use in another project exists? In other states, is the legislature involved in this redirection decision?

i
1 1 1 2 3 4 5 6 7 8 9 9
9
13 15
15
18 18
18
20
22 27

General Obligation Bonds
Triple AAA Bond Rating Please comment on the value of the state's Triple AAA bond rating. Based on recent trends, how much would the state incur in higher interest costs if its rating was downgraded? What has been the impact on states in terms of interest costs that held a Triple AAA rating and were downgraded?
Appendix A: Objectives, Scope, and Methodology

ii 28
28 31 33

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Purpose of the Special Examination
Our review of the authorization, issuance, and utilization of general obligation bonds was conducted at the request of the Senate Appropriations Committee. The Committee asked the following questions:
a. What is the length of time between the time bonds are authorized in the appropriations act, issued through a bond sale, and utilized by an agency? Are there best practices that can be adopted from other states to make the process more timely and efficient?
b. Construction bonds are currently issued for the entire value of a project. Is this common to other states? Please comment on the efficiency of issuing bonds for distinct phases of construction.
c. What is the process of redirecting unused funds sold for one project for use in another project? What oversight of this process exists? How often does this happen and what is the average amount? In other states, is the legislature involved in this redirection decision?
d. Please comment on the value of the state's triple AAA bond rating. Based on recent trends, how much would the state incur in higher interest costs if its rating was downgraded? What has been the impact on states in terms of interest costs that held a triple AAA rating and were downgraded?

A description of the objectives, scope, and methodology used in this review is included in Appendix A on page 33. A draft of the report was provided to Georgia State Financing and Investment Commission (GSFIC) and the Governor's Office of Planning and Budget for their review. Pertinent responses have been incorporated throughout the report.

Background

State Constitution and Statutory Requirements
Article VII Section IV of the state Constitution permits the state to incur general obligation debt through the issuance of general obligation (GO) bonds to finance its capital outlay requirements. The state Constitution and various articles within O.C.G.A. 50-17 provide the requirements for the issuance and management of GO bonds. The state Constitution limits the proceeds of GO bonds to the following purposes:

to acquire, construct, develop, extend, enlarge, or improve land, waters, property, highways, buildings, structures, equipment, or facilities of the state, its agencies, departments, institutions, and certain state authorities;
to provide educational facilities for county and independent school systems and to provide public library facilities for county and independent school systems, counties, municipalities, and boards of trustees of public libraries or boards of trustees of public library systems; and,
to make loans to counties, municipal corporations, political subdivisions, local authorities, and other local government entities for water or sewage facilities or systems or for regional or multijurisdictional solid waste recycling or solid waste facilities or systems.

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The state Constitution limits the amount of general obligation debt the state can incur by limiting aggregate annual debt service payments to 10% or less of the state's total treasury receipts for the preceding fiscal year. Annual debt service payments are equal to the total principal and interest coming due in each fiscal year. Also, the state Constitution limits the term of GO bonds to a maximum of 25 years for state and educational facilities.

Organization The Georgia State Financing and Investment Commission (GSFIC), created by constitutional amendment in 1972, is responsible for the issuance and management of the state's GO bonds. No agency or authority can incur debt or employ other financial or investment advisory counsel without GSFIC's approval. GSFIC consists of the Financing and Investment Division (GSFIC Finance) and the Construction Division (GSFIC Construction). The primary responsibilities for each division are described in Exhibit 1. In addition, the Georgia Higher Education Facilities Authority (GHEFA) is administratively attached to GSFIC and has previously issued revenue bonds issued to finance capital projects for the University and Technical College Systems.

Exhibit 1 GSFIC Organization Chart

Georgia State Financing and Investment Commission (GSFIC)
Commission Members: -- Governor Chairman -- Lieutenant Governor Vice Chairman -- State Auditor Secretary and Treasurer -- Speaker of the House of Representatives -- Attorney General -- Commissioner, Department of Agriculture -- State Treasurer

Georgia Higher Education Facilities Authority (GHEFA)
-- Authorized to have outstanding at any point $300 million in revenue bonds to finance capital projects for the University and Technical College Systems
-- Staffed by Financing and Investment Division

Construction Division
Responsibilities: -- Provides all support services for the Commission
-- Disburses General Obligation bond proceeds
-- Manages capital outlay projects funded, all or in part, with General Obligation bond proceeds

Financing and Investment Division
Responsibilities: -- Issuance of General Obligation bonds
-- Review of state authority debt financing
-- Investment and accounting of all General Obligation bond proceeds
-- Prepares the State's Debt Management Plan

-- ADA Compliance Assistance
-- Procurement and Construction Services Budget: $15,422,9711 Positions: 128

-- Monitors agencies' expenditures of General Obligation bond proceeds for compliance with federal tax regulation
Budget: $1,680,6841 Positions: 8

1Investment earnings support the operations of GSFIC Source: GSFIC Fiscal Year 2011 Audit

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Bond Process
In Georgia, the three distinct phases of the state's bond process are the authorization and issuance of GO bonds and the usage of GO bond proceeds. Each phase is discussed below:

Authorization Legislation must be enacted by the General Assembly before GO bonds may be issued. The sale of GO bonds is typically authorized through an annual appropriations bill. The authorizing legislation must state the purpose, in either general or specific terms, for the GO bonds, the specific agency authorized to use the GO bond proceeds, the maximum maturity of the debt, and the appropriation of the maximum annual debt service for the GO bonds. In order to match the useful life of a project with the debt issuance, the General Assembly typically approves GO bonds with a 20-year maturity for major construction and rehabilitation projects, or with a 5-year maturity for minor repair projects and equipment needs. The General Assembly has also authorized several GO bonds with a 10-year maturity for several projects and major equipment.

The General Assembly is required by the state Constitution to appropriate funds sufficient to pay the annual debt service requirements on all general obligation debt. The state Constitution requires appropriations for debt service payments on all general obligation debt to be deposited into a special trust fund. Once the Governor signs the annual appropriations bill and the fiscal year begins, the GO bonds are "authorized" and may be sold by the Commission on the bond market.

Issuance At the beginning of each fiscal year, GSFIC Finance solicits input from agencies that have been authorized to receive GO bond proceeds regarding their preferred timing (based on project readiness) for receiving their GO bond funding. Based on agency input and in order to comply with tax certifications required for the issuance of taxexempt bonds, GSFIC Finance combines projects with similar timeframes into a GO bond package. Due to various stages of project readiness, there are typically several GO bond issuances planned for the fiscal year. Typically, the state "issues" or sells bond packages in the market two to four times per year. In fiscal year 2011, there were two bond packages, one worth approximately $556 million and the other approximately $247 million. A GO bond issuance may include both GO bond funding authorized for the current fiscal year and from prior fiscal years. GO bonds from prior fiscal years may be included since, as discussed on page 10, these GO bond funds were not requested by the agency during the fiscal year for which they were authorized. According to O.C.G.A. 50-17-27, GSFIC is responsible for holding proceeds from GO bond sales and disbursing them according to the original purpose stated in the GO bond's authorization.

Usage Upon receipt of the proceeds from a bond issuance, GSFIC Construction establishes a budget for the project(s) and agencies sign a commitment letter regarding the use of the proceeds. Agencies may then submit invoices and requests

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for reimbursements from GSFIC Construction. If GSFIC Construction is managing the construction project, invoices may be paid directly to the contractor rather than on a reimbursement basis. Agencies are responsible for completion of projects on a timely schedule following receipt of GO bond proceeds in order to be compliant with federal tax requirements regarding tax-exempt bonds. The requirements for tax-exempt bonds are discussed on page 5.

Bond Purpose Legislation authorizing GO bonds must state the purpose for the bonds in either general or specific terms. While the specific purpose may be stated in either the appropriations bill authorizing the issuance of GO bonds or in the corresponding tracking document, historically the only legally binding language regarding how GO bond proceeds must be used is stated in general terms which designate an agency but not a specific project. For example, as shown below, the General Assembly authorized $27 million of GO bond funds for the School of Dentistry at the Medical College of Georgia in Section 49 of the fiscal year 2010 appropriations bill (HB119). This authorization contains specific terms in light-faced text on the first line and general terms in bold.

Excerpt from fiscal year 2010 appropriation bill:
University System of Georgia, Board of Regents
397.633 BOND: Medical College of Georgia: $27,000,000 in principal for 20 years at 6.5%:
Complete design, construction, and equipment of the School of Dentistry From State General Funds, $2,451,600 is specifically appropriated for the purpose of financing projects and facilities for the Board of Regents of the University System of Georgia by means of the acquisition, construction, development, extension, enlargement, or improvement of land, waters, property, highways, buildings, structures, equipment or facilities, both real and personal, necessary or useful in connection therewith, through the issuance of not more than $27,000,000 in principal amount of General Obligation Debt, the instruments of which shall have maturities not in excess of 240 months.

As shown below, the same appropriations bill later states the specific purpose stated for GO bonds is for information only, making the general purpose language legally binding.
For authorizations for general obligation debt in Section 49, the indented, bold-faced paragraphs following each Bond number are the lowest level of detail and constitute appropriations in accordance with...the Georgia Constitution. The caption above the Bond number, the light-faced text immediately following the Bond number before the bold-faced text... [is] information only.
In other instances, the appropriations bill only states the purpose for the GO bonds in general terms and the specific purpose for the GO bonds is contained in the corresponding budgetary tracking document. In these cases, since the tracking document is not a legally binding document, the legally binding purpose for the GO bonds is stated in general terms in the appropriations act. For example, the General Assembly authorized $15 million in GO bonds for the Board of Regents in the fiscal year 2011 appropriation bill (HB 948). The corresponding tracking document states the specific purpose is to construct phase 1 of the biology building at Georgia Southern University.

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Excerpt from fiscal year 2011 appropriations bill:
[Bond #33] From State General Funds, $1,308,000 is specifically appropriated for the purpose of financing projects and facilities for the Board of Regents of the University System of Georgia by means of the acquisition, construction, development, extension, enlargement, or improvement of land, waters, property, highways, buildings, structures, equipment or facilities, both real and personal, necessary or useful in connection therewith, through the issuance of not more than $15,000,000 in principal amount of General Obligation Debt, the instruments of which shall have maturities not in excess of two hundred and forty months.

Excerpt from fiscal year 2011 tracking document:
(Bond #33) Construct phase I of the Biology Building, Georgia Southern University, Statesboro, Bulloch County ($15,000,000 in 20 year bonds)

Therefore, while it may appear that the General Assembly is authorizing GO bonds for specific projects, there is no legal requirement that the funds be used for those projects. Instead, the funds must only be used by the agency indicated in the appropriations bill, up to the maximum dollar amount appropriated. While state agencies and GSFIC generally adhere to the specific purpose of the bond authorizations, they are not required to do so.

Federal Tax Implications
Georgia's GO bonds are generally issued as tax-exempt bonds, which means that the interest paid to bondholders is not included in their gross income for federal tax purposes. Therefore, a state must adhere to federal requirements for expending taxexempt bond proceeds. The tax-exempt status remains throughout the life of the bond provided that all applicable federal tax laws are satisfied. If the federal requirements for tax-exempt bonds are not satisfied, the bonds would lose their tax-exempt status and the interest paid to bondholders would be included in their gross income for federal tax purposes. This could adversely impact the state's borrowing costs.
While federal regulations regarding tax-exempt bonds are extensive, there are regulations which are directly related to the issuance and usage of tax-exempt bonds. Federal regulations generally restrict the ability to earn arbitrage on tax-exempt bonds. Arbitrage is the difference between the interest paid on tax-exempt bonds and the interest earned by investing the proceeds of the bonds in higher yielding taxable securities until the bond proceeds are spent. In addition, federal regulations require that the state "reasonably expect" to expend the proceeds of tax-exempt bonds within the following amount of time regardless of length of maturity:

The purpose of these regulations is to minimize the benefits to the issuer of investing the proceeds of tax-exempt bonds in higher yielding investments which would create revenue for the state. In addition, these regulations minimize the incentive to issue bonds in excess of the cost of planned projects and to issue bonds earlier than needed to finance a project.

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Each bond series, not individual projects, is subject to these timeframes and the arbitrage requirements are managed by GSFIC Finance. The timeframes are managed through certain administrative procedures such as compliance exchanges and redirects. Compliance exchanges are a dollar-for-dollar exchange in bond proceeds between a non-compliant project and a compliant project within the same agency. Redirection is the process of utilizing GO bond proceeds intended for one project for another project in the same agency.

Financial Information
Exhibit 2 shows the amount of general obligation debt outstanding at the beginning and end of fiscal years 2009 through 2012. In addition, Exhibit 2 details the changes to the amount outstanding, such as new authorizations and retirement of debt, for each fiscal year. At the beginning of fiscal year 2011 the state had approximately $8.63 billion of outstanding general obligation debt and ended the year with approximately $8.55 billion outstanding. During fiscal year 2011 the state issued approximately $654 million and retired approximately $699 million in general obligation debt. Also, Exhibit 2 shows the state's highest annual debt service and the percentage of debt service to prior year receipts (the percentage is limited by state Constitution to 10%). For fiscal year 2011 the highest annual debt service was approximately $ 1.3 billion and the percentage of debt service to prior year receipts was 7.8%. It should be noted that the state's debt management plan targets the percentage of debt service to prior year receipts to 7%.

Exhibit 2

GO Bond Summary

Fiscal Years 20092011

GO Bonds Issued Principal Outstanding Start of FY Prior Authorizations New Authorizations
5 year 10 year 20 year 20 year motor fuel Total Issuances Total Refunding Bonds Scheduled/Early Retirements Other Refunding's Principal Outstanding End of FY

(in 000's)

2009

2010

$7,839,575 $8,552,130

575,580

62,465

124,970 -
750,320 -
1,450,870 149,730
(708,585) (179,460) $8,552,130

89,730 -
571,660 70,000
793,855 640,825 (664,225) (691,950) $8,630,635

2011 $8,630,635
296,285

20121 $8,551,145
438,710

94,510 50,725 212,405
653,925
(698,570)
(34,845) $8,551,145

49,345 28,000 287,560
803,615 719,465 (651,870)2 (837,410) $8,584,8453

Debt Service

Prior Year Total State Treasury

Receipts Highest Annual Debt Service Debt Service to Prior Year Receipts

$19,799,131 $17,832,362 $16,251,240 $17,546,374

$1,072,007 $1,201,703 $1,271,966 $1,230,3434

5.4%

6.7%

7.8%

7.0%4

1FY2012 issuances as of 12/31/2011. This assumes no additional new money debt will be issued during the

fiscal year. 2Projected as of 12/1/2011. Included is $222,245,000 due to pay during 1/1/2012 6/1/2012 3Projected Balance Outstanding 6/30/2012 4Projected as of 12/31/2011

Source: GSFIC

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Bond Ratings
The credit ratings on bonds reflect the creditworthiness of the issuer, the likelihood of repayment, and the likelihood of an issuer maintaining financial health adequate to meet its payment obligations. Ratings also reflect the issuer's vulnerability to adverse economic conditions. While specific criteria vary somewhat among the three major rating agencies (Standard and Poor's, Moody's, and Fitch), the overall rating analysis generally takes into account the following factors:
Debt burden as measured by a variety of ratios;
Quality and strength of a state's economic base;
Fiscal management; and,
Financial performance.
Due to the financial diversity among the 50 states, purchasers of state bonds rely heavily on the bond credit ratings of the three major credit rating agencies. The bond credit ratings range from AAA (highest quality) to D (lowest quality). A higher rating indicates a lower likelihood of default and allows the obligor to borrow at the lowest possible cost. Exhibit 3 shows a description for each credit rating.

Moody's Aaa

S&P/Fitch AAA

Exhibit 3 Credit Rating Descriptions
Credit Worthiness
An obligor has EXTREMELY STRONG capacity to meet commitments.

Aa

AA

An obligor has VERY STRONG capacity to meet commitments. It differs from AAA by only a small degree.

A

A

An obligor has STRONG capacity to meet commitments but is more susceptible to changing economic conditions.

Baa

BBB

An obligor has ADEQUATE capacity to meet commitments. Adverse economic conditions are likely to lead to a weakened capacity.

Ba

BB

An obligor is LESS VULNERABLE in the near term than other lowerrated obligors. However, it faces major ongoing uncertainties and exposure to adverse economic conditions.

B

B

An obligor is MORE VULNERABLE than higher-rated obligors. It currently has the capacity to meet commitments, but adverse economic conditions will impair the obligor's capacity.

Caa

CCC

An obligor is CURRENTLY VULNERABLE and is dependent upon favorable economic conditions to meet commitments.

Ca

CC

An obligor is CURRENTLY HIGHLY-VULNERABLE.

C

D

An obligor is in DEFAULT on one or more commitments.

Sources: Morgan Stanley; Bankers Almanac

Each of the three rating agencies issues ratings separately and, as a result, a state may have several ratings. For example, one agency may assign a credit rating of AAA for a state while other agencies could assign it a credit rating of AA. For the calendar year 2011, 36 states were rated at or above AA. Of the 37 states, eight including Georgia, were

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rated AAA by all three rating agencies. When all three rating agencies rate a state as AAA it is referred to as a "triple AAA." Two states were rated below AA and 12 states did not have a rating by all three rating agencies. Exhibit 4 shows the number of states by rating level.

Exhibit 4

Number of States by Rating Level

As of December 2011

Rating Level

# of States

AAA

AAA

AAA

8

AA

AAA

AAA

5

AA

AA

AAA

1

AA

AA

AA

22

Less than AA

2

Not Rated1

12

1Some states received 1-2 ratings ranging from A-AAA, but were not rated by all three agencies. Iowa is

included in triple AAA.

Source: California State Treasurer

Due to the high degree of importance attributed to credit ratings by investors, each issuer's ratings have a major impact on the marketability of an issuer's bonds and the interest rates necessary to generate investor demand in the issuer's bonds. Georgia's favorable bond rating allows the state to borrow at the lowest possible cost.

Other States
In order to compare Georgia's bond process to other states, we identified seven other triple AAA-rated states to serve as peer states. Despite having the same triple AAA rating, we noted significant differences in the manner in which these states authorize GO bond debt. The differences in the authorization processes result in significant differences in how other states manage their bond processes and also limit comparisons to Georgia's process. Our comparison of Georgia's bond process to other states is discussed, where applicable, throughout the report.

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Requested Information

What is the length of time between the time bonds are authorized in the appropriations act, issued through a bond sale and utilized by an agency?
Between fiscal years 2001-2011, the General Assembly and the Governor authorized 1,057 expenditures of bond proceeds for which GO bonds have been issued. Exhibit 6 shows the trend in the average number of days from authorization through first expenditure of bond proceeds for the approximately $10 billion in GO bonds authorized during this time frame. On a project basis, the average length of time between authorization and the first expenditure of bond proceeds was approximately 439 days, ranging from a low of 300 days for GO bonds authorized in 2011 to a high of 712 days for GO bonds authorized in 2005. Within that timeframe it took an average of 182 days from the authorization date to the issuance of the first bond, ranging from a low of 98 days for bonds authorized in 2008 to a high of 392 days for bonds authorized in 2005.1 Also, during this time period, it took an average of 259 days from the bond issuance date to the date of the first expenditure of GO bond proceeds, ranging from a low of 156 days for GO bonds authorized in 2011 to a high of 320 days for GO bonds authorized in 2005.

Exhibit 7 shows the average length of time from the authorization in an appropriations act to the issuance of bonds and then to the date bonds proceeds were first expended for bonds authorized in fiscal years 2006-2011. This analysis is limited to fiscal years 2006-2011 to remove the anomaly in fiscal year 2005 due to the delayed issuance of the state's CAFR.
1 According to GSFIC Finance, the anomaly in 2005 was due to a delay in the issuance of the state's Comprehensive Annual Financial Report (CAFR). Debt could not be issued until certain financial information contained in the CAFR was available.

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Exhibit 7 Average Timeframe For the Issuance and Use of Authorized Bonds
Fiscal Years 20062011

Authorization Date

Bond Issue Date

First Expenditure Date

164 Days

234 Days 398 Days1

1 The actual average number of days between the authorization date and the first expenditure is 390. The averages presented above do not total 390 because 66 authorizations with a bond issue date do not have a first expenditure date.
Source: GSFIC records
It should be noted that each bond issue (not individual authorizations) is subject to the federal arbitrage requirements regarding the timeframes for the expenditure of bond proceeds. Because our time analysis is based on individual authorizations and not bond issues, the analysis above cannot be used to determine compliance with arbitrage requirements. GSFIC Finance manages the state's compliance with federal arbitrage requirements. These requirements state, for example, that 5% of proceeds from a single bond issue should be expended within 6 months, and GSFIC policy requires state agencies to meet this timeframe. According to GSFIC, on average, 25% of proceeds were spent within 180 days following the bond sale for calendar year 2006 to 2011.
Factors Influencing the Timeframe between Bond Authorization, Issuance, and Use The time it takes to authorize and issue GO bonds and use their proceeds is a function of legal requirements regarding the timeframe that tax-exempt bond proceeds must be spent, the legislative calendar, project readiness, and bond market conditions. These factors are further explained below:
The federal requirements regarding the timeframe for expending tax-exempt proceeds (federal arbitrage regulations) have a significant impact on the time between bond authorization, issuance, and usage. According to GSFIC Finance, prior to each issue of GO bonds, in order to demonstrate compliance with federal arbitrage regulations for tax-exempt bonds (see discussion on page 5), each state agency which requests that GO bonds be sold for an authorized project must make an affirmative statement that it "reasonably expects" at least five percent of GO bond proceeds will be expended (or that binding contractual obligations have been entered into for such amount) no later than six (6) months subsequent to the issuance of the GO bonds and that 85% of GO bond proceeds will be spent within three years. Projects which are not at such a stage of readiness must wait until a subsequent bond issuance. So, although the General Assembly may have appropriated GO bond funds for a project in the current fiscal year, GO bonds for that project will not be issued until the agency is ready for the project to begin. Also, the total funding for a project may be split into two or more GO bond issuances to coincide with the various phases of a project from design through construction to meet federal arbitrage regulations.

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GO bonds are only authorized by the General Assembly during the legislative session.

For many projects, actual expenditures follow months of procurement initiated upon GO bond issuance.

Some projects have multiple bond authorizations; the use of the GO bond proceeds is dependent upon the project's status. If previously authorized and issued GO bonds have not been expended, there may be a delay in the issuance of subsequent GO bonds and the use of the proceeds.

Exhibit 8 shows the timing of GO bond authorizations, issuances, and use for a large construction project in the University System. As shown in the exhibit, on April 17, 2000, the General Assembly authorized $1,425,000 in 20-year design bonds for the Continuing Education Center at Kennesaw State University. The associated GO bonds were issued July 1, 2000. Approximately 10 months later another $19,000,000 in GO bond funds were authorized for the construction of this facility. Although the first expenditure of design bonds occurred within four months of their issuance, approximately $255,000 (18%) of these funds was expended at the time $19,000,000 in construction bonds was issued in November 2001. The first expenditure of these construction bonds did not occur until all design bonds had been exhausted which was one year later in December 2002. Approximately six months after the first expenditure of construction bonds, on July 1, 2003, the General Assembly authorized the issuance of $350,000 in equipment bonds for the facility. These GO bonds were issued within five months of the start of fiscal year 2004 even though only $6.5 million (34%) of the construction bonds had been expended. Because the construction bonds were not exhausted until January 2007, the first expenditure of the equipment bonds did not occur until almost three and one-half years after their issuance.

Exhibit 8 Bond Authorization, Issuance, and Expenditure Timeline Continuing Education Center- Kennesaw State University

$1,425,000 Design Bonds
Authorized (4/17/2000)

$19,000,000 Construction Bonds Authorized (4/26/2001)

$350,000 Equipment Bonds
Authorized (7/1/2003)

Expenditure of Bond Funds

$1,425,000
Authorized FY 2000

$19,000,000
Authorized FY 2001

4/17/2000

11/3/2000

12/17/2002

$1,425,000 Design Bonds
Issued (7/1/2000)

$19,000,000 Construction Bonds Issued (11/1/2001)

$350,000 Equipment Bonds Issued (12/1/2003)

Source: GSFIC Records

$350,000
Authorized FY 2004
1/16/2007 10/19/2007

General Obligation Bonds

12

In some instances, GO bonds are authorized and/or issued for projects that have either not been planned in advance or are non-viable. In these instances, there is a delay in the issuance and/or use of the GO bond proceeds while the project is planned or, in the case of a non-viable project, an alternative project is initiated. Non-viable projects are those projects that the agency is unable to complete for a variety of reasons. For example, if an agency is unable to acquire the necessary permits for the construction, a project would be non-viable.

The number of times per year Georgia is able to sell a bond package in the market impacts the time from authorization to issuance. Similar to other states, Georgia sells bond packages a few times per year. So, if an agency is not at a stage of readiness to request bond proceeds from the first bond sale of a fiscal year, there will be a time lag until the next bond sale.

To meet federal arbitrage requirements, GSFIC Finance staff continuously monitors the spend-down of projects and submits a report to Commission members which documents agency spend-down compliance with critical milestones (e.g., six months, three years, and five years). Agencies that have not met the spend-down guidelines are required to report on the status of the projects and to detail the corrective action that will be implemented to become compliant with respect to the next milestone. If a project is delayed and becomes non-compliant, GSFIC Finance will perform a "compliance exchange," which is a dollar-for-dollar exchange of bond proceeds between a non-compliant project and a compliant project within the same agency. Compliance exchanges are used to meet federal arbitrage requirements and are possible only in instances where the authorization was legally stated in general terms.

GSFIC Response: "While we understand that DOAA sought to answer the question regarding when bond funds are utilized by an agency based upon the date GSFIC processes the first payment for a particular authorization, we believe the resulting analysis does not provide an accurate or complete set of facts regarding spend-down of bond proceeds or initiation of projects.
First and foremost, the Commission and agencies who receive bond funds are subject to expenditure requirements contained in the Internal Revenue Code of 1986... Second, most bond projects are funded on a reimbursement basis and require an expenditure of agency funds prior to receipt of reimbursement of bond funds. The DOAA analysis does not capture the agencies' initial expenditure on projects or instances where older bond proceeds were utilized to initiate projects in order to comply with federal spend-down requirements for tax-exempt bonds. Third, the DOAA analysis counts project authorizations without consideration of the dollar value of the project. Again, federal regulations require spend-down to be measured by amount of bond proceeds spent, not project initiation. With respect to the 10 year analysis, GSFIC's records and our review of DOAA analysis indicate that, during the time period 2001-2010:
1. Of the $9.5 billion in authorized projects for which bonds were sold and proceeds disbursed $4 billion of those projects, or 43% of projects on a dollar-weighted basis, received a payment from GSFIC in the first 90 days.
2. $6.9 billion of the $9.5 billion in authorized projects, or 73% of projects on a dollarweighted basis, received a payment from GSFIC in the first 180 days.

General Obligation Bonds

13

3. A small number of agency projects (12 out of 1,425), with relatively small budgets ($14.8 million, or 0.16% of $9.5 billion) took over 3 years to submit a payment request to GSFIC. These projects are outliers and distort the DOAA averages."

Auditor's Response: GSFIC's concerns with our methodology appear to be based primarily upon the presumption that it should have included an analysis of the time taken to spend-down bond proceeds. While we recognize GSFIC's need to focus its activities on ensuring that spend-down occurs in compliance with federal requirements for tax-exempt bonds, this type of analysis was not required to answer the question
posed by the Senate Appropriations Committee: "What is the length of time between the time
bonds are authorized in the appropriations act, issued through a bond sale and utilized by an agency?" The focus of the question requires a chronological analysis of time starting with the date bonds were authorized by the General Assembly for a project through the utilization of funds for the project. Because of the wide variety and range in project complexity (e.g., the difference in purchasing equipment versus planning and constructing a building on a college campus), we did not include an analysis of how long it took for all of the funds for a specific project to be expended.

The date of "first expenditure of bond proceeds" (i.e., the first payment date from the bond proceeds from GSFIC to the agency) was used in our analysis as the date when bond proceeds were utilized. As determined through conversations with GSFIC, this date is a valid data point and is also the only centralized, consistent, and reliable data for determining "utilization" across all authorizations. The report clearly acknowledges that this date does not necessarily reflect the date of project initiation. Data regarding the actual initiation date of projects is not available centrally and would require a manual review of each project's files (which would potentially be more than 1,000 files depending on how the files were maintained) at each agency. Without this type of review, the time between when an agency initiated a project and subsequently requested a reimbursement from GSFIC cannot be determined.

Regarding GSFIC's review of the data and the contention that "$6.9 billion of the $9.5
billion in authorized projects, or 73% of projects on a dollar-weighted basis, received a payment from
GSFIC in the first 180 days...," while 73% of projects on a dollar-weighted basis received a payment, this payment could be minimal relative to the total dollar value of the project and is in no way an indication that all funds have been expended. In addition, regarding the contention that outliers are distorting our averages, to test this assertion, we removed 23 projects that had a first expenditure date by GSFIC of more than 1,000 days following bond issuance; the removal of these projects did not change the average because of the large number of projects in our analysis (which is not on a dollarweighted basis). It should be noted that the median time between bond issuance and first expenditure by GSFIC is 196 days with an average of 246 days, and a range of 0 days to 1,763 days.

Are there best practices that can be adopted from other states to make the process more timely and efficient?
We reviewed the policies and procedures from several AAA- and AA- rated states to identify practices that may increase the timeliness and efficiency of bond authorization, issuance, and usage. We found that Georgia utilizes many of the same practices employed by these other states, such as issuing authorized debt on a project readiness

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14

basis. We also identified additional practices that other states use regarding the issuance and use of bond proceeds. Specifically, we found that several states deauthorize the use of bond funds if the project is not initiated within a specified time frame. (Georgia's Constitution states that bonds remain authorized until issued, unless the General Assembly deauthorizes the bonds in a subsequent appropriation bill prior to their issuance.) In addition, several states authorize funding for an entire project, but stagger the sale of the bonds based on cash flow needs and to meet federal arbitrage requirements. Due to a lack of data, however, we were not able to specifically determine if any of the practices are more timely or efficient than Georgia's. The practices used by other states are discussed below.

Statutorily-defined Timetables

Delaware: Projects are required to commence in the year they are authorized. If projects have not been initiated within 18 months of the authorization, they are required to be de-authorized. Any unexpended or unencumbered bond funds are subject to reversion or reauthorization.

Maryland: If within two years after the date of an authorization, a project has not been initiated, the authorization terminates unless otherwise provided for in the enabling act (the act authorizing the project).

Minnesota: Unencumbered or unspent debt for all projects with authorizations aged four or more years old is cancelled unless specifically reauthorized by an act of the legislature. In 2011, 78 projects with total unspent/unencumbered funds over $10.1 million were subject to cancellation.

Bonds Issued on a Cash Flow Basis

Maryland: The sale of bonds is staggered. Only about half the bonds authorized each year are issued within the ensuing two fiscal years, and the remaining issuances occur over the next three years after that. The bond proceeds are deposited in the State and Local Facilities Loan Fund and expended as needed for any project authorized by an enabling act.

Minnesota: Each year the Minnesota Management and Budget Office polls agencies on the status of authorized projects and related funding needs to determine the needed size of that year's bond issuance. There are typically several bond issuances per authorization.

Utah: The amount of authorized debt issued for projects is based on agencies' estimated cash-flow needs for the next 12 to 15 months.

Virginia: After projects have been approved by the General Assembly and by the electorate through a referendum, Treasury staff surveys agencies to identify the timeframe that funds will be needed. Draw schedules are developed for these projects so that bond funds can be available on a cash-flow basis. An issuance schedule is prepared and bonds are sized to meet the draw schedules. It should be noted that the last authorization for GO debt occurred in 2002. The debt authorized in this referendum was exhausted with Virginia's last bond issuance in 2009.

General Obligation Bonds

15

While timeliness and efficiency are important, it should be noted that the process of issuing debt is complex and not all factors affecting timeliness and efficiency can be controlled. As discussed throughout the report, there are many issues that impact the time between authorization and issuance of GO bonds and the use of bond proceeds. For example, all states that issue tax-exempt bonds must follow federal requirements regarding the timeframe for expending tax-exempt bond proceeds. As a result, the timing and amount of debt issued must be carefully managed to ensure that proceeds will be spent within the required time frame. In addition, there are trade-offs to timeliness and efficiency that are important considerations in a political process. For example, Georgia's process, which allows GO bond funds to be redirected from one project to another, is flexible and efficient, but may lack a desired level of transparency and legislative accountability. If the state were to change the redirection process to include some form of legislative involvement, the process may be less timely and efficient, but may provide for a greater level of transparency and legislative accountability. A more lengthy process could also make compliance with spend-down regulations more difficult. (The redirection process is discussed more fully on pages 5 and 18).

Please comment on the efficiency of issuing bonds for distinct phases of construction.
In Georgia, bonds are typically authorized either for the entire value of a project or for project phases. Our review of appropriations acts and tracking documents for fiscal years 2001 through 2011 found that the majority of projects were authorized and/or issued in project phases (e.g., acquisition, design, and construction). As shown in Exhibit 9, GO bond authorizations may include funding for one specific phase, such as construction, while others include funding for more than one phase, such as both design and construction. We did not, however, readily identify authorizations for sub-phases of the construction process, such as grading, foundation, and roofing. As discussed below, the advantages and disadvantages of either approach (financing project phases versus construction sub-phases) are not limited to questions of efficiency. A decision to begin issuing bonds for sub-phases of construction would also have to take into consideration factors such as state Constitutional limits on debt and debt service, and the risk associated with the potential for additional costs and project delays.
The advantage of the current approach is that the financing of projects in phases rather than the entire value of the project allows the state to delay debt retirement requirements for the entire project value while trying to maximize the number of projects that can be financed. The same argument could be made by further subdividing project phases into construction sub-phases; however, the risks and costs associated with authorizing and issuing bonds for sub-phases of construction appear to outweigh any efficiency gained.
Constitutional limits on debt: While the General Assembly may authorize GO bonds by project phase, the total amount of debt authorized is ultimately limited by the legal debt limits contained in the state Constitution and the policy limits established by GSFIC in the state's debt management plan. The state Constitution limits the amount of general obligation debt the state can incur by limiting the aggregate annual debt service payments to 10% or less of

General Obligation Bonds

16

total revenue receipts for the preceding fiscal year and requires that the annual estimated debt service payments associated with all authorized debt be appropriated and deposited into the Debt Service Sinking Fund. Both of these requirements not only limit the amount of debt issued each year, but also limit the amount of debt authorized to be issued at some point in the future. Since 2005, GSFIC's debt management plan has established 7% as the appropriate percentage of debt service payments of prior year treasury receipts to keep the state's debt ratios more in line with its triple AAA peers. While the General Assembly could maximize the number of GO bond-funded projects initiated in any one year by authorizing sub-phases of construction, this would present a short-term solution, since in the long-term the total value of capital projects funded by the state is limited by Constitutional requirements and GSFIC policy.

Risk: The authorization of sub-phases of construction could also increase the risk of a construction project not being completed. For example, future legislative bodies with different priorities may choose not to authorize the debt necessary to complete the project. Also, if sufficient bond funds were not authorized to continue construction on a project until the following year and subsequent bond issuance, projects could be delayed, which could result in increased construction costs. In addition, unforeseen economic circumstances (such as the financial market conditions subsequent to the Lehman Brothers bankruptcy) could impact the state's ability to issue debt, and if projects were only partially constructed and bond funds were not available, construction could be delayed, possibly resulting in increased costs. It should be noted that both GSFIC Construction and construction officials in other state agencies noted that contracting for components of the construction phase would not only be risky but cost prohibitive.

General Obligation Bonds

17

Exhibit 9 Project Phases Funded Fiscal Years 2001-2011 Authorizations

Acquisition

Design

Construction

Equipment

MRR3

18
1
3
1
80
94
34
92
10
160
305
Unspecified: 180 (1)
1 The language included in the tracking documents for these bonds did not specify the phase or phases to be funded, instead only listing the name of the project. 2 FY 2001-2011 bond authorizations also included 38 authorizations for Department of Education funds for local school boards, 28 authorizations for GHEFA loans to local governments for infrastructure projects, and 14 large Department of Transportation projects such as the Governor's Road Improvement Program. These authorizations are not for one identifiable project and, therefore, do not include project phases. 3 MRR refers to maintenance, repairs, and renovation projects. Sources: Tracking Documents for FY 2001-2011 Appropriations Acts.

Exhibit 10 is an example of a project that received multiple authorizations over a ten year period. The Special Collections Library at the University of Georgia has been authorized in four separate years: (2002, 2009, 2010, and 2011) and in each year the project phase is specified. In other instances, where a project receives multiple authorizations, the phases may not be specified. For example, the tracking document for House Bill 948 (the FY 2011 Appropriations Act) only specified that $6.5 million in 20-year bond funds were to be issued for the Health and Human Sciences Building at Georgia Southwestern College. The specific phase of the project was not stated. However, in the prior year, $1.1 million in five-year bond funds were authorized to be issued for the design of this building. Additionally, in the following year (2012), another $7.8 million in 20-year bond funds were authorized to be issued for the construction of this facility.

General Obligation Bonds

18

Exhibit 10

Bond Authorizations for the Special Collections Library at the

University of Georgia

Design

Construction

Equipment

House Bill 1001 (FY 2002 Amended) $240,000
Pre-Design and Design

House Bill 990 (FY 2009) $1,500,000 Design

House Bill 119 (FY 2010) $26,600,000 Construction

House Bill 948 (FY 2011) $3,050,000
Complete Construction and Equipment

Source: Tracking Documents for 2001-2011 Appropriations Acts

GSFIC Response: "The report correctly states that the issuance of bonds in phases for capital projects would be risky and likely to increase construction costs."

Is issuing bonds for distinct phases of construction common in other states?
In the other states included in our review, we did not note examples of bonds authorized for distinct phases of construction. As discussed in the previous section regarding timeliness of bond use, the states we reviewed issue debt for authorized projects on as as-needed basis in order to meet federal arbitrage requirements. This is accomplished through several methods which typically involve soliciting input from agencies regarding project status and forecasting cash needs for the following year.

What is the process of redirecting unused funds sold for one project for use in another project?
Redirection is the process of utilizing GO bond proceeds for a project intended by the General Assembly for a different project in the authorized agency. As discussed on page 4, redirection is legally permissible because the General Assembly authorizes an agency to expend GO bond proceeds in general terms. According to GSFIC Finance, GSFIC has been advised by the Law Department on numerous occasions that the agency for which the GO bonds were issued has the legal authority to direct the specific use of the proceeds consistent with the general authorization contained in the appropriations act, the statutory powers of the agency, and federal tax requirements.
Despite this legal flexibility, and in an effort to document and formalize the process for redirects, GSFIC requires agencies desiring to redirect funds from one authorized bond project to another project must request approval from GSFIC Construction which verifies that funds are available and that funds could be spent expeditiously subsequent to the transfer and forwards the request to OPB. The redirection approval process is

General Obligation Bonds

19

shown in Exhibit 11. According to GSFIC policy, any bond funds identified for potential redirection are evaluated on several factors including, but not limited to, (a) the original intent of the funds, (b) the age of the funds, and (c) how quickly the funds can be expended if transferred to another project. If GSFIC and OPB approve the redirection of funds, the funds are moved from the original project account into a new project account.

Agency determines a need
to redirect funds

Exhibit 11 Redirection Process

Agency submits Redirect Request
form to Construction
Division

Construction

Division determines if funds

No

are available

Reject Redirect Request

Yes

Request submitted

Request submitted

to OPB for

No

to GSFIC for

Yes1

approval

approval

Yes

No

Request submitted

to GSFIC staff for

No

approval

Reject Redirect Request

Yes

Redirect Funds2

1GSFIC typically does not approve a redirect request if OPB disagrees with the request 2 After the redirect request has been approved by OPB and GSFIC, the House Budget Office and the
Senate Budget Office is notified.

General Obligation Bonds

20

How often does the process of redirecting unused funds sold for one project for use in another project happen and what is the average amount?
As shown in Exhibit 12, during calendar years 2001 through 2010, a total of 298 transactions involving the redirection of approximately $185 million in GO bond proceeds were approved. This amount represents 1.7% of the $11 billion in bond proceeds available for capital expenses during this time. On average, 30 redirect transactions occurred each year at an average value of approximately $621,000. These averages are influenced by a large redirection of $46 million in GO bond proceeds originally issued for the construction of the West Georgia Reservoir.2 When this redirect is excluded, the total amount of redirects was approximately $139 million or 1.3% of the bond proceeds available for capital expenses during this time. The average value of each redirect transaction was approximately $494,709 when the West Georgia Reservoir is excluded.

It should be noted that the number of redirects cannot be directly related to the number of authorizations in the same year because redirects do not necessarily occur in the year of the original authorization. Also, the number of redirects in a specific year may be the result of authorizations from multiple years, or, one authorization could result in multiple redirects in multiple years. For fiscal years 2001 to 2010 there were 971 authorizations which resulted in 777 projects (identified as unique GSFIC project numbers). During this same time period, 298 redirect transactions redirected funds from 167 projects to 162 projects.

Exhibit 12

Redirects By Calendar Year1

2001-2010

Calendar year No. Redirects Total Amount

Avg. Amount

2001

19

$8,915,107

$469,216

2002

26

10,711,397

411,977

2003

29

8,822,017

304,207

2004

36

21,441,094

595,586

2005

40

48,340,681

1,208,517

2006

58

16,495,819

284,411

2007

32

16,365,439

511,420

2008

15

11,824,297

788,286

2009

12

6,276,639

523,053

2010

31

35,959,834

1,159,995

Total

298

$185,152,324

$621,317

1 Includes only those transactions that move bond funds betw een projects w ith separate legislative intent. 2To the greatest extent possible procedural transactions (used for project management) w ere identified and removed from our analysis.

Source: GSFIC data

2 As discussed on page 22, the redirection of the West Georgia Reservoir GO bond proceeds was authorized by the General Assembly.

General Obligation Bonds

21

Exhibit 13 shows the distribution of these redirects among state agencies. Almost twothirds (65%) of all redirect transactions occurred in two state agencies: the University System and the Technical College System. The redirections in the exhibit include, but are not limited to, the following types of transactions:

Applying surplus funds from a cancelled or completed project to another project that may be experiencing cost overruns.

Applying surplus funds from a cancelled or completed project to allow the scope of another project to expand.

Applying surplus funds from a cancelled or completed project to a new project that had not been identified in prior tracking documents or appropriations acts.

Applying surplus funds from cancelled or completed projects to the minor or major repairs and rehabilitation (MRR) account. The MRR Program is a funding process designed to help the state maintain its physical plants, facilities, and infrastructure.

Exhibit 13 Redirects By Agency: Calendar Years 2001-20101

Agency

No. Redirects

University System

104

Technical College System

91

Natural Resources

39

Human Resources (2)

17

Juvenile Justice

10

Ga. Building Authority

7

Corrections

5

Trans portation

5

Ga. Bureau of Investigations

4

Ga. World Congress Center

4

Labor

3

Veterans Services

3

Defens e

2

Education

2

Agriculture

1

Public Safety Training Ctr.

1

Total

298

Total Amount $45,305,163 34,456,371 57,049,594 6,740,150 3,139,755 5,258,951 2,023,836 25,030,691 486,500 1,263,508 1,646,342 319,286 750,572 6,605 1,500,000 175,000
$185,152,324

Avg. Amount $435,627 378,641
1,462,810 396,479 313,975 751,279 404,767
5,006,138 121,625 315,877 548,781 106,429 375,286 3,303
1,500,000 175,000
$621,317

1 Includes only those transactions that move bond funds betw een projects w ith separate legislative intent.

2 Includes projects associated w ith the Department of Community Health, the Department of Human Resources, and the Department of Behavioral Health and Developmental Disabilities, and the Department of Public Health.

Source: GSFIC data

General Obligation Bonds

22

What oversight of the process of redirecting unused funds sold for one project for use in another project exists?
Currently, agencies desiring to redirect funds from one authorized bond project to another project must request approval from GSFIC Construction, which then seeks approval from OPB. In some instances, redirects may also have either been approved formally by the General Assembly or informally by individual legislators.

Legislative Involvement in Redirections In some instances, redirects have been initiated through the direction of the General Assembly through the annual appropriations process. Since 2001, the tracking documents for appropriations bills have included instructions for 23 of 328 redirects. Fifteen of these redirections, worth a total of $44 million, were associated with only one project (the West Georgia Reservoir), which was cancelled after bond funds were issued. The transactions associated with the project are illustrated in Exhibit 14.

As shown in Exhibit 14, in the 1993 and 1999 Appropriations Acts, the General Assembly authorized the issuance of $51.5 million in bonds for the construction of a water reservoir in west Georgia. The bonds associated with this authorization were issued in 1992 and in 2002. However, due to the inability to obtain the necessary permits for this project, it was cancelled. Subsequently, in the 2004 Amended Appropriations Act, the General Assembly provided instructions for the redirection of $44 million of this bond issuance.3 Fifteen separate projects were identified, each to receive a specific amount of the funds ranging from $225,000 to $15 million. GSFIC records show that $38.6 million of the West Georgia Reservoir bond funds were redirected in accordance with these instructions. However, $7.6 million of the Reservoir bond funds were redirected to projects not included in the redirect instructions. This is legally permissible due to the broad language in the appropriations act. These GO bond proceeds were redirected to other projects for a variety of reasons. For example, the $625,000 for the Lake Seminole Marina was redirected to the Lake Seminole Group Lodge because the U.S. Army Corps of Engineers would not grant the necessary permits to build the marina.

In some instances, agencies requesting redirection of GO bond funds indicated they received prior approval from specific legislators. For example, in October 2010 the Georgia Department of Transportation (GDOT) submitted a request to GSFIC Construction for the redirection $3,050,000 issued for the construction of a new transloading facility in Rock Spring to the rehabilitation of the mainline of the Chattooga and Chickamauga Railway from Rossville to Lyerly. The request was made by GDOT after it received a letter in support of the redirection from the chairman of the Senate Transportation Committee.

3 The difference between the $51.5 million issued and the $44 million in redirect instructions is due to a small portion of the bond proceeds expended on the planning of the reservoir.

General Obligation Bonds

23

Exhibit 14 Redirection of $46.15 million in Bond Funds Issued for the West Georgia Reservoir

West Georgia Reservoir
(FY 1993 HB 1260 $5,500,000 Bonds Issued 8/5/1992) (FY 1999 HB1250 $46,000,000 Bonds Issued 5/16/2002)

Project Cancelled. General Assembly provided instructions for the redirection of bond funds in FY 2004 HB1180.

General Assembly's Instructions for Redirection of $44 million
Georgia Land Conservation Partnership $15,000,000
Battlefield Park Renovations $6,000,000
Minor Construction at State Facilities $3,325,000
Paving at Various State Parks
$3,000,000
Pigeon Mountain Land Purchase $3,000,000
Okefenokee Education Center
$2,500,000
Dam Construction Yuchi WMA
$2,000,000
Gordonia-Altamaha State Park Master Plan $3,000,000
Houston County State Park $1,900,000
Lake Blackshear Marina Complex $1,750,000
Tired Creek Park and Lake $675,000
Lake Seminole Marina $625,000
Renovation of Bo Ginn Aquarium $500,000
Silver Comet Trail $500,000
Bacon County Fishing Area $225,000

Redirections To Projects Included Redirections Without Legislative

in Legislative Instructions

Instructions

Georgia Land Conservation Partnership $15,000,000
Battlefield Park Renovations $5,992,677
Minor Construction at State Facilities $3,325,000
Paving at Various State Parks
$3,000,000
Pigeon Mountain Land Purchase $3,000,000

Oaky Woods WMA Acquisition $2,071,125
Oaky Woods WMA Acquisition $7,323
Chattahoochee Bend $484,400
Go Fish $375,000
Capital Repairs $1,640,600

Dam Construction Yuchi WMA $71,263
Gordonia-Altamaha State Park Master Plan $3,000,000
Houston County State Park $1,900,000
Lake Blackshear Marina Complex $1,750,000

Oaky Woods WMA Acquisition $1,928,737
Lake Seminole Group Lodge
$625,000

Renovation of Bo Ginn Aquarium $500,000
Silver Comet Trail $500,000
Bacon County Fishing Area $225,000

$44,000,000

$38,589,140

$7,562,185

$46,151,325

Source: GSFIC records and Appropriations Bills

General Obligation Bonds

24

Bond Funds Redirected to Projects without Legislative Intent As shown in Exhibit 15, approximately $90 million of redirected GO bond proceeds was transferred to projects that had not previously been specifically identified through the appropriations process but were approved by GSFIC and OPB.4 This amount represents 0.78% of the GO bond proceeds available for capital expenses during this time. The types of projects funded in this manner ranged from small-scale renovation projects, such as the replacement of a damaged culvert at Atlanta Regional Hospital ($108,000 in redirects), to large-scale projects such as the conversion of High Occupancy Vehicle (HOV) express lanes to High Occupancy/Toll (HOT) lanes ($16 million in redirects).

Exhibit 15 Projects Without Legislative Intent That Received

Redirected Funds Jan. 2001-Oct. 2011

Agency

No. Projects Amount Redirected

Trans portation

10

$33,068,930

Technical College System

9

19,164,268

Natural Resources

7

6,929,200

Univers ity Sys tem

6

11,942,344

Building Authority

3

354,424

Corrections

3

10,713,000

Juvenile Justice

3

Human Resources1

2

1,461,000 4,046,905

Ga Public Safety Training Ctr

1

175,000

Defens e

1

1,791,581

Total

45

$89,646,652

1 These transactions include projects in the Department of Human Services, the

Department of Behavioral Health and Developmental Disabilities, the Department

of Community Health, and the Department of Public Health.

2 This table includes $25,072,521 in total redirect transactions that occurred

during calendar year 2011. These transactions are not reflected in Exhibits 12

and 13 as the time period included in those exhibits is calendar years 2001-

2010.

Sources: GSFIC records and Appropriations Bills

Exhibit 16 illustrates how GO bond proceeds issued for specific projects in the University System have been redirected. As shown in this example, it appears that approximately $6.2 million was redirected from the $28 million in GO bond proceeds for the AASU Science building to Solms/Hawes Halls. However, while the Solms/Hawes Halls renovation was never specifically disclosed in a tracking document or appropriations act, it was specifically disclosed in documents submitted by the University System when they initially requested the GO bond funds for the AASU Science Hall project. GO bond proceeds that remained after the Solms/Hawes Halls renovation was complete were then redirected to a minor capital outlay project fund. These funds were subsequently redirected to the renovation of Jenkins Hall. The Jenkins Hall renovation also received $5 million in redirected GO bond funds from the Burnett Hall project. The Burnett Hall project was authorized by the General Assembly

4 For the purposes of this report, legislative intent refers to the non-legally binding language regarding specific projects included in either the tracking document or the appropriations act.

General Obligation Bonds

25

to receive $5 million in 2007. After the authorization and the GO bonds were issued for the addition to Burnett Hall, the University System learned that the Georgia Department of Transportation was going to widen a road adjacent to Burnett Hall. The University System decided to delay the addition to Burnett Hall due to the road widening and to redirect the entire amount to the renovation to Jenkins Hall. It should be noted that while in the fiscal year 2006 Appropriations Act the General Assembly approved $2.9 million in GO bond proceeds for Jenkins Hall, the Governor vetoed this line item.

Original Project

Amount Redirected

AASU Science Building
(FY1999 HB 1250) $28,000,000

$6,205,308 6/30/2004

AASU Upgrade Electrical
Distribution Center
(FY 2001A HB 174) $3,000,000

$294,321 10/3/2005

Exhibit 16 Redirection of Bond Proceeds to a Fund AASU Facilities
Without Apparent Legislative Intent

Initial Project Receiving Redirected Funds

Amount Second Project Receiving Amount

Redirected

Redirected Funds

Redirected

Final Project Receiving Redirected Funds

AASU Renovation to Solms/ Hawes Halls
Included in the AASU Science Building Project Funds Totaling $6,499,629

$21,061 3/8/2007

Minor Capital Outlay Projects (AASU)
(FY2003A HB 121) $5,000,000-Bond Issue

$72,643 8/22/2008

AASU Jenkins Hall No authorization (Vetoed) Funds Totaling $5,072,643
Acquired Through Redirects

AASU Addition to Burnett Hall (FY 2007 HB 1027)
$5,000,000
Source: GSFIC records and Appropriations Bills

$5,000,000 3/31/2008

In another example, illustrated in Exhibit 17, excess funds from a number of projects have accumulated over time to create pools of funds in general use accounts for the Technical College System. These funds may be transferred to projects that had not been specifically identified through the appropriations process but may receive approval by GSFIC and OPB. GO bond funds have never been authorized with the intent to allow proceeds to be used on an account such as the "Property Acquisition" account. Within a span of two weeks, over $4 million in excess funds from 11 projects was redirected into this account. Apparently, the funds from this new account were expended for "property acquisitions" as well as for the construction of the Allied Health Building in the Atlanta Tech campus. In another example, $12,200,000 in 20-year bonds was authorized in the fiscal year 2009 Appropriations Act to be issued to the Technical College System of Georgia for major repairs and rehabilitation (MRR). The bonds associated with the authorization were issued in July 2008 and February 2009. During the next two years (2010 and 2011), additional GO bond proceeds totaling over $7.5 million were redirected into this account from nine projects.

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Exhibit 17

Redirection of Excess Funds Into Pooled Accounts

Original Projects

Amount Redirected

Initial Project Receiving Redirected Funds

Columbia County Campus Augusta Tech (FY 2005 HB 1181) $4,620,000

$245,517 5/1/2004

NW Technical College No Authorization $269,411 from redirect

$230,728 5/1/2004

Polytech Center Altamaha Tech (FY 1999 HB 143) $3,570,000
Moultrie Tech Campus (FY 2000 HB 1162) $17,554,134

$64,014 5/12/2004
$200,000 5/12/2004

Technology Building Griffin Tech (FY 1999A HB 143) $11,787,000
Technology Swainsboro Tech (FY 1999A HB 143) $3,965,000
Agribusiness, /Gen Classroom Ogeechee (FY 1999A HB 143) $3,965,000
Tech Ed Center- Sandersville-Jefferson (FY 1999A HB 143) $1,735,000
Child Development Ctr-East Central Tech (FY 1999A HB 143) $1,300,000
Renovations South GA Tech (FY 2000A HB 1162) $3,802,120

$2,550,000 5/12/2004
$52,442 5/1/2004
$486,006 5/12/2004
$83,520 5/12/2004
$40,507 5/12/2004
$108,245 5/1/2004

Property Acquisition No Authorization
Funds Totaling $4,132,734
Acquired through redirects

Asbestos Abatement South GA Tech No Authorization $181,870 from redirect

$81,756 5/1/2004

Phase 2 Classroom Building- SW GA Tech (FY 2009 HB 990) $12,760,000

$2,500,000 7/1/2010

Logistic Training Center-Albany Tech (FY 2009 HB 990) $9,150,000

$1,554,602 7/1/2010, 8/1/2011

Industrial Training Building-Flint River

$365,288

(FY 2007 HB 1027) $7,550,000

7/1/2010, 3/21/2011

Health & Science Building-Athens Tech (FY 2008 HB 95) $17,815,000
Industrial Tech Building-Athens Tech (FY 2009 HB 990) $5,235,000
Cherokee Campus-Appalachian Tech (FY 2008 HB 95) $14,855,000

$661,216 7/1/2010, 3/2/2011
$840,000 7/1/2010, 3/2/2011
$260,000 3/2/2011

Major Repairs and Rehabilitation (FY 2009 HB990)
$12,220,000-Authorization
Additional Funds Totaling $7,545,450
Added through Redirects

Allied Health Building-Okeefenokee (FY 2007 HB 1027) $10,300,000

$254,000 12/14/2010, 7/22/2011

Life Science Building-Gwinnett Tech (FY 2009 HB 990) $18,650,000

$1,000,000 7/1/2010

Allied Health Building-Atlanta Tech (FY 2005 HB1181) $14,715,000

$110,344 3/21/2011

Source: GSFIC records

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GSFIC Response: "GSFIC has worked diligently with state agencies to ensure bond funds are spent in accordance with legislative intent and federal tax-exempt bond regulations. In accordance with GSFIC policy, and on a limited basis, GSFIC and agencies have redirected bond funds in accordance with the appropriations act when bond funds remain following the completion of one agency project and are needed to complete other agency projects, when a project for which bonds were issued is no longer viable or necessary, and when such transfers will facilitate compliance with federal spend-down requirements."

OPB Response: "OPB acknowledges that although there is no legal requirement that the bonds funds be used for those projects authorized by general language in the appropriations bill, it is OPB's expectation that projects will be implemented by agencies as intended based on specific language in the appropriation bill or legislative tracking documentation."

In other states, is the legislature involved in this redirection decision?
A comparison to seven other states found that North Carolina is the only other state similar to Georgia in that the legally binding authorization to issue debt does not specify the projects eligible to receive bond proceeds. Although North Carolina's redirect process may be different, like Georgia, such transactions do not appear to require legislative approval. Of the remaining six states, four of the states require legislative approval or action prior to such transactions. The remaining two states have strict guidelines regarding such transactions and often require formal resolutions by their governing commissions. The procedures followed by the seven states included in our review are detailed in Exhibit 18.

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State Delaware Maryland

Are projects specified in authorizing legislation?
Yes
Yes

Exhibit 18

Redirect Process in Other States

Do transactions

require legislative

Redirect Process

approval?

Redirects of excess funds must be approved by the co-

Yes

chairs of the Joint Legislative Committee on the Capital

Improvement Program.

Excess funds can only be deposited into either the Annuity

Bond Fund (used to make debt payments) or the

Yes

Construction Contingency Fund (used for emergencies).

The use of Construction Contingency Funds must be

approved by the legislative budget committee.

Minnesota

Yes

In the "bond bill" (the annual bill authorizing debt), the

legislature may insert language to control how excess bond

funds are used. For example, recent bills authorizing bonds

for higher education projects require that excess funds be

Yes

deposited into the special maintenance and repairs account.

The agency is required to report to various legislative

committees regarding how these funds have been allocated

or spent.

Missouri

Yes

North Carolina

No

Utah

Yes

Virginia

Yes

Yes

Legislation is required to change the use of any bond funds authorized for specific projects.

No

Bond funds authorized for an agency may be utilized for any project within that agency.

Any unexpended bond funds must be deposited into the

related debt sinking fund unless the State Bonding

No

Commission (members include the Governor, the State

Treasurer, and an appointee of the Governor) provides

otherwise by resolution.

When the cost of a project is less than what is listed in the

authorizing legislation, the Governor or Governor's designee

may increase the amount allocated to any other project listed

in the same act. Before doing so, it must be demonstrated

No

that: (1) the cost of the project has been reduced to the

extent reasonable, (2) the capital project has not been

expanded or enhanced beyond that originally approved, and

(3) the capital project is suitable and adequate for the scope

originally intended.

Sources: Relevant laws, rules, regulations, policies and procedures of Delaware, Maryland, Minnesota, Missouri, North Carolina, Utah, and Virginia.

Please comment on the value of the state's triple AAA bond rating. Based on recent trends, how much would the state incur in higher interest costs if its rating was downgraded?
Georgia is one of eight states that has a triple AAA credit rating from the major bond rating agencies (Standard and Poor's, Moody's, and Fitch). The value of a credit rating of triple AAA is significant from both a qualitative and quantitative perspective. However, our research indicates that the actual financial impact of downgrading the state's credit rating in terms of interest costs is difficult to isolate and, therefore, to estimate. The qualitative and quantitative value of the state's triple AAA bond credit rating is discussed below.
Qualitative There are multiple qualitative benefits to the state's triple AAA credit rating. The triple AAA credit rating provides a positive perception of the state's finances which allows Georgia the maximum flexibility in selling its GO bonds.

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Access to market Since there are purchasers of bonds (mutual funds, pension funds, etc.) that, by their own rules, are limited to purchasing only triple AAA rated bonds or are required to maintain a certain bond rating for their portfolio, Georgia's triple AAA bond rating expands the market for Georgia's bonds to all potential purchasers.
Marketability Georgia's triple AAA bond credit rating increases the marketability of Georgia's GO bonds. This allows Georgia to increase the size of its bond offerings. Also, when credit market disruptions occur (such as after the Lehman Brothers bankruptcy in 2008), bonds with high rated credits are able to sell sooner and in greater amounts than lower rated credits. In addition, due to the triple AAA rating, Georgia is able to sell bonds using methods which result in lower bond issuance costs.
Public Perception Georgia's triple AAA bond rating creates a public perception that Georgia state government's fiscal affairs are well-managed and the state is fiscally conservative. It creates a positive perception of the state's fiscal affairs to the public and the business community. In addition, it is often touted politically as a positive. In other states, a downgrade from a triple AAA bond credit rating has been perceived negatively by citizens and politicians and in the media.

Quantitative The quantitative benefit resulting from Georgia's triple AAA bond credit rating is Georgia has a lower debt service cost5. Exhibit 19 compares how much the state would have theoretically incurred in higher debt service (using true interest cost6) on its June 2011 bond issuance of approximately $560 million if its rating was downgraded from triple AAA to triple AA and to triple A. The difference in true interest cost between the triple AAA and triple AA is .22%. The resulting increase in debt service would be $736,854 annually and $14,737,085 over the life of the bonds. The difference in true interest cost between the triple AAA and triple A is .8%. The resulting increase in debt service would be $2,805,425 annually and $56,108,491 over the life of the bonds.

5 The difference in interest costs between two credit bond ratings is known as the credit spread and is measured using a basis point, which is 1/100th of 1%. For example, if the interest on a triple AAA bond is 1.5% and the interest rate on a triple AA bond is 2.0% the credit spread is 50 basis points. 6 True Interest Cost (TIC) is a method of computing the interest expense to the issuer of bonds. TIC is defined as the rate, compounded semi-annually, necessary to discount the amounts payable on the respective principal and interest payment dates to the purchase price received for the new issue of bonds. TIC considers the time value of money.

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Typically the bond ratings assigned by the three rating agencies (Standard and Poor's, Moody's, and Fitch) do not move in unison. Therefore, it is highly unlikely a state with a triple AAA bond rating would be downgraded to a AA rating simultaneously by all three rating agencies. In addition, a AA bond rating differs from a AAA bond rating only in a small degree. Therefore, a downgrade by one rating agency could have minimal impact on a downgraded state in terms of interest cost. As discussed below, other triple AAA states that have received a downgrade stated they experienced a minimal impact in terms of interest costs. However, GSFIC Finance noted that they cannot state with absolute certainty that the first sale of bonds following a downgrade from AAA to AA

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ratings that Georgia would be able to sell at the same interest rates as other long established AA rated creditors. Holders of Georgia's previously issued GO bonds would see a decline in the value of their holdings as valuations would have to be adjusted to reflect AA ratings versus AAA ratings. The resulting drop in value could cause investors to be reluctant to add Georgia's bonds to their holdings. Fewer potential purchasers could translate to decreased demand and potentially higher required interest rates.

GSFIC Response: The AAA rating not only helps the state secure the lowest possible borrowing costs, it reinforces the strength of our conservative financial policies to Georgia's business community and reminds taxpayers of our commitment to a prudent use of the state's resources and a balanced approach to improving infrastructure while ensuring a manageable debt burden for current and future generations.

OPB Response: "The AAA bond rating not only helps the state secure the lowest possible borrowing costs, it also reinforces the strength of our conservative financial policies to Georgia's business community and reminds taxpayers of our commitment to excellent management of the state's fiscal resources."

What has been the impact on states in terms of interest costs that held a Triple AAA rating and were downgraded?
As shown in Exhibit 20, since calendar year 2000, Minnesota, North Carolina, and South Carolina have each received a downgrade from at least one rating agency from AAA to AA. While North Carolina received a downgrade in 2002, its AAA rating was restored in 2006.

Exhibit 20

Recent State Credit Rating Changes

Standard & Poor's, Moody's, and Fitch

Minnesota AAA

2000 Aaa

AAA AAA

2003

2011

Aa1

AAA AA+

Aa1

AA+

North

2000

2002

2006

2011

Carolina AAA Aaa AAA AAA Aa1 AAA AAA Aaa AAA AAA Aaa AAA

South

2000

2005

2011

Carolina AAA

Aaa

AAA AA+

Aaa AAA AA+

Aaa AAA

Credit Rating: Downgrade, Upgrade Source: Census Data, California State Treasurer

We were able to contact bond officials in both Minnesota and North Carolina to determine the impact on their states interest cost due to the downgrade. Each state's explanation is below.

Minnesota State bond officials indicated that there is no way to measure the cost of its credit rating change. They indicated that while Minnesota may have lost a few basis points, the actual interest increase attributed directly to a downgrade would be hypothetical and impossible to quantify. Minnesota bond officials did indicate that, in their opinion, investors perceived the same risks associated with Minnesota's bonds as before.

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North Carolina State bond officials stated they assumed the downgrade had very little impact and they did not attempt to measure the impact. In addition, they indicated it would be impossible to determine if the cause of a couple basis points change between prior and past issuances was from a credit rating change or just normal volatility in the market.

While Maryland is a AAA-rated state and has not been downgraded, Maryland bond officials indicated that while they have been asked on several occasions to determine the financial impact of a downgrade, they have been unable to isolate the impact of a potential downgrade.

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Appendix A Objectives, Scope, and Methodology

The Senate Appropriations Committee requested a special examination on the authorization, issuance, and utilization of General Obligation (GO) bonds. As requested by the Committee, our review provides information regarding: (a) the length of time between the authorization, issuance, and utilization of general obligation bonds, (b) the efficiency of issuing bonds for distinct phases of construction, (c) the process for redirecting unused funds from one project to another, and (d) the value of the state's triple AAA bond rating.
Our review of GO bonds included interviews with staff from GSFIC Finance, GSFIC Construction, OPB, and several state agencies regarding the process of authorizing, issuing GO bonds, and utilizing the proceeds. We also reviewed the state Constitution and statutory requirements regarding GO bonds. In addition, we reviewed industry literature related to bond ratings.
In order to determine the length of time between authorization, issuance, and utilization, we identified individual authorized projects listed in the tracking documents for each appropriations bill over the past ten years (from fiscal 2001 through fiscal year 2011). Authorization date is the 1st date that GSFIC is legally allowed to issue the GO bonds (typically the first day of the fiscal year). Data from GSFIC's eBONDS system was obtained and reviewed to identify the date of the first bond issuance associated with each project included in these authorizations. The same data was utilized to obtain the date of the first expenditure of bond proceeds (the date of the check being issued by GSFIC to the agency) from these bonds. Our analysis did not include an analysis of compliance with arbitrage requirements for tax-exempt bonds. Arbitrage requirements are calculated on an issuance basis, not on a project/authorization basis as used in our analysis.
To determine the efficiency of issuing bonds for distinct phases of construction, we first identified trends in authorizations for various project phases (e.g., design, construction, equipment). We reviewed the tracking documents associated with appropriations acts passed during fiscal years 2001 through 2011 to identify legislative intent regarding project phases listed in each bond authorization. We also identified projects which received funding from multiple authorizations for various project phases. In this review we also identified some projects that received multiple authorizations for the construction phase. GSFIC records were reviewed and GSFIC staff members were interviewed to determine if authorized construction bonds are issued at one time or if the bonds are split into more than one issue. We found that large authorizations are occasionally split into more than one bond issue. We also interviewed GSFIC and other state agency staff members to determine the efficiency and potential hazards of splitting the total cost of construction (e.g., foundation of a building, roof, etc.) over one or more authorizations and issuances.
The process of redirecting unused funds from one project to another was determined by reviewing GSFIC policies and procedures and by interviewing appropriate staff members of GSFIC, the Governor's Office of Planning and Budget, and three state agencies that commonly redirect bond funds. The prevalence and average amount of bond fund redirections was calculated by analyzing data from GSFIC's eBONDS database. This database was also reviewed to track the flow of bond funds through several examples of large and complicated redirect transactions. It should be noted that the data regarding redirects cannot be readily differentiated from procedural transactions within the same database that did not meet our definition of a redirect. (These procedural transactions are for project management purposes.)

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To the extent possible, we removed procedural transactions that were identified in GSFIC's eBONDS database. However, both the number and dollar value may be overstated.

In order to determine the value of the state's triple AAA bond rating, we reviewed literature regarding bond credit ratings and reviewed literature specifically related to previous triple AAA states who had received a downgrade. The state's financial advisor, Public Resources Advisory Group, calculated the difference in interest cost for the state's June 2011 bond issuance for a triple AAA rate, triple AA rate, and a triple A rate. Also, we interviewed bond officials with previously triple AAA rated states that had been downgraded to determine both the qualitative and quantitative impacts of the downgrade.

Our comparison of the authorization, issuance, and utilization of GO bonds to other states included interviewing bond agency personnel from other triple AAA rated states including Maryland, Missouri, North Carolina, Utah, and Virginia. Data was not available on the amount of time between the authorization and issuance of bonds and the usage of bond proceeds to serve as a comparison to Georgia's timeliness.

The project was not conducted in accordance with generally accepted government auditing standards (GAGAS), given the timeframe in which the report was needed. However, it was conducted in accordance with Performance Audit Division policies and procedures for nonGAGAS engagements. These policies and procedures require that we plan and perform the engagement to obtain sufficient, appropriate evidence to provide a reasonable basis for the information reported and that data limitations be identified for the reader.

It should be noted the State Auditor is a member of the Georgia State Financing and Investment Commission. The Performance Audit Division answered the questions as posed by the Committee and followed its standard policies and procedures which address how a special examination is to be conducted.

For additional information or for copies of this report call 404-657-5220. Or see our website:
http://www.audits.ga.gov/rsaAudits/