Internal Audit Report

Transcription

1 Internal Audit Report State Infrastructure Bank TxDOT Internal Audit Division

2 Objective To evaluate the State Infrastructure Bank program to determine if objectives are being met and are in compliance with current regulations/policy. Opinion Based on the audit scope areas reviewed, control mechanisms are effective and substantially address risk factors and exposures considered significant relative to impacting reporting reliability, operational execution, and compliance. The organization's system of internal controls provides reasonable assurance that most key goals and objectives will be achieved despite significant control gap corrections and improvement opportunities identified. Control gap corrections and improvement opportunities identified are likely to impact the achievement of the organization's business/control objectives, but management has agreed to corrective action plans to address the relevant risks within 6 months. Overall Engagement Assessment Satisfactory Finding 1 Finding 2 Title State Infrastructure Bank (SIB) Program Lending and Management Procedures Annual Reporting to Federal Highway Administration (FHWA) Findings Control Design Operating Effectiveness Rating X X Needs Improvement X X Satisfactory Management concurs with the above findings and prepared management action plans to address deficiencies. Control Environment TxDOT s State Infrastructure Bank (SIB), established in 1997, provides financing options to communities and allows access to capital funds at or below market interest rates to finance transportation projects. The Project Finance, Debt & Strategic Contracts Division (PFD) is responsible for the oversight and monitoring of TxDOT s SIB program. Although general guidance is provided through Federal Highway Administration (FHWA), specific details on how the SIB program will be administered (loan application process, loan agreement terms, changes to loan terms, and interest rates, etc.) are determined by each state. Interest rates are negotiated at the time the borrower submits an application for a SIB loan and includes review of the borrower credit rating, the length of the loan (i.e., loan term), eligibility for borrower economically disadvantaged county (EDC) discount, and market index rates, as determined by PFD. While a general methodology for establishing interest rates is applied, other factors and consideration can influence final interest rate decisions. Prior to the execution of an SIB loan agreement and disbursement of funds, loans must first be approved through a minute order by the Texas Transportation Commission. The minute order for final approval includes the amount, interest rate, and term of the loan, as recommended by PFD and TxDOT staff. June

3 Annually, PFD must submit SIB program reporting to FHWA including loan commitments, disbursements, and payments received. The reporting is in response to the Cooperative Agreement between TxDOT and FHWA which states that TxDOT will submit an annual report no later than 90 days after the end of the federal fiscal year. In addition to reporting by TxDOT to the FHWA, the borrower of the SIB loan is required to submit financial reporting (i.e., audit reports, project expenditures, and operating/capital budgets) annually to PFD in order to demonstrate ability to fulfill commitment and account for use of loan proceeds. PFD typically obtains the reporting information from the borrower s webpage and manually tracks it using a spreadsheet. The Texas Financial Assistance System (TFAS), which was a system to improve oversight and monitoring capabilities for PFD, was launched in the fall of 2017 to support a growing loan portfolio for SIB retention, financial management, and reporting. PFD has begun utilizing TFAS for the oversight and monitoring of the SIB program in addition to paper loan files, electronically stored loan documents and manual spreadsheets, in order to help supplement information within TFAS while implementation of the system is ongoing. As part of TFAS, loan payments are automatically uploaded from an enterprise resource planning system daily. Summary Results Audit testing completed resulting in management action plans: Finding Scope Area Evidence Testing of SIB program oversight activities for 20 judgmentally selected active SIB loans executed between fiscal year (FY) identified: 1 Portfolio Management Borrower Reporting 24 of 24 (100%) annual project expenditure reports (required for loans of $1M and under) between FY were not provided by or requested from the borrower. 8 of 34 (24%) annual budget reports (required for all SIB loans executed since June 2012) from FY were not provided by or requested from the borrowers. Interest Rate Assignment 1 of 20 (5%) SIB loans did not have interest rates that were at or below market rate. Loan Payment Information A review of 124 SIB loan payments ($29.5M) (including accuracy of payment amount and date) in TFAS and identified: 38 of 124 (31%) SIB loan payment dates were not accurately recorded in TFAS. 21 of 124 (17%) SIB loan payments were received June

4 late and required additional interest charges to be assessed per loan agreement terms. o 11 late loan payments were not charged additional interest nor was documentation retained to support waiver of charges of $7K. o 10 late loan payments, for one borrower, resulted in additional interest charges; however, borrower was overcharged an amount of $ SIB Loan Reporting Loan Agreement Execution A comparison of loan information within the loan agreement and TFAS identified undocumented changes to loan agreements: 2 of 20 (10%) SIB loans did not have loan agreement amendments for changes made to original agreements. Testing of supporting documentation, accuracy, and submission timing for three annual SIB program activity reports to FHWA for FY identified the following: 1 of 3 (33%) annual SIB activity reports had amounts reported for outstanding loans and loan repayments that could not be reconciled to supporting documentation retained. 1 of 3 (33%) annual SIB activity reports had an understated amount of $890K reported that was inconsistent with prior year reporting methodology. 3 of 3 (100%) annual reports were submitted to FHWA after the reporting deadline (i.e., December 31 st of each year). Audit testing completed not resulting in management action plans: Scope Area Portfolio Management Evidence Testing of SIB program oversight activities for 20 judgmentally selected active SIB loans executed between FY identified: Borrower Reporting 26 of 27 (96%) borrower annual audit reports were obtained directly by PFD or from the borrower. Loan Payment Information A total of 124 SIB loan payments ($29.5M) were reviewed (including accuracy of payment amount and date) in TFAS and identified: June

5 Audit Scope and Methodology The scope and methodology used for this audit included: 121 of 124 (98%) SIB loan payment amounts were accurately recorded. Loan Agreement Execution A comparison of loan information within the loan agreement and TFAS identified: 20 of 20 (100%) SIB loans were properly approved through the Texas Transportation Commission prior to execution of the loan agreement; loan agreements were also properly executed prior to disbursement of funds. 19 of 20 (95%) SIB loans were invoiced per the terms defined in the executed agreement. Scope 1: SIB Loan Reporting assess the timeliness and accuracy of annual SIB program activity reports for FY Methodology included: Reviewed federal and state regulations such as the National Highway System Designation Act, FHWA Guidance, and Texas Administrative Code. Reviewed TxDOT Records Retention Schedule. Interviewed PFD personnel including the: Portfolio Project Manager and Financial Analyst. Interviewed FHWA personnel including the: Financial Manager and Director of Finance and Administration. Reviewed and reconciled documentation supporting the annual SIB program activity reports for FY Scope 2: Portfolio Management assess the monitoring and management of the SIB program to include integrity of automated and manually tracked loan data, determination of interest rates, required approvals, monitoring and utilization of borrower financial reporting, and benchmarking with other SIB programs from other state departments of transportation. Methodology included: Reviewed federal and state regulations including National Highway System Designation Act, FHWA Guidance, and Texas Administrative Code. Reviewed TxDOT Records Retention Schedule Interviewed PFD personnel including the: Portfolio Project Manager and Financial Analyst. Reviewed SIB borrower financial reporting for FY for a judgmental selection of 20 active SIB loans based on loan approval date and loan principal amount starting with the most recently approved loans and including a mix of loans under $1M, over $1M and over $10M. June

6 Reviewed SIB program documentation for the 20 active SIB loans executed between FY 2008 FY 2017 that included the loan application, interest rate determination, approval, agreement, disbursement, invoicing, and payments. Reviewed interest rate and historic market interest rate values for the 20 active SIB loans. Reviewed information collected by PFD of other state SIB programs, including information such as funding, project types, loan terms, fees, and interest rates. Interviewed Colorado, Florida, Michigan, Oregon, Pennsylvania, and Wisconsin state SIB personnel to obtain information regarding the management of their SIB program. The audit was performed by Francine Hudson, Carlis Jackson, Monica Washington, and Jennifer Stanush (Engagement Lead). The audit was conducted during the period from March 12 to April 27, Background This report is prepared for the Texas Transportation Commission and for the Administration and Management of TxDOT. The report presents the results of the State Infrastructure Bank audit that was added to the FY 2018 Audit Plan. SIB programs were authorized in 1995 as part of the National Highway Designation Act (NHS) with an objective to help accelerate needed mobility improvements through a variety of financial assistance. SIB programs are established and administered by each individual state. TxDOT s SIB program, authorized by the state legislature in 1997, was created with federal and state funding. It operates as a revolving loan fund where the account balance grows through the monthly interest earned, repaid principal, and interest payments. Loans can be granted to any public or private entity authorized to construct, maintain, or finance an eligible transportation project. As of February 2018, a total of 114 loans equaling more than $605.2M had been approved. In addition, $293.8M of the $313.8M within the SIB account balance was available for additional loans. Loan interest rates are negotiated by PFD, on behalf of the executive director, based upon borrower credit rating, loan term and using municipal market data (MMD) among other criteria. Borrowers located within EDCs can also qualify for reduced interest rates as part of the SIB loan program. A 2017 SIB Peer Exchange was hosted by PFD and gave FHWA and states across the nation an opportunity to participate in discussions on best practices and lessons learned. We conducted this performance audit in accordance with Generally Accepted Government Auditing Standards and in conformance with the International Standards for the Professional Practice of Internal Auditing. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. Recommendations to mitigate risks identified were provided to management during the engagement to assist in the formulation of the management action plans included in this report. The Internal Audit Division uses the June

7 Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control Integrated Framework version A defined set of control objectives was utilized to focus on reporting, operational, and compliance goals for the identified scope areas. Our audit opinion is an assessment of the health of the overall control environment based on (1) the effectiveness of the enterprise risk management activities throughout the audit period and (2) the degree to which the defined control objectives were being met. Our audit opinion is not a guarantee against reporting misstatement and reliability, operational sub-optimization, or non-compliance, particularly in areas not included in the scope of this audit. June

8 Detailed Findings and Management Action Plans (MAP) Finding No. 1: State Infrastructure Bank (SIB) Program Lending and Management Procedures Condition SIB program written internal procedures require improvement to ensure activities associated with lending and management are designed and are consistently followed to provide assurance for loan recommendations made to the Texas Transportation Commission. Effect/Potential Impact Without obtaining borrower reporting, insight is limited into the borrower s financial condition that could be used to assess the borrower s ability to fulfill their commitment to the SIB program. Retention of information and documentation provides transparency and the support needed to qualify decisions made if ever questioned or needing substantiation related to waiving of charges owed for late payments. Payment records not accurately documented could result in inaccuracies within loan payment schedules. Creation of loan agreement amendments to document changes to the agreement, terms or responsibilities, and subsequent approval provide documented support of TxDOT and borrower concurrence of changes made to the original loan agreement. Criteria 43 Texas Administrative Code (TAC) 6.42 states that for loans of $1M or less, the borrower shall submit an annual report to the department listing project expenditures, providing an accounting of financial assistance proceeds, and providing any other information requested by the department. 43 TAC 6.45 (effective June 21, 2012) states that annual operating and capital budgets shall be submitted by the borrower within 30 days of the date of their adoption. National Highway System Designation Act of 1995, Section 350 states that loans must bear interest at or below market interest rate as determined by the state to make the project subject to the loan feasible. TxDOT s Records Retention Schedule for SIB and other long-term project financing files states that records related to the review, decision, execution, and management of SIB loans and other instruments related to the financing of transportation projects should be retained up to 7 years after the completion of the loan. Terms within the SIB Loan Agreements state that: any changes in the character, agreement, terms or responsibilities must be enacted through a written amendment. June

9 late payments, defined as over 30 days past due date or not received on the due date depending on specific loan agreement, will bear interest (overdue principal and overdue interest) at the loan rate until paid. Cause Written procedures do not incorporate all operating procedures for the oversight of the SIB program. This includes retention of documentation to support decisions and/or changes to the loan agreement terms and reconciliation/verification of loan payment dates through tracking tools. Additionally, some borrowers are not submitting all of the required information per the executed loan agreement (i.e. project expenditure as well as capital and operating budget reporting). Current SIB program written operating procedures do not address monitoring of TAC 6.42 and 6.45 reporting compliance by the borrower. Evidence Testing of the SIB program oversight activities for 20 active SIB loans (9 loans greater than $1M and 11 loans less than or equal to $1M) executed between FY was performed to determine if required borrower reporting was obtained, negotiated interest rates were established at or below the market rate, and there was accuracy of automated and manually tracked loan information. The following was noted: Borrower Reporting Loans for $1M or under require the borrower to submit an annual report of project expenditures on each principal payment date to ensure there is an accounting for the utilization of loan proceeds. 8 of 20 SIB loans required annual submission of project expenditures. A review of project expenditure reporting for FY noted: o 24 of 24 (100%) annual project expenditure reports were not submitted by the borrower nor was follow-up performed by Project Finance, Debt & Strategic Contracts Division (PFD) to request from the reports from the borrower. All loans executed after June 2012 require annual reporting of operating and capital budgets for the duration of the loan to demonstrate borrower s ability to fulfill commitment. 12 of 20 SIB loans selected required the annual submission of operating and capital budgets. A review of budget reporting for FY noted: o 8 of 34 (24%) annual operating and capital budget reports were not requested or obtained by PFD from the borrower. Interest Rate Assignment A review of the documentation retained to support interest rate assignment to ensure interest rates were established at or below the market rate, as defined by PFD, at the time of assignment identified: 1 of 20 (5%) SIB loans did not have interest rates that were at or below market rate. o Using a simple interest calculation, the additional loan interest for the difference between the interest rate assigned and the market rate for that borrower at time of assignment totaled $388. June

10 Payment Information A total of 124 SIB loan payments ($29.5M) were reviewed for timeliness and accuracy (including that of the payment amount and date) into the Texas Financial Assistance System (TFAS). The following was identified: 38 of 124 (31%) SIB loan payment dates were not accurately recorded in TFAS to reflect the receipt date recorded on the payment voucher. 21 of 124 (17%) SIB loan payments (for 10 SIB loans) were received late, as defined by the loan agreement terms, and thus required the borrower to incur additional interest charges. o 11 late SIB loan payments (for 9 SIB loans) were not charged additional interest totaling $7K. Documentation supporting the waiver of the interest charges was not retained. o 10 late SIB loan payments (for 1 SIB loan) resulted in additional interest charges; however, as of May 18, 2018 the borrower s loan balance reflected an overcharge of $461. Loan Agreement Amendment A comparison of loan information within the loan agreement and TFAS indicated: 1 of 20 (5%) SIB loans did not have the complete loan amount disbursed ($4.5M vs. $5M) as outlined in the executed loan agreement. A loan agreement amendment was not executed to document the change in disbursement amount. 1 of 20 (5%) SIB loans were found to have a revised payment schedule and invoicing sent to the borrower for monthly payments as opposed to annual payments as required in the executed loan agreement. A loan agreement amendment was not executed to document the change in payment frequency. Management Action Plan (MAP): MAP Owner: Benjamin H. Asher, Director, Project Finance, Debt & Strategic Contracts Division MAP 1.1: The Project Finance, Debt & Strategic Contracts Division (PFD) will: Establish written procedures to better document information to support recommendations made by PFD to the Texas Transportation Commission for decisions, define the market ceiling and what documentation will be retained, retention location for documentation, tracking/monitoring of borrower reporting to include timeframe for follow-up, and reconciliation of loan payment information. Incorporate Annual Expenditure Reporting into the compliance tracking sheet for new loans from fiscal year 2017 and forward to help ensure receipt of required reporting. Ensure any manual payments entered in to TFAS are accurate. When applicable, PFD will review and adjust amortization schedules periodically to ensure loan balances are accurate. Create loan agreement amendments for the borrower to approve and execute when changes to the original agreement occur that require an amendment. Completion Date: January 15, 2019 June

11 Finding No. 2: Annual Reporting to Federal Highway Administration (FHWA) Condition Reports submitted to FHWA included inconsistencies with data accuracy. In addition, Project Finance, Debt & Strategic Contracts Division (PFD) did not submit State Infrastructure Bank (SIB) program activity reports according to the prescribed deadlines. Effect/Potential Impact Inconsistencies with data accuracy and methodology in calculating totals resulted in inaccurate reporting to external parties. Annual reporting submitted after the federal reporting deadline result in TxDOT being noncompliant with required federal reporting submission deadlines. Criteria The Cooperative Agreement between TxDOT and FHWA states that TxDOT will submit an annual report no later than 90 days after the end of the federal fiscal year (i.e., due December 31 st of each year). FHWA SIB Pilot Programs Guidance also states that each SIB program should submit an Annual Report to FHWA no later than 90 days after the end of each federal fiscal year and report should give history and detailed update regarding SIB activity of the immediately preceding year. Cause There are no documented operating procedures for the Annual SIB Program Activity Reporting process defining submission timing, data and source of data to be included in the report, report review prior to submission, and retention of documentation to support data being reported. Current practices used do not align with the requirements within the Cooperative Agreement between TxDOT and FHWA. Evidence Testing of SIB program annual reporting for fiscal years (FY) 2015, 2016 and 2017 was performed to determine if annual federal reporting to FHWA was completed by the required deadline, and reconciled to supporting documentation. Reconciliation A review of documentation retained to support information included within these three fiscal years of annual reporting identified: 2 of 3 (67%) annual reports had 1) specific program activity line items reported that were not supported or 2) used inconsistent methodology in calculating one specific program activity line item. o FY 2015 $13K of the outstanding loan and loan repayment amounts reported could not be reconciled to supporting documentation retained. o FY 2017 the loans committed amount reported of $28.2M was understated by $890K which was inconsistent with prior year reporting of reserved SIB loan funds. June

12 Timeliness A review of documentation supporting the submission of reporting to FHWA noted: 3 of 3 (100%) annual reports were submitted to FHWA after the reporting deadline o FY 2015 submitted 37 days after deadline o FY 2016 submitted 37 days after deadline o FY 2017 submitted 75 days after deadline Management Action Plan (MAP): MAP Owner: Benjamin H. Asher, Director, Project Finance, Debt & Strategic Contracts Division MAP 2.1: The Project Finance, Debt & Strategic Contracts Division (PFD) will submit the Federal Highway Administration (FHWA) template for the State Infrastructure Bank (SIB) annual report using information as of September 30th by the required deadline of December 30th. In addition, documentation to support data being reported will be obtained and retained within TFAS. Completion Date: January 15, 2019 June

13 Observation and Recommendation Audit Observation (a): Documentation to Support Interest Rates Interest rates are negotiated at the time the borrower submits an application using a combination of the following: municipal market data (MMD) index, borrower credit rating, eligibility for borrower economically disadvantaged county discount, information from administration or management discussion, and negotiation with borrower. A review of the documentation retained to support interest rates noted that 17 State Infrastructure Bank (SIB) loans, totaling $77.7M, had some but not all documentation and/or information needed to support the final negotiated interest rates. Effect/Potential Impact Without complete retention of information utilized to negotiate these rates, verification for compliance with assignments at or below market rate may not be able to be clearly determined. Likewise, retaining proper supporting documentation provides transparency for the analysis performed for information presented to the Texas Transportation Commission for review and final approval. Audit Recommendation PFD should establish written procedures to outline specific documentation and/or information to be retained to support final negotiated interest rates. June

14 Summary Results Based on Enterprise Risk Management Framework Closing Comments The results of this audit were discussed with the Project Finance, Debt & Strategic Contracts Division (PFD) Portfolio Project Manager and provided to the PFD Director on June 15, The Internal Audit Division appreciates the cooperation and assistance received from PFD personnel during this audit. June