Rate hikes affect city’s utility fund investments

The annual comprehensive financial report the Hot Springs Board of Directors acknowledged Tuesday showed government-backed securities the city bought with water and wastewater bond proceeds lost more than $7 million in value last year.

The debt has since grown in value, according to information the city provided Wednesday. As of the end of last month, the net position of water and wastewater investments increased by $1.4 million. District 5 Director Karen Garcia said the 2022 ACFR was the first audit of city finances that listed the fair market value of the city’s investments.

Kyle Elmore, director of FORVIS, the accounting firm the city hired to conduct the statutorily-required annual audit, said market value was based on the value of the securities at the end of last year. He said the city reported its financials fairly and accurately, giving a clean, unmodified opinion on the ACFR.

The city’s more than $200 million investment and deposit portfolio included U.S. Treasuries and general obligation bonds valued at close to $150 million at the end of last year, according to the ACFR.

The city said rising borrowing costs lowered the value of debt the water and wastewater funds held. As interest rates rose, investors sought out bonds that paid higher interest than the lower-yield bonds in the two utility funds’ portfolios. The city’s investment policy generally prohibits it from buying debt with a maturity exceeding five years.

“The city uses this policy as a means to mitigate the interest rate risk and exposure to fair-value losses in an increasing interest rate market,” the ACFR said.

Garcia, a certified public accountant, noted the loss in value was a paper loss, not a cash loss.

“That doesn’t mean it was a realized loss,” she explained after Elmore concluded his summary. “The market value at the

end of the year is what you were looking at, but that doesn’t mean we had realized losses at that time of that amount.

“Over the years, looking at my retirement investment funds, they’ve gone up and down. Over time it does come back. There are fluctuations, and the fluctuation at the end of the year is what was reported on these statements.”

Proceeds from the $110 million bond issue the board authorized for the Lake Ouachita water supply project in June 2020 purchased most of the debt held by the water fund. According to the bond fund’s August reconciliation report, more than $30 million had yet to be paid to contractors hired to bring online the city’s more than 20 million-gallon-a-day allocation from Lake Ouachita.

Debt held by the wastewater fund’s portfolio was acquired with proceeds from the $46 million bond issue the board authorized in June 2022. The bonds were issued for improvements mandated by the consent decree the city entered into with the state last year.

They’ll finance the construction of a new pump station and force mains in the Gulpha Creek Basin collection area and improvements to the Davidson Drive treatment plant. Those contracts have yet to be awarded.

“We’ve got a huge amount of dollars invested in water and wastewater as we continue these projects,” City Manager Bill Burrough said of bond proceeds the city invested in government-backed debt.

The general fund ended the year with a $22.5 million balance, about four times the amount of the city code-mandated reserve requirement. The code requires the general fund maintain a reserve of 16.5% of annual expenses.