REPORT DIGEST STATE OF ILLINOIS FINANCIAL AUDIT FOR THE YEAR ENDED JUNE 30, 2019 Release Date: April 30, 2020 FINDINGS THIS AUDIT: 5 CATEGORY: NEW -- REPEAT -- TOTAL Category 1: 0 -- 3 -- 3 Category 2: 0 -- 0 -- 0 Category 3: 0 -- 2 -- 2 TOTAL: 0 -- 5 -- 5 FINDINGS LAST AUDIT: 5 Category 1: Findings that are material weaknesses in internal control and/or a qualification on compliance with State laws and regulations (material noncompliance). Category 2: Findings that are significant deficiencies in internal control and noncompliance with State laws and regulations. Category 3: Findings that have no internal control issues but are in noncompliance with State laws and regulations. State of Illinois, Office of the Auditor General FRANK J. MAUTINO, AUDITOR GENERAL 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 (888) 261-2887 This Report Digest and Full Report are also available on the worldwide web at www.auditor.illinois.gov INTRODUCTION The Illinois Office of 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, 2019, and its results of operations during the fiscal year. The financial section of the CAFR includes the Independent Auditor’s Report on the basic financial statements, management’s 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, 2019, reflect the following: • The net position of governmental activities continued to deteriorate and the deficit increased by $4.0 billion from June 30, 2018, to June 30, 2019. Overall, the net position of governmental activities is reported as a deficit of $193.1 billion. (Exhibit 1) • The General Fund deficit decreased by $250 million from June 30, 2018, to June 30, 2019. The General Fund deficit is $7.5 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, 2019 Governor: JB Pritzker 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 $4.011 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 2012 through 2019. (See Exhibit 1 in the 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, 2019, from June 30, 2018. The fund balance deficit in the State’s General Fund decreased by $250.322 million on a GAAP basis. The June 30, 2019, deficit was $7.5 billion. Exhibit 2 reflects the General Fund deficit for Fiscal Years 2012 through 2019. (See Exhibit 2 in the PDF version of this digest.) STATE COMPARISON Exhibit 3 provides an analysis of State’s governmental activities net position at June 30, 2019, compared to other States. (See Exhibit 3 in the 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 Illinois Office of Comptroller (Comptroller). The 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 Comptroller requires the State’s agencies to prepare a series of financial reporting forms (SCO forms) designed by the Comptroller, which are utilized to prepare the CAFR. Although these SCO forms are subject to review by the 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 Comptroller continue to work together to resolve the State’s inability to produce timely and accurate generally accepted accounting principles (GAAP) 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 Illinois Office of 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 Illinois Office of 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. 101-0010, which extended lapse period from August 31 to October 31 for Fiscal Year 2019 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 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 26 audits at agencies of the primary government, including five pension systems and the Illinois State Board of Investment. During these audits, we noted a total of 25 material weaknesses and 7 significant deficiencies related to the internal controls over the financial reporting process at 12 of the agencies. (Please see the exhibit in the PDF version of this digest.) 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 adequate internal controls over the Integrated Eligibility System. • The Department of Human Services and the Department of Healthcare and Family Services failed to execute adequate internal controls over the Illinois-Michigan Program Alliance for Core Technology system. • The Department of Employment Security did not have adequate controls over its accounts receivable and refunds paid. • The Department of Transportation did not have adequate controls over its financial reporting. 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 two agencies. The adjustments totaled $35 million, $99 million, $23 million, and $99 million for Governmental Activities, Business-Type Activities, Road Fund, and Unemployment Compensation Trust Fund, respectively. (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 Illinois Office of 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 Illinois Office of Comptroller agreed with our recommendation and stated that the Illinois Office of 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 $10.078 billion, on hand at June 30, 2019, 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 $5.100 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 processed for payment (on a cash basis) $202.705 million in interest payments during Fiscal Year 2019. (Finding 5, page 19) 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 Illinois Office of 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. OTHER FINDINGS The remaining findings included two noncompliance issues. We will review the State’s progress towards the implementation of our recommendations in our next audit. This financial audit was conducted by staff of the Office of the Auditor General. JANE CLARK Division Director This report is transmitted in accordance with Section 3-14 of the Illinois State Auditing Act. FRANK J. MAUTINO Auditor General FJM:skm