Notes to the Financial Statements

June 30, 2016

Note 18 Derivative Financial Instruments

The fair value balances and notional amounts of the State's derivative instruments outstanding at June 30, 2016, classified by type, and the changes in fair value of such derivative instruments for the year then ended are as follows
(amounts in thousands; debit (credit)):

   Changes in Fair Value       Fair Value at Year End       
   Classification    Amount    Classification    Amount    Notional
Governmental activities
Cash flow hedges: Deferred Non-current
Pay-fixed interest outflow of portion of LT
rate swap Resources $(1,504) Obligation $(1,857) 40,000

Objective and Terms of Hedging Derivative Instruments
The following table displays the objective and the terms of the States' governmental activities hedging derivative instruments outstanding at June 30, 2016, along with the credit rating of the associated counterparty (amounts in thousands).

      Notional             
      Amounts    Effective    Maturity       Counterparty
Type    Objective    (000's)    Date    Date    Terms    Credit Rating
Pay-fixed interest rate swap Hedge of changes in cash flows of the 2005 GO bonds $20,000 4/27/2005 6/1/2017 Pay 5.07% receive CPI plus 1.73% A3/A-
Pay-fixed interest rate swap Hedge of changes in cash flows of the 2005 GO bonds 20,000 4/27/2005 6/1/2020 Pay 5.2% receive CPI plus 1.79% A3/BBB+
Total Notional Amount $40,000

The fair values of interest rate swaps were estimated using the zero-coupon method. This method calculates the future net settlement payment required under the swaps, assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-coupon bonds due on the date each future net settlement on the swaps.

Credit Risk
As of June 30, 2016, the State had no credit risk exposure on any of the swaps because the swaps had negative fair value. However, should interest rates change and the fair values of the swaps become positive, the State would be exposed to credit risk in the amount of the swaps' fair value.

Basis Risk
The State's variable-rate bond interest payments are based on the CPI floating rate. As of June 30, 2016 the State receives variable-rate payments from the counterparty based on the same CPI floating rate.

Termination Risk
The State or the counterparty may terminate any of the swaps if the other party fails to perform under the terms of the contract. If any swap is terminated, the associated variable-rate bonds would no longer carry synthetic interest rates. Also, if at the time of termination the swap has a negative fair value, the State would be liable to the counterparty for a payment equal to the swap's fair value. Under the 2005 swap agreements, the State has up to 270 days to fund any required termination payment.

Rollover Risk
Because all of the swap agreements terminate when the associated debt is fully paid, the State is only exposed to rollover risk if an early termination occurs. Upon an early termination, the State will not realize the synthetic rate offered by the swaps on the underlying debt issues.

Hedging Derivative Instrument Payments and Hedged Debt
As rates vary, variable-rate bond interest payments and net swap payments will vary. Using rates as of June 30, 2016, debt service requirements of the State's outstanding variable-rate bonds and net swap payments are as follows
(amounts in thousands):

Fiscal Year    Variable-Rate Bonds    Interest Rate
Ending June 30,    Principal    Interest    SWAP, Net    Total
2018 $20,000 $689 $1,365 $22,054
2019 - 351 689 1,040
2020 - 351 689 1,040
2021 20,000 352 688 21,040
$40,000 $1,743 $3,431 $45,174