Institutional Federal Compliance Report 2021

92 • Notes to Basic Financial Statements __________________________________________________________________________

Interest Rate Exchange Agreements (Swaps) Article 5-D of the State Finance Law authorized the use of a limited amount of swaps equal to 15 percent of statutorily defined State-supported debt. Starting in November 2002, the State began to enter into swap agreements to “synthetically” change the interest cost associated with bonds it had issued from either variable rate to fixed rate or from fixed rate to variable rate. The intention of each of the swaps was to lower the cost of borrowing to the State below what could have been achieved on bonds without the use of the asso- ciated swap agreements and to reduce the risks asso- ciated with the variability of cash flows or fair values of the underlying debt. The statutory authorization for the use of swaps also requires that each of the swaps entered into meet the following requirements: Counterparties have a credit rating from at least one NRSRO that is within the two highest investment grade categories; An independent financial advisor certifies that the terms and conditions of all swaps reflect a fair value; A standardized interest rate exchange agree- ment is utilized;

Monthly reports are issued by the public benefit corporations to provide monitoring and swap performance assessment; and The agreements comply with uniform interest rate exchange guidelines. The State manages the swaps as a single portfolio, although they relate to debt reported under both gov- ernmental activities and business-type activities. Swap Activity and Terms The State has a notional amount of approximately $1.4 billion of swaps outstanding ($1.01 billion of which related to governmental activities and $383 million related to business-type activities) that were issued to synthetically create fixed rate debt from vari- able rate debt. The $1.4 billion portfolio includes 35 separate pay-fixed, receive-variable interest rate swap agreements with seven counterparties. The maturities of the synthetic fixed rate swaps are coterminous with the underlying debt. The table below summarizes fair value balances and notional amounts of derivative instruments out- standing on March 31, 2019 for governmental activities and on June 30, 2018 for business-type activities, and the changes in fair value of those derivatives for the years then ended as reported in the State’s 2019 finan- cial statements (amounts in millions):

Changes in Fair Value

Fair Value

Notional Amount

Issuer/Type

Classification

Amount

Classification

Amount

Governmental Activities: Cash Flow Hedges: Dormitory Authority

Deferred Outflow Deferred Outflow Deferred Outflow Deferred Outflow

Derivative Instruments Derivative Instruments Derivative Instruments Derivative Instruments

Pay-fixed interest rate swaps . . . . . . . . $ Urban Development Corporation Pay-fixed interest rate swaps . . . . . . . . Pay-fixed interest rate swaps . . . . . . . . Local Government Assistance Corporation Pay-fixed interest rate swaps . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . Housing Finance Agency

147

$

1

$

(11)

375

(2)

(55)

45

1

(1)

367 934

4 4

(20) (87)

Investment Derivatives: Housing Finance Agency

Investment Earnings

Derivative Instruments

Pay-fixed interest rate swaps . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . .

79

(1)

(12) (99)

1,013

3

Business-Type Activities (as of June 30, 2018): Cash Flow Hedges: Dormitory Authority—CUNY

Deferred Outflow

Derivative Instruments

Pay-fixed interest rate swaps . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . .

383

18 21

(35)

$

1,396

$

$

(134)