Financial statements received nine months after fiscal year end

$599 million correction made to the financial statements

Department officials partially agreed with auditors

$2.4 billion in payments to be made

Supplemental appropriation

Liability at June 30^th

Auditors’ comment

Matters first brought to Department’s attention on June 19, 2007

Financial statements not submitted to auditors until March 4, 2008 and only in response from the Auditor General that all audit activity would be suspended

Department ultimately agrees on May 27, 2008 with accounting presentation recommended by State Comptroller and auditors

Department delays were dilatory and a disservice to users

Workers’ Compensation Act claims

Interagency agreement

CMS processed approximately $20 million in Workers Compensation claims from Department funds

Department disagreed with auditors

Auditors’ comment

Circumvention of limitations established by law

Hospitals not paid timely

Department paid all FY07 payments totaling $1.2 billion on September 25, 2007

Department agrees with reservation

Auditors’ comment

Cook County owed the Department $10 million at June 30, 2007

Repayment delayed due to Cook County cash flow issues

$1.6 million in 2008 medical services paid from fiscal year 2007 appropriations

An estimated $17.6 million in interest owed to medical service providers at June 30, 2007

Inadequate controls for calculating interest due on intercepted State income tax refunds

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

ACCURATE FINANCIAL STATEMENTS NOT PROVIDED TO AUDITORS IN A TIMELY MANNER

The Department did not provide the auditors with timely and accurate financial statements.

The Department did not provide complete Departmental financial statements for the year ended June 30, 2007 to the auditors until March 4, 2008. In addition, the Department did not provide certain Hospital Provider Fund’s (Fund 346) accounting reports to the auditors for testing until March 18, 2008. Departmental financial statements were received nine months after the year end and the Hospital Provider Fund’s GAAP Package was received nine and a half months after year end.

Additionally, the Statement of Activities provided to the auditors required a material correction to the governmental activities section of the financial statements. Operating grants and contributions (program revenues) for the health and social services function was overstated and other taxes (general revenues) was understated by approximately $599 million.

The Department’s management has the ultimate responsibility for the Department’s internal control system and the accuracy and completeness of the Department’s financial statements to ensure that the financial statements and GAAP Packages are timely and accurate. (Finding 1, pages 12-15)

We recommended the Department review its current process for the preparation and review of Departmental financial statements and allocate the resources necessary to ensure Departmental financial statements and Fund GAAP Packages are completed on a timely basis and are accurate.

Department officials partially concurred with our recommendation and stated that extenuating circumstances led to the Department requiring more time to provide financial statement information relative to the Hospital Provider Fund. The Department was unable to fully execute requirements set forth in 305 ILCS 5/5A of the Public Aid Code, in regards to a payment schedule originally anticipated as $2.4 billion in payments be made to eligible hospitals in FY’07, to be used to improve access to services for Medicaid clients. However, for FY’07 the Department originally only received $1.2 billion in appropriation authority from the General Assembly to the Hospital Provider Fund (HPF) for execution of the statutory requirement. Supplemental appropriation language requesting an additional $1.2 billion was submitted, but was not passed by the legislature until June 13, 2007 and was subsequently passed into law August 13, 2007. According to the Department, the payments were not rendered due to the minimal time available to utilize the supplemental appropriation and the lack of the required funding. The payments were made in September 2007.

Department officials went on to say, as a result of the Department’s inability to execute the payments as stated in 305 ILCS 5/5A-12.1, significant research was conducted to ensure the transactions associated with the Hospital Assessment Tax (HAT) were properly accounted for in the Department’s financial statements. At the forefront of the research were whether or not a liability existed as of June 30, 2007 and the fair presentation of the true financial position of the Department and State for FY’07. Consideration was given to: defining the nature of the Access Improvement Payments (AIP’s) and the resulting federal reimbursement and assessment tax revenues, the legal existence of a liability, the statutory interpretation, revenue recognition criteria, and the overall presentation of the financial statement to the reader. The Department solicited in-house counsel, the Chief Internal Auditor, contracted external counsel, an international accounting firm, as well as the Governmental Accounting Standards Board to assist in assessing the proper reporting of the transactions associated with the HAT for the reporting period ending June 30, 2007.

The Department further responded that the principal reporting concern of the Department was the potential for misleading a reader of the financial statements by recording payments occurring in FY’08 as a liability in FY’07, without recording the corresponding revenue. At the fund reporting level, since the revenue is received beyond 60 days of the year-end, the State’s revenue recognition criteria requires the revenue associated with the $1.2 billion to essentially not be recognized. The process of the HAT is to pay AIP’s in the amount of $1.2 billion to eligible hospitals through the use of short-term borrowing (STB). Once paid, HFS is able to claim the AIP’s to the federal government to generate $600 million in new federal revenue and the recipient hospitals are able to pay $734 million in assessment tax to the Department. All transactions occur within approximately a one-month period, allowing the State to repay the STB and net $134 million in additional revenues. Recording the liability in FY’07 in essence doubles the expenditures in FY’07 and the revenues in FY’08, without achieving the effect of offsetting each other, as was intended by the HAT program. The overall impact is $1.34 billion in revenues over the $1.2 billion in expenditures, creating a net income of $134 million. The entirety of the transaction is administered within the HPF.

The Department finally noted that following multiple conversations with the OAG, it was determined to work closely to further disclose the impact of the revenue associated with the HAT. As a result, further language was added to both the Fund Deficit and Subsequent Event footnotes to explain the associated transactions and to ensure full disclosure within the financial statements. The further explanation of the increased revenue to the State through expanded footnote disclosure enabled the Department to concur with recording the payment to the hospitals. The Department will continue to work closely with the OAG to ensure all material transactions are properly and accurately disclosed and reported.

In an auditors’ comment, we noted that the Department refers to “extenuating circumstances” as justification for its untimely and inaccurate submission of Departmental financial statements. While the issues surrounding the Hospital Provider Fund were complicated, these matters were first brought to the Department’s attention on June 19, 2007 and should have been and could have been dealt with by the Department in a timely manner. Instead, financial statements due November 15, 2007, were not submitted by the Department to the auditors until March 4, 2008 – nearly four months late – and only then in response to notice from the Auditor General that all audit activity was suspended and would not be resumed until delinquent information was provided by the Department.

Ultimately, the Department agreed with the financial statement presentation for the Hospital Provider Fund recommended by the Comptroller in a December 2007 position paper. The Department was also informed in December 2007 that the auditors agreed with the Comptroller’s position. This financial statement presentation, however, was not adopted by the Department until May 27, 2008, and only after the Department had expended considerable human and fiscal resources on this issue. In addition to in-house legal counsel, the Chief Internal Auditor, and staff and a consultant from the Governor’s Office, the Department used contractual assistance from both a law firm and an accounting firm on this issue. Unfortunately, the Department’s attention to this matter was not timely. For instance, the Department contracted with the accounting firm on the due date of the Auditor General’s final demand for the outstanding documents.

To have value, the auditors believe financial statements must not only be accurate but must also be timely. The Department’s actions resulted in significant delays in the financial reporting process, were dilatory and were a disservice to the users of the State’s financial reports.

INAPPROPRIATE USE OF APPROPRIATION AUTHORITY

The Department made inappropriate payments of Workers’ Compensation Act claims from its appropriation for health care coverage per the State Employees Group Insurance Act of 1971.

Public Act 94-0798 appropriated to the Department $1,785,234,100 from the Health Insurance Reserve Fund for “provisions of health care coverage as elected by eligible members per the State Employees Group Insurance Act of 1971.”

The same Public Act appropriated to the Department of Central Management Services (DCMS) $108,200,000 from the Workers’ Compensation Revolving Fund for “payment of Workers’ Compensation Act claims and contractual services in connection with said claims payments.”

In April 2007, an interagency agreement was transacted between the Department and the Department of Central Management Services (DCMS), which essentially authorized DCMS to expend funds from the Department’s appropriation from the Health Insurance Reserve Fund for the payment of medical expenses under the Workers’ Compensation program. The agreement limited the amount to be paid not to exceed $20 million for the payment of invoices of medical care and all expenses associated with that care. During fiscal year 2007 DCMS processed $19,998,199 from the Department’s appropriation for State Employees Group Insurance to pay for medical claims and services related to the Workers’ Compensation Act. (Finding 2, pages 16-17)

We recommended the Department make payments in accordance with its appropriation authority and ensure payment certifications are accurate. Further, the Department should implement controls to ensure interagency agreements are in compliance with all provisions of the Intergovernmental Cooperation Act.

Department officials did not concur with our recommendation and stated that as reviewed by the CMS legal counsel, the State Employees Group Insurance Act allows for payment of medical expenses from the HIRF (5 ILCS 375/13.1), and the Department paid for such medical expenses, through an Interagency Agreement (IA) with Central Management Services. The HFS Office of the General Counsel has reviewed the Intergovernmental Cooperation Act (5 ILCS 220/4.5) and determined that the State Finance Act precludes an agency from doing something via an interagency agreement that it could not do directly. However, according to the Department, the State Employee Group Insurance Act allows for payment of medical expenses from HIRF (5 ILCS 375/13.1). HFS, via the IA with CMS, paid medical expenses from HIRF associated with the Worker’s Compensation Program, for which the liability for those expenses sits with the Workers' Compensation Act. An appropriation to another agency to pay other expenditures incurred under the Workers' Compensation Act does not preclude payment via this IA.

In an auditors comment we noted the 2007 appropriation law clearly provided for separate appropriations for health care coverage as elected by eligible members and for payment of Worker’s Compensation Act claims. This authority was circumvented when the Department paid Worker’s Compensation Act claims from the appropriations made to the Department for health care coverage. Furthermore, since the actions of the interagency agreement between the Department and DCMS resulted in the circumvention of limitations established by law on State appropriation, according to the Intergovernmental Cooperation Act, this interagency agreement is invalid.

HOSPITAL IMPROVEMENT ACCESS PAYMENTS NOT PAID TIMELY

The Department did not pay the fiscal year 2007 hospital improvement access payments on a timely basis.

The Department paid all fiscal year 2007 hospital improvement access payments totaling $1.2 billion on September 25, 2007 (fiscal year 2008). The fiscal year 2007 payments for the first two quarters were due by March 8, 2007, the third quarter payment was due by March 9, 2007 and the fourth quarter payment was due by May 9, 2007. (Finding 3, pages 18-19)

We recommended the Department comply with the Illinois Public Aid Code and ensure that adequate funding is secure to make the hospital improvement access payments as required.

Department officials concurred with our recommendation with reservation. The Department stated that they have and will ensure that payments are timely made when sufficient spending authority exists. The Department was unable to fully execute requirements set forth in 305 ILCS 5/5A of the Public Aid Code, in regards to a payment schedule originally anticipated as $2.4 billion in payments be made to eligible hospitals in FY’07, to be used to improve access to services for Medicaid clients. However, for FY’07 the Department originally only received $1.2 billion in appropriation authority from the General Assembly to the Hospital Provider Fund (HPF) for execution of the statutory requirement. Supplemental appropriation language requesting an additional $1.2 billion was submitted, but was not passed by the legislature until June 13, 2007 and was subsequently passed into law August 13, 2007. According to the Department, the payments were not rendered due to the minimal time available to utilize the supplemental appropriation and the lack of the required funding. The payments were made in September 2007.

Therefore, given that the General Assembly first acted on these appropriations in June 2007, the Department could not have paid the AIP at the May 9, 2007 date. Further, the Department made the payments at the earliest possible point after appropriations and funding became available.

The supplemental appropriation was passed by the General Assembly on May 31, 2007 and sent to the Governor on June 14, 2007.

TERMS OF COOK COUNTY INTERGOVERNMENTAL AGREEMENT NOT COMPLIED WITH

The Department did not require Cook County to comply with an Intergovernmental Agreement (Agreement) that was executed between the Department and the County.

The Department allowed the County to adjust the timing and submit the County’s Secondary Transfer Payments according to a payment schedule established in a proposed amendment to the Agreement. The proposed amendment was never executed and as of June 30, 2007, the Department had not collected the entire amount of the Secondary Transfer Payments as required by the Agreement. The County has not paid $10 million of the entire balance of the transfer, which was due by April 30, 2007. The Department also granted the County an extension until December 1, 2007 to remit the $10 million payment without a proper amendment to the Agreement.

The Intergovernmental Agreement between the Department and the County requires the County to submit secondary transfer payments for each annual rate period on a quarterly basis in amounts specified by the Intergovernmental Agreement.

Department management stated that the Department and the County agreed to delay repayment of the final $10 million until December 1, 2007, due to cash flow issues faced by Cook County, and the critical role that is performed by the County’s three hospitals. (Finding 4, page 20)

We recommended the Department require the County to comply with the terms of the Intergovernmental Agreement between the Department and the County. Furthermore, we recommended the Department execute proposed amendments prior to implementing the proposed terms.

Department officials agreed with our recommendation and stated that they have taken steps to ensure that the County complies with the terms of the Intergovernmental Agreement. Monies due to the Department have been recouped according to the terms of the agreement.

VOUCHER PROCESSING WEAKNESS

The Department did not exercise adequate internal control over voucher processing. We noted the following:

· During lapse period voucher testing, we noted the Department paid $1,619,391 for medical services that were performed during fiscal year 2008 from fiscal year 2007 appropriations.

· The Department did not pay interest on vouchers as required by the State Prompt Payment Act. The Department estimated at June 30, 2007 that approximately $16.13 million of automatic interest and $1.47 million of requested interest was owed to vendors supplying medical services. (Finding 6, pages 23-24)

We recommended the Department comply with the Illinois Administrative Code and the State Prompt Payment Act and implement controls to automatically pay interest of $50 or more on all vouchers not paid within 60 days. Further, the Department should pay expenses with the correct fiscal year’s appropriation unless otherwise permitted by law.

Department officials concurred with our recommendation and stated that prior to the discovery of this issue there were system controls already in place in the NIPS/Pharmacy and Hospital/LTC claiming systems to prevent the payment of current fiscal year services from prior fiscal year funds. Once this issue was reported, further examination revealed that under certain conditions these controls were not handling all situations adequately. A problem request (PRR) was written to have the Bureau of Information Systems (BIS) address the issue. Coding changes were made by BIS to correct the issue. These changes have been tested and the changes have been implemented in the production environment to prevent this from occurring in the future.

The Department also stated that they believe that its newly automated procedures for payment of interest will enable those payments to be made timely.

INTEREST NOT PAID ON INTERCEPTED STATE INCOME TAX REFUNDS

The Department did not comply with the Illinois Public Aid Code regarding State income tax refunds and other payments that were intercepted. We noted the following:

· 8 of 15 (53%) payees did not receive the proper interest on their intercepted State income tax refund.

· The Department could potentially owe interest on approximately 300 of 4,371 intercepted payments.

· Key Information Delivery System (KIDS) is not capable of automatically calculating interest on intercepted state income tax refunds. In addition, the KIDS system does not generate reports detailing refunds that are due interest. As a result, the Department does not know how much interest is currently due on intercepted state income tax refunds. (Finding 7, pages 25-26)

We recommended the Department comply with the Illinois Public Aid Code by strengthening its controls to ensure all wrongfully or erroneously intercepted state income tax refunds are properly refunded with interest, if any. Further, the Department should pay interest to all individuals who are entitled due to their state income tax refunds being erroneously or wrongfully intercepted.

Department officials concurred with our recommendation and stated that they have developed and implemented a system to automatically identify interest due on intercepted State income tax refunds. Interest is now being identified and paid on a quarterly basis.

OTHER FINDINGS

The remaining findings are reportedly being given attention by the Department. We will review the Department’s progress toward implementation of our recommendations in our next audit.

AUDITORS’ OPINION

Based on their audit of the Department's financial statements for the year ended June 30, 2007, the auditors expressed unqualified opinions on the Department’s financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information.

STATE COMPLIANCE EXAMINATION –

ACCOUNTANTS’ REPORT

The auditors qualified their report on State Compliance for findings 07-1 and 07-2. Except for the noncompliance described in these findings, the auditors state the Department complied, in all material respects, with the requirements described in the report.

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WILLIAM G. HOLLAND, Auditor General

WGH:TLD:pp

AUDITORS ASSIGNED

This audit was performed by the Office of the Auditor General's staff.

SYNOPSIS

VOUCHER PROCESSING WEAKNESS

INTEREST NOT PAID ON INTERCEPTED STATE INCOME TAX REFUNDS

AUDITORS’ OPINION