REPORT DIGEST

ILLINOIS STUDENT ASSISTANCE COMMISSION

FINANCIAL AND COMPLIANCE AUDIT

(In accordance with the Federal Single Audit Act and OMB Circular A-133)

For the Two Years Ended:
June 30, 1999

Summary of Findings:

Total this audit 14
Total last audit 15
Repeated from last audit 7

Release Date:
March 23, 2000

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State of Illinois
Office of the Auditor General

WILLIAM G. HOLLAND
AUDITOR GENERAL

To obtain a copy of the Report contact:
Office of the Auditor General
Attn: Records Manager
Iles Park Plaza
740 E. Ash Street
Springfield, IL 62703

(217)782-6046 or TDD (217) 524-4646

This Report Digest is also available on
the worldwide web at
http://www.state.il.us/auditor

 

 

 

 

 

 

 

SYNOPSIS

 

  • Based upon the extent of noncompliance noted during testing, it was concluded that there is more than a relatively low risk that there exists other noncompliance in areas not tested by the auditors.
  • ISAC incorrectly applied a fixed rate of interest instead of a variable rate of interest to certain defaulted student loans guaranteed and held by ISAC.
  • ISAC presented its Annual Reports with inappropriate references in the reports as "audited" in violation of professional reporting standards. Also, the Annual Reports did not contain all information required by State statute.
  • ISAC did not adequately collateralize cash on deposit with various banks as required by the State Officers and Employees Money Disposition Act.

 

 

 

 

 

{Expenditures and Activity Measures are summarized on the next page.}

 

ILLINOIS STUDENT ASSISTANCE COMMISSION

FINANCIAL AND COMPLIANCE

For The Two Years Ended June 30, 1999

(All dollar amounts are expressed in thousands)

APPROPRIATED FUNDS EXPENDITURE STATISTICS

FY 1999

FY 1998

FY 1997

  • Total Expenditures (All Funds)

$483,169

$474,970

$483,810

OPERATIONS TOTAL

$30,092

$27,611

$25,082

% of Total Expenditures

6.2%

5.8%

5.2%

Personal Services

$12,777

$11,855

$11,455

% of Operations Expenditures

42.5%

42.9%

45.7%

Average No. of Employees

536

526

537

Other Payroll Costs (FICA, Group Insurance, Retirement)

$4,094

$3,393

$3,102

% of Operations Expenditures

13.6%

12.3%

12.4%

Contractual Services

$10,738

$9,953

$8,008

% of Operations Expenditures

35.7%

36.0%

31.9%

All Other Operations Items

$2,483

$2,410

$2,518

% of Operations Expenditures

8.3%

8.7%

10.0%

DISTRIBUTIONS FOR UNCOLLECTIBLE LOANS

$103,636

$125,331

$155,496

% of Total Expenditures

21.5%

26.4%

32.1%

GRANTS TOTAL

$349,441

$322,028

$303,231

% of Total Expenditures

72.3%

67.8%

62.7%

  • Cost of Property and Equipment (All Funds)

$28,355

$28,136

$28,135

PROPRIETARY FUND FINANCIAL OPERATIONS

FY 1999

FY 1998

FY 1997

REVENUES      
Interest on loans and investments

$79,042

$70,581

$61,056

Federal Special Allowance and interest

16,102

16,208

15,960

Other

1,434

-

684

Total

$96,578

$86,789

$77,700

EXPENSES      
Salaries and employees benefits

$8,028

$6,737

$5,729

Outside loan servicing

6,677

5,504

4,826

Line of credit fees

1,717

1,968

1,905

Note and bond interest expense

65,402

59,221

54,401

Other

9,171

7,686

8,356

Total

$90,995

$81,116

$75,217

SELECTED PROPIETARY FUND BALANCES      
Cash and cash equivalents

$264,536

$211,630

$169,926

Investments

$464,895

$189,866

$199,696

Receivables

$1,114,770

$939,233

$769,596

Revenue notes and bonds payable

$1,404,654

$1,236,057

$1,046,947

Retained Earnings

$92,839

$87,256

$79,396

AGENCY DIRECTOR(S)

During Audit Period: Larry E. Matejka
Currently: Larry E. Matejka

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ISAC incorrectly applied fixed interest rates instead of variable rates to defaulted loans

 

 

ISAC should have continued to apply a variable interest rate even after default by the borrower

 

 

 

ISAC’s ability to identify and correct balances has been impaired by its computer system

 

 

 

 

 

 

61,000 loan accounts identified

 

 

 

 

 

Determination has not yet been made as to whether ISAC will be required to reimburse the U.S. Department of Education

 

 

 

 

 

 

 

 

 

 

 

Review of FY 1996, FY 1997 and FY 1998 Annual Reports reveal inappropriate reference to data being "audited"

 

 

Statutory required information omitted from agency's annual report

 

 

 

 

 

 

 

 

 

 

 

 

 

Failure to protect public deposits could result in loss

 

 

85.4% in FY 1999 and 86.3% in FY 1998 of bank balances were not insured or collateralized

 

 

State statutes require FDIC insurance or collateralization

 

 

 

INTRODUCTION

The Illinois Student Assistance Commission (ISAC) was created to establish and administer a system of financial assistance, through loan guarantees, scholarships and grant awards for residents of the State of Illinois to enable them to attend qualified public or private institutions of their choice within Illinois. FY 1999 was the first year ISAC issued the first contracts in its new mandate of offering a prepaid tuition program.

Based upon the extent of noncompliance noted during State Compliance audit tests, it was concluded that there is more than a relatively low risk that there exists other noncompliance in areas not tested by the auditors.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

INCORRECT INTEREST RATES FOR DEFAULTED LOANS

ISAC incorrectly applied a fixed rate of interest instead of a variable rate of interest to certain defaulted PLUS, SLS, and Stafford student loans guaranteed and held by ISAC.

Defaulted student loans are purchased by ISAC from the lending institutions. Collection of defaulted loans is the responsibility of ISAC pursuant to an agreement with the U.S. Department of Education (ED). ED reimburses ISAC for the defaulted loan purchased including the amount of capitalized interest paid to the lending institution. ISAC is required to continue collection efforts in accordance with federal regulations.

The 1986 reauthorization of the Higher Education Act established variable interest rates for PLUS and SLS loans effective for loans disbursed July 1, 1987 and thereafter. Stafford loans, previously made at fixed rates, became eligible for variable rates as of October 1, 1992. At the time of default on variable interest rate student loans, ISAC froze the variable interest rate being applied. Interest was then applied to the loan balance using a fixed rate convention rather than a variable rate. These defaulted student loans should have continued to have a variable interest rate even after default by the borrower.

Effective July 1, 1995, all variable interest rate loans in ISAC’s portfolio were calculated at the applicable variable rate. Variable interest rate loans which had been in default prior to ISAC’s system changes, required retroactive adjustments for every year they had been in default and subject to the fixed interest rates prior to July 1, 1995. ISAC began these modifications in June of 1996 which continue to the present time. ISAC’s ability, however, to identify and correct balances has been impaired by its computer system. The computer system did not maintain previous account balances and changes in balances after payments were made. In order to reconstruct an account history of accrued interest and other manual adjustments such as refunds, ISAC needed to conduct manual calculations outside the computer system which is a cumbersome and time consuming process.

ISAC provided documents that showed, of the 61,000 loan accounts identified, about 14,000 accounts were potentially lower than appropriate by approximately $291,000. ISAC has decided to waive the application of any potential increases. ISAC is in the process of resolving this issue with ED. As of November 1999, 4,387 accounts out of the 14,000 contained potential misstatements of approximately $125,000. These accounts are being addressed in the pending proposal with ED.

About 47,000 accounts were potentially higher than appropriate by about $2.7 million. ISAC has provided refunds to borrowers who were overcharged interest. As of August 1999, ISAC had issued 4,276 refunds totaling approximately $390,000. ISAC does not believe that any additional refunds are due.

The full financial effects of account balance adjustments had not been determined as of the end of the audit. Since the loans were in default, adjustments would not affect the account receivable balances within ISAC financial statements. In accordance with federal regulations, ISAC is working with ED to develop a reimbursement plan for amounts due the federal government for defaulted accounts with "undercharged" amounts. (Finding 1, pages 16-18)

We recommended ISAC complete its review and ensure that adjustments to loans are performed so that correct interest is posted to the accounts where a fixed rate was applied instead of a variable rate after default. Further, ISAC should determine the proper method of resolving the matter by seeking guidance from the U.S. Department of Education.

ISAC officials agreed with the finding and recommendation and stated they have embarked on a project to overhaul their systems. At present, they are awaiting a response from ED on their reimbursement plan to the federal government.

ANNUAL REPORT INFORMATION NEEDS TO BE IMPROVED

ISAC presented its Annual Reports with inappropriate references to financial schedules in the reports as "audited" in violation of professional reporting standards.

Besides the Annual Reports, ISAC issued a Comparative Reserve Fund Sources and Uses statement on a federal fiscal year and presented it as an "audited" report. Audit reports require an attestation by an external, independent auditor.

Also, ISAC's Annual Reports did not include the following information as required by State law:

  • the total amount and the number of claims due and payable to the State (receivables), and
  • the method used in collecting its receivables, whether by a private collection agency service or the Attorney General. (Finding 6, pages 25-26)

We recommended Annual Reports not be presented as "audited" unless attested by an external, independent auditor. Additionally, appropriate disclosure should be made as to date and source of information when taken from an "audited" report and used in another publication. Also, although ISAC prepares a number of reports that includes the number and amount of receivables, we recommended the official Annual Report contain the information required by State Statute.

ISAC officials agreed with the finding and recommendations and stated they will ensure that staff follow the professional standards when issuing financial reports. Further, action will be taken to include the information pertaining to the number and amount of receivables in their official Annual Report.

AMOUNT OF COLLATERIALIZATION NOT WITHIN REQUIREMENTS OF STATE OFFICERS AND EMPLOYEES MONEY DISPOSITION ACT

The amount of collateral pledged to secure cash on deposit with various banks was not adequate as required by the State Officers and Employees Money Disposition Act. Both the Illinois Designated Account Purchase Program (IDAPP) and the Illinois Opportunity Loan Program (IOLP) program's bank balances exceeded FDIC Insurance and collateral. This finding has been repeated since 1995.

A review of the IDAPP and IOLP records revealed that the two programs together had cash and cash equivalents on deposit with banking institutions totaling $175.5 and $193.7 million in FY 1999 and FY 1998, respectively. Of this total, $149.9 million (85.4%) and $167.2 million (86.3%) in FY 1999 and FY 1998, respectively, were not covered by FDIC Insurance or adequately collateralized.

The State Officers and Employees Money Disposition Act requires that public deposits be protected against risk of loss with FDIC Insurance or with collateral.

Agency officials state the cost of securing all its deposits with collateral at its various banks exceeded the benefits to be derived. (Finding 13, pages 37-38)

We recommended ISAC require financial institutions to pledge an adequate amount of collateral to secure their deposits where the amount on deposit exceeds FDIC Insurance coverage.

ISAC officials agreed with the finding and recommendation and stated they are taking steps to review and monitor its cash and cash equivalents held in financial institutions. (For previous ISAC responses, see Digest footnote #1.)

OTHER FINDINGS

Other findings involved issues such as inadequate reconciliation of student receivable records to accounts assigned to collection agencies, lack of implementation of procedures for eligibility for fees, poor documentation of claims reimbursements and credit bureau reports, delays in following ISAC's established timetable for post-secondary institutional audits, untimely compliance with reporting required by bond indentures, a need to maintain proper accountability over fixed assets, and failure to adopt procedures so that unauthorized bank signatories are removed by the disbursing banks. These findings and recommendations are being given attention by ISAC management. We will review progress toward implementation of our recommendations during our next audit.

Responses to the recommendations were provided by Marcia Thompson, Fiscal Officer.

AUDITOR’S OPINION

The auditors have stated the financial statements for the Illinois Student Assistance Commission as of and for the year ended June 30, 1999 are fairly presented in all material respects.

 

 

 

___________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:SES:pp

 

AUDITORS ASSIGNED

Pandolfi, Topolski, Weiss & Co. were our special assistant auditors for this audit.

 

DIGEST FOOTNOTES

#1 ILLINOIS DESIGNATED ACCOUNT PURCHASE PROGRAM AND ILLINOIS OPPORTUNITY LOAN PROGRAM CASH AND CASH EQUIVALENTS - (Previous ISAC Responses)

1997: ISAC agrees and has taken steps to collateralize as much of its cash and cash equivalents as it believes is cost beneficial. All outstanding Guaranteed Investment Contracts are collateralized at 102% with U.S. Treasury Notes and Bills. Money Market accounts selected for investment of funds invest only in U.S. Treasury Notes and Bills, U.S. Agencies or Repurchase Agreements collateralized at 102% with U.S. Treasury Notes and Bills. The remaining cash and cash equivalents are invested in savings and checking accounts with various banks and are secured with collateral agreements, except for certain cases where the amount exceeding FDIC insurance is not large enough for collateralization to be cost beneficial. Less than 1% of IDAPP and IOLP assets are not adequately collateralized due to the cost benefit analysis. We will continue to make improvements in this area and will monitor this figure on a regular basis in order to adequately manage this risk.

1995: ISAC agrees and will seek to collateralize deposits with financial institutions that exceed FDIC Insurance in accordance with the State Officers and Employees Money Disposition Act. The majority of the cash and cash equivalents were invested in accordance with the Public Funds Investment Act in Treasury money market funds and Guaranteed Investment Contracted and were not deposits that needed to be collateralized.