FY2016 CCDOA Financial Report as of 6302016.pdf - page 106

Notes to Financial Statements
For the Fiscal Years Ended June 30, 2016 and 2015
(a) Interest Rate Swaps
The intention of the Department’s implementation of a swap portfolio was to convert variable
interest rate bonds to synthetically fixed interest rate bonds as a means to lower its borrowing
costs when compared to fixed-rate bonds at the time of issuance. The Department executed
several floating-to-fixed swaps in connection with its issuance of variable rate bonds. The
Department also executed forward starting swaps to lock in attractive synthetically fixed rates
for future variable rate bonds. Some of the Department’s swaps are structured with step-down
coupons to reduce the cash outflows of the fixed leg of those swaps in the later years of the
With the implementation of GASB 72, the derivative instruments are valued at fair value. The
fair values of the interest rate derivative instruments were estimated using an independent
pricing service. The valuations provided were derived from proprietary models based upon
well-recognized principles and estimates about relevant future market conditions. The
instruments' expected cash flows are calculated using the zero-coupon discount method,
which takes into consideration the prevailing benchmark interest rate environment as well as
the specific terms and conditions of a given transaction and which assumes that the current
forward rates implied by the benchmark yield curve are the market’s best estimate of future
spot interest rates. The income approach is then used to obtain the fair value of the instruments
by discounting future expected cash flows to a single valuation using a rate of return that takes
into account the relative risk of nonperformance associated with the cash flows and the time
value of money. This valuation technique is applied consistently across all instruments. Given
the observability of inputs that are significant to the entire sets of measurements, the fair values
of the instruments are based on inputs categorized as Level 2. As of June 30, 2016, the
derivative instruments are stated at fair value as required under GASB 72. Information required
to restate the derivative instruments to fair value as of June 30, 2015, as required under GASB
72, was not available, therefore, the derivative instruments were stated at mark-to-market
value for FY 2015 in accordance with GASB 53.
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