DENVER – As Denver wraps up projects built with voter-approved bonds and prepares to issue $937 million in new bonds, Auditor Timothy M. O’Brien, CPA, recommends in a new audit that the city tighten its debt management processes.
“Denver has an excellent bond rating, and I want to see our credit remain superior through wise and meticulous management of bonds and other debt,” Auditor O’Brien said.
The audit of Denver’s debt management, released this month, did not find that any debt proceeds had been improperly spent and no instances of noncompliance with federal regulations or bond requirements were found, but it did show the need for improvements to how the city documents its debt processes.
The audit focused on two bond programs totaling $1.3 billion: The Better Denver Bond Program of 2007, which authorized bonding up to $550 million, and Ballot Measure 2C of 2015, which authorized bonding up to $778 million. The audit also looked at how the city manages certificates of participation — a type of debt the city can use without voter approval — as well as various information technology systems used to track and manage city debt.
The city uses bonds and other debt to help maintain and build new infrastructure, ranging from roads and bridges to buildings. The 2007 program included general obligation bonds for city infrastructure improvements, while the 2015 ballot measure used revenue-backed bonds for work at the Convention Center and the National Western Center complex. In 2017, voters approved another general obligation bond package for up to $937 million. These latest bonds have not been issued yet and were not part of the scope of the audit.
The audit team found Denver needs to create a citywide policy clearly defining allowable spending of proceeds from tax-exempt bonds. The city’s policy also does not require documentation of instances when the city deviates from existing guidelines for using certificates of participation, auditors found. Certificates of participation are a type of lease-purchase agreement where a facility is used as collateral to secure the financing for a project.
Existing guidelines say that the city is supposed to demonstrate that there will be cost savings, efficiencies or new revenue to help make the lease payments for the certificates of participation. While the audit team recognized the need for occasional deviation from these guidelines, best practices call for documentation of these instances and the reasoning. Auditors recommended updating the debt policy to require documentation for deviation from cost saving guidelines.
The city could also improve documentation of controls after issuing bonds to ensure all employees are fulfilling their duties related to covenant compliance, an annual arbitrage calculation and compiling debt information data for the Comprehensive Annual Financial Report. The audit team found evidence of these post-issuance controls being executed, but the documentation was missing.
“The city is doing its job in managing debt according to applicable requirements,” Auditor O’Brien said. “However, I would like to see more detailed and complete documentation for the benefit of taxpayers who voted for the bonds.”
In examining the city’s IT processes over debt management, auditors found that there was only one person, employed by a company contracting with the city, who can support a critical system that tracks capital improvement projects and planning. The audit team recommends cross-training to ensure timely execution of critical changes in case that one person is unavailable.
Other findings included the need for better controls over access to debt management systems and software changes, in order to avoid unauthorized revisions to the systems. The audit team also recommended better oversight of third-party service providers to ensure they are doing work according to contracts.
The Departments of Finance and Public Works agreed to all 16 of our recommendations.