Summary

The following summarizes the results of our performance audit of State of Florida local government bond pools existing at January 2002.

Finding No. 1: Of the eight bond pool issues we reviewed, the proceeds of only one, the City of Gulf Breeze Capital Funding Revenue Bonds, Series 1997A, were substantially loaned out to accomplish the public purposes for which the bonds were issued. Of the remaining seven bond pool issues, through January 2002 approximately $1.45 billion of bond proceeds (91 percent of the total bonds issued) had not been loaned to accomplish the intended public purposes, while $42,327,144 of bond issuance and administrative costs had been incurred. The effect of issuing these bonds without loaning a significant portion of the proceeds has been to generate significant investment earnings and significant fees for financial advisors, underwriters, insurers, attorneys, consultants, and other bond professionals, with minimal demonstrated benefit to the local governments and citizenry of Florida. This appears to be inconsistent with the provisions of Article VII, Section 10 of the State Constitution, in that it appears that private, rather than public, purposes were primarily served.

Finding No. 2: For the eight bond pool issues we reviewed through January 2002, $72,320,000 of bond proceeds had been loaned to out of state local governments and nonprofit organizations, with no apparent benefit to citizens of the State of Florida. The issuers and their representatives generally maintained that the out-of-state loans benefited Florida citizens. However, for the bond issues we reviewed, the validation orders and other documentation provided did not clearly state the benefit to Florida citizens.

Finding No. 3: For some of the bond issues we reviewed, bond validations were made on a blanket basis and had no term limits; did not address what specific projects were intended to be financed with the bond issue; and were used by local government issuers and administrators as justification for issuing bonds with a myriad of purposes, including out-of-state loans for which there was no demonstrated benefit to Florida citizens.

Finding No. 4: Organizations used by one of the local government bond issuers to administer its local government loan program paid a total of $39,445 to an employee of the local government for administrative services during the fiscal years ended September 30, 2000, and 2001. This situation may represent a conflict of interest in violation of Section 112.313(7)(a), Florida Statutes.

Finding No. 5: For the eight bond issues we reviewed, there was no documentation, of record, as to how the local governments determined that a negotiated sale was in the best interests of the issuers, borrowers, and citizens of the State of Florida. In addition, the issuers generally incurred certain issue costs, including underwriter fees, financial advisor fees, attorney fees, credit facility fees, insurance, and remarketing services, without benefit of a competitive selection process.

Finding No. 6: Our audit disclosed a lack of accountability and reporting for the eight bond issues we reviewed as follows:

• Records on bond pools to ensure proper accountability for the bond funds were not available for six of the eight bond pool issues. Our review of trustee account statements disclosed several errors made by the trustee for three bond issues, which may have been prevented or detected had accounting records been maintained.
• Each bond pool earned millions of dollars in interest on investments (at least $157 million collectively for the eight bond issues we reviewed). The amounts of interest earned were accepted at face value by the local governments without verification.
• Although requested, we were not provided with a schedule of sources and applications of funds from the date of issuance for each bond pool issue and, as such, we prepared such schedules through January 2002 based on information provided by the issuers and other parties to the bond programs. We requested that the local governments or their designated representatives verify the schedules; however, for three bond issues, the local government issuers were unable to determine, without qualification, the accuracy and reliability of source and application of funds information for each bond issue. For three other bond issues, for which the issuer did verify the schedules, calculated balances (total sources less total applications) exceeded actual balances by a total of $2,101,936.
• Three of the local government issuers provided for audits for the fiscal years ended September 30, 2000, and September 30, 2001, pursuant to Section 218.39, Florida Statutes; however, the seven bond issues we reviewed for these entities were not included within the scope of those audits. Nor did these entities otherwise provide for separate audits of their bond pool operations for the fiscal years ended September 30, 2000, and September 30, 2001.

Finding No. 7: For the eight bond issues we reviewed, adequate documentation was generally not available to support payments for professional services and related expenses. Our review of approximately $17,000,000 of issue costs paid disclosed that $6,698,449 of such costs were not supported by invoices or other documentation, or were supported by documentation that was not adequate to demonstrate the propriety of the payments.

Finding No. 8: It appears there is a need for additional oversight over bond pools, given the findings noted in this report. Additional oversight for bond pool issues, other than bonds issued by finance commissions created pursuant to Section 163.01(7)(d), Florida Statutes, could be accomplished by:

• Requiring that all such bond pool issues be issued by the Division of Bond Finance or by a newly created State or other finance commission, or by
• Designating the Division of Bond Finance or other existing State agency, or establishing a newly created governmental or nonprofit entity, to be responsible for approving all such bond pool issues prior to issuance.

Finding No. 9: There appears to be a need to make additional bond pool financing available to local governments within the State of Florida. There are several means by which this could be accomplished, such as establishing a State Finance Commission or multiple finance commissions, or by authorizing a State agency to operate a bond pool consistent with provisions of the State Constitution.

Management responses to the audit findings and recommendations are presented on the Auditor General Web site.