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Concentration of Credit Risk
The City’s investment policy does not restrict the level of investment in money markets or federal agencies, but it restricts
investment in commercial paper or bankers’ acceptances of a single issuer to no more than 10% of the total investment
portfolio. As of June 30, 2016, the City owned the following investments, which exceed 5% of the City’s total investments,
along with the percentage noted for each compared to the total portfolio:
Federal National Mortgage Association
17.41%
Federal Home Loan Bank
12.66%
Federal Home Loan Mortgage Corporation
38.38%
Federal FarmCredit Bank
7.91%
At June 30, 2016, the City OPEB Plan had $15,182,164 invested in the State Treasurer’s Local Government Other Post-
Employment Benefits (OPEB) Investment Fund pursuant to G.S. 147-69.4. The State Treasurer’s OPEB Fund may invest in
public equities and both long-term and short-term fixed income obligations as determined by the State Treasurer pursuant to
the General Statutes. At year-end, the State Treasurer’s OPEB Fund was invested as follows: State Treasurer’s Short Term
Investment Fund (STIF) 26%; State Treasurer’s Long Term Investment Fund (LTIF) 11% and BlackRock’s Global Ex-US
Alpha Tilts Fund B and BlackRock’s Russell 3000 Alpha Tilts Fund B 63%.
a.
Hedging Derivative Instruments
Objective of the Interest Rate Swaps
As a means to convert variable rate obligations to synthetic fixed rate obligations to reduce the overall variable rate exposure
of the City, the City entered into an interest rate swap agreement with Bank of America Merrill Lynch in October 2002, in
connection with its $5,700,000 Series 1998 Variable Rate General Obligation Bonds. The intention of the swap was to
effectively change the City’s interest rate on the bonds to a synthetic fixed rate of 3.46%.
Swap Terms
The bonds and the related swap agreement will mature on April 1, 2020. At inception, and at June 30, 2016, the swap
notional amount of $5,700,000 matched the $5,700,000 variable-rate bonds outstanding. Starting in Fiscal Year 2019, the
notional value and the principal amount of the associated debt declines. Under the swap, the City pays the counterparty a
fixed payment of 3.46% and receives a variable payment computed as 67% of 1 Month London Interbank Offered Rate
(LIBOR). The bonds’ variable rate coupons are closely associated with the Securities Industry and Financial Markets
Municipal Swap Index (SIFMA).
Fair Value
Because interest rates were lower on June 30, 2016 than at the date of the execution of the swap, the swap had an estimated
fair value as of June 30, 2016 of ($566,943). The mark-to-market valuation was established by market quotations from the
counterparty representing estimates of the amounts that would be paid for replacement transactions.
Credit Risk
As of June 30, 2016, the City is not exposed to credit risk of the counterparty given the derivatives’ negative fair values. The
counterparty was rated A1 by Moody’s Investors Services (Moody’s), A by Standard and Poor’s (S&P) and A+ by Fitch
Ratings (Fitch) at June 30, 2016. No collateral or other security is required to support the hedging derivative instruments’
credit risk. No master netting arrangements are maintained as there is only one counterparty to the transactions.
Interest Rate/Basis Risk
As noted above, the swap exposes the City to basis risk should the relationship between 67% of 1 Month LIBOR and SIFMA
diverge, changing the synthetic rate on the bonds. The effect of this difference in basis is indicated by the difference between
the intended synthetic rate of 3.46% and the actual synthetic rate as of 2016 of 3.37%. As of June 30, 2016, the rate on the
City’s bonds was 0.43% whereas 67% of 1 Month LIBOR was 0.31%.