Question

Question-2 10-14. Financial Analysis. (L010-4, LO10-5) At the time of this case in July 2017, the Illinois State legislature had just passed its first budget in two years. The lack of a budget for the past two years has created a great deal of fiscal stress in the state. For this case, obtain the most recent copy of the State of Illinois CAFR.** Required a. Using the information in the MD&A and the statistical trend information, answer the following questions: 1. What has been the trend in governmental fund revenues? 2. Have governmental expenditures been increasing faster than revenues? 3. What has been the trend in the General Fund unassigned fund balance? 4. What has been the trend in the governmental activities unrestricted net position? 5. What is the trend in governmental fund intergovernmental (federal) revenues as a portion of total revenues? 6. What has been the trend in pension and other postemployment benefits? b. Based on your findings, provide an opinion on the financial condition of the State of Illinois. Explain how you arrived at your opinion.

Answer 1

REPORT DIGEST

STATE OF ILLINOIS

STATEWIDE FINANCIAL STATEMENT AUDIT
FOR THE YEAR ENDED JUNE 30, 2018

Release Date: August 29, 2019

FINDINGS THIS AUDIT: 5

CATEGORY: NEW -- REPEAT -- TOTAL
Category 1: 0 -- 3 -- 3
Category 2: 0 -- 0 -- 0
Category 3: 0 -- 2 -- 2
TOTAL

To obtain a copy of the Report contact:
Office of the Auditor General, Iles Park
Plaza, 740 E. Ash Street, Springfield, IL
62703
(217) 782-6046 or TTY (8

The Office of the State Comptroller
prepares the State of Illinois’
Comprehensive Annual Financial Report
(CAFR). The CAFR is the State’s official
annual report which provides the readers
with the financial position of the State as
of June 30, 2018, and results of operations
during the fiscal year.

The financial section of the CAFR includes
the Independent Auditors’ Report on the
basic financial statements, management
discussion and analysis, the basic
financial statements, required
supplementary information, and individual
fund statements and schedules.

AUDITOR’S OPINION

The financial statements of the State of
Illinois are fairly presented in all
material respects.

The financial statements at June 30, 2018,
reflect the following:
• The net position of governmental
activities continued to deteriorate and the
deficit increased by $6.4 billion from June
30, 2017 to June 30, 2018. Overall, the
net position of governmental activities is
reported as a deficit of $189.1 billion.
(Exhibit 1)

• The General Fund deficit decreased by
$6.8 billion from June 30, 2017, to June
30, 2018. The General Fund deficit is $7.8
billion. (Exhibit 2)

Over time, increases and decreases in net
position measure whether the State’s
financial position is improving or
deteriorating. A comparison of the State’s
financial position to other states is
contained in Exhibit 3.

REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING AND ON COMPLIANCE

In accordance with Government Auditing
Standards, a report on our consideration of
the State of Illinois’ internal control
over financial reporting and our tests of
its compliance is also issued as part of
our financial statement audit. This report
is a separate document and is summarized in
this document. Our report noted that the
State’s decentralized internal control
system is not adequate. We also reported
significant financial reporting
deficiencies at several State agencies.

STATE OFFICIALS
As of June 30, 2018

Governor: Bruce Rauner

Comptroller: Susana A. Mendoza

Speaker of the House: Michael J. Madigan

President of the Senate: John J. Cullerton

House Republican Leader: Jim Durkin

Senate Republican Leader: William E. Brady

FINANCIAL ANALYSIS OF THE STATE

The net position of the State’s
governmental activities declined $6.420
billion. The following condensed financial
information was derived from the
government-wide Statement of Net Position
and reflects the State’s governmental
activities financial position as of June 30
for Fiscal Years 2011 through 2018. The
net position balance as reported within the
June 30, 2017, Governmental Activities
financial statements was restated from a
deficit of $141.7 billion to a deficit of
$182.6 billion due to the implementation of
GASB Statement No. 75, Accounting and
Financial Reporting for Postemployment
Benefits Other Than Pensions. GASB
Statement No. 75 required the State of
Illinois to report the State’s entire net
other postemployment benefits liability on
the face of the statements. (Please see
Exhibit 1 in PDF version of this digest)

The deficits reflected in Exhibit 1 are
presented on an accrual basis and represent
the excess of total liabilities and
deferred inflows of resources over total
assets and deferred outflows of resources
at a given point in time. These deficits
represent the deferral of current and prior
year costs to future periods.

GENERAL FUND

Many programs are accounted for in the
General Fund. The GAAP basis financial
position of the General Fund deficit
decreased at June 30, 2018, from June 30,
2017. The fund balance deficit in the
State’s General Fund decreased by $6.848
billion on a GAAP basis. The June 30,
2018, deficit was $7.8 billion. Exhibit 2
reflects the General Fund deficit for
Fiscal Years 2011 through 2018. (Please see
Exhibit 2 in PDF version of this digest)

STATE COMPARISON

Exhibit 3 provides an analysis of State’s
governmental activities net position at
June 30, 2018, compared to other States.
(Please see Exhibit 3 in PDF version of
this digest)

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

INADEQUATE FINANCIAL REPORTING PROCESS

The State of Illinois’ current financial
reporting process does not allow the State
to prepare a complete and accurate
Comprehensive Annual Financial Report
(CAFR) in a timely manner. Reporting
issues at various individual agencies
caused delays in finalizing the financial
statements. The lack of timely financial
reporting limits effective oversight of
State finances and may adversely affect the
State’s bond rating.

Accurate and timely financial reporting
problems continue to exist even though the
auditors have: 1) continuously reported
numerous findings on the internal controls
(material weaknesses and significant
deficiencies), 2) commented on the
inadequacy of the financial reporting
process of the State, and 3) regularly
proposed adjustments to financial
statements year after year. These findings
have been directed primarily towards major
State agencies under the organizational
structure of the Office of the Governor and
towards the Office of the State
Comptroller.

The Office of the State Comptroller has
made significant changes to the system used
to compile financial information; however,
the State has not solved all the problems
to effectively remediate these financial
reporting weaknesses. The State has a
highly decentralized financial reporting
process due to the use of numerous
financial reporting systems, many of which
are not interrelated and require manual
intervention to convert data. The process
is also overly dependent on the post audit
program even though the Office of the
Auditor General has repeatedly informed
State agency officials that the post audit
function is not a substitute for
appropriate internal controls at State
agencies.

Annual financial reporting to the Office of
the State Comptroller requires the State’s
agencies to prepare a series of financial
reporting forms (SCO forms) designed by the
Office of the State Comptroller, which are
utilized to prepare the CAFR. Although
these SCO forms are subject to review by
the Office of the State Comptroller’s
financial reporting staff during the CAFR
preparation process and there are
recommended minimum qualifications for all
new GAAP coordinators who oversee the
preparation of the SCO Forms, the current
process still lacks sufficient internal
controls at individual agencies. (Finding
1, pages 7-9)

We recommended the Office of the Governor
and the Office of the State Comptroller
continue to work together to resolve the
State’s inability to produce timely and
accurate Generally Accepted Accounting
Principles basis financial information.

The Office of the Governor agreed with our
recommendation and stated that the Office
of the Governor will continue to work
together with the Office of the State
Comptroller, and together with the
individual agencies that have the most
pressing challenges, to address the core
issues of the State’s inability to produce
timely and accurate GAAP basis financial
information. The State is in the midst of a
multi-year implementation of an Enterprise
Resource Planning (ERP) system—an
integrated enterprise-wide application
system for financial accounting—which is
coordinated by the Illinois Department of
Innovation and Technology and is intended
to transform Illinois’ IT system to be more
inter-related among agencies and responsive
to the needs of the State, its employees
and those it serves. A new grants
management system is also currently under
development. New challenges have arisen as
State agencies have been making the
transition from old systems to new, but a
fully-operational ERP system and grants
management system will improve internal
controls and will better support the
production of accurate financial statements
in a timely manner in agencies throughout
State government.

The Office of the State Comptroller agreed
with our recommendation and stated that the
State still faces several road blocks in
the timely completion of the CAFR. The
General Assembly enacted P.A. 97-0691,
which extended lapse period from August 31
to December 31 for Fiscal Year 2013 and
future fiscal years for medical assistance
payments of the Department of Healthcare
and Family Services. As a result of the
extension, the preparation and completion
of critical financial schedules will
continue to be delayed. In addition, the
General Assembly enacted P.A. 100-0587,
which extended lapse period from August 31
to October 31 for Fiscal Year 2018 for all
State agencies, further delaying the
financial reporting process. More
importantly, the CAFR completion continues
to be delayed because of financial
reporting issues identified during
individual State agency financial and
compliance audits. The CAFR cannot be
finalized until these issues are resolved
at the individual State agency reporting
level.

The Office of the State Comptroller will
continue to work with the Office of the
Governor, the Auditor General’s Office, and
agency GAAP coordinators to improve the
timeliness, quality, and processing of
financial reporting for the State.

FINANCIAL REPORTING WEAKNESSES

The State of Illinois did not have adequate
controls to assess the risk that
information reported by individual agencies
of the primary government would not be
fairly stated and compliant with generally
accepted accounting principles (GAAP). The
Office of the Auditor General performed
audits at 27 agencies of the primary
government, including five pension systems
and the Illinois State Board of Investment.
During these audits, we noted at 17
agencies there were a total of 40 material
weaknesses and 11 significant deficiencies
related to the internal controls over the
financial reporting process.

Specifically, some of the more significant
issues noted included the following:
• The Department of Human Services and the
Department of Healthcare and Family
Services lacked controls over the
Integrated Eligibility System.
• The Department of Healthcare and Family
Services, the Department of Human Services,
the Department of Children and Family
Services, and the Department on Aging
failed to execute adequate internal
controls over the Illinois-Michigan Program
Alliance for Core Technology system.
• The Department of Healthcare and Family
Services failed to implement adequate
fiscal-related monitoring controls over
Managed Care Organization contracts.
• The Department of Employment Security did
not have adequate controls over its
accounts receivable.

Material weaknesses and significant
deficiencies further extend financial
reporting timelines since additional
measurements and reporting are required.
Completion or substantial completion of
these audits is necessary in order for the
Auditor General to issue an opinion on the
State’s basic financial statements.

In addition to the deficiencies noted
above, material misstatements were
identified by the auditors at one agency.
The adjustment totaled $47 million.
(Finding 2, pages 10-15)

We recommended the State continue its
efforts to improve internal control
procedures in order to assess the risk of
material misstatements to the financial
statements and to identify such
misstatements during the financial
statement preparation process. The
internal control procedures should include
a formal evaluation of prior problems and
implementation of procedures to reduce the
risk of these problems reoccurring.

The Office of the Governor agreed with our
recommendation and stated that the Office
of the Governor will continue to work
together with the Office of the State
Comptroller, and together with the State
agencies facing the greatest challenges, to
improve internal control procedures and
reduce the likelihood of material
misstatements to the financial statements.
The State is in the midst of a multi-year
implementation of an Enterprise Resource
Planning (ERP) system—an integrated
enterprise-wide application system for
financial accounting—which is coordinated
by the Illinois Department of Innovation
and Technology and is intended to transform
Illinois’ IT system to be more inter-
related among agencies and responsive to
the needs of the State, its employees and
those it serves. A new grants management
system is also currently under development.
New challenges have arisen as State
agencies have been making the transition
from old systems to new, but an operational
ERP system and grants management system
ultimately will improve the State’s
internal controls to more effectively
assess the risk of material misstatements
to the financial statements, and to
prevent, detect and correct such
misstatements on a timely basis during the
financial statement preparation process.

The Office of the State Comptroller agreed
with our recommendation and stated that the
Office of the State Comptroller will
continue to assist the Office of the
Governor in their efforts to increase the
quality of GAAP packages by providing
enhanced training and technical assistance
to State agencies.

INSUFFICIENT CONTROLS OVER FINANCES

The State of Illinois did not have
sufficient controls over its finances.
This condition increases the risk that
liabilities will not be properly recorded.
Further, this condition increases risk and
diminishes the oversight and authority of
the budgeting and appropriation process.

We noted during our audit of the State’s
financial statements that the State had
transactions, totaling $7.492 billion, on
hand at June 30, 2018, that had been
approved for payment by the State, but
remained unpaid at year end due to the
State’s cash flow difficulties. Of this
amount, approximately $3.199 billion was
owed to external parties; the remaining
balance was related to intra-governmental
transactions and statutorily mandated
transfers. Due to the State not being able
to pay external vendors in a timely manner,
the State paid approximately $997.619
million in interest payments during Fiscal
Year 2018, and the State processed for
payment (on a cash basis) $127.793 million
during Fiscal Year 2019 as of July 31,
2019. (Finding 5, pages 20-21)

We recommended the Governor work with the
General Assembly to improve the State’s
control over its finances in a manner that
eliminates significant payment delays and
unnecessary interest payments to State
vendors.

The Office of the Governor agreed with our
recommendation and stated that the Office
of the Governor will continue to work
together with the General Assembly, and
together with the Office of the State
Comptroller and the Office of the State
Treasurer, to improve the State’s financial
controls in an effort to reduce payment
delays and unnecessary interest costs.