REPORT DIGEST

ILLINOIS FINANCE AUTHORITY

Compliance Examination
For the Two Years Ended June 30, 2015

Release Date:  February 18, 2016

FINDINGS THIS AUDIT:  8

CATEGORY:  NEW -- REPEAT -- TOTAL
Category 1:  2 -- 1 -- 3
Category 2:  0 -- 5 -- 5
Category 3:  0 -- 0 -- 0
TOTAL:  2 -- 6 -- 8

FINDINGS LAST AUDIT: 11

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

This digest covers the Authority’s
compliance examination for the two years
ended June 30, 2015. A separate financial
audit as of and for the year ended June 30,
2015, was previously released on January 28,
2016. In total, this report contains eight
findings, two of which were reported within
the Authority’s financial audit.

SYNOPSIS

• (15-3) The Authority did not comply with
statutory provisions regarding the use of
assets within the Authority’s Fire Truck
Revolving Loan Fund.
• (15-4) The Authority’s internal controls
to properly maintain records for monitoring
covenant compliance for conduit bonds were
inadequate.
• (15-5) The Authority failed to adhere to
the internal auditing provisions of the
Fiscal Control and Internal Auditing Act.
• (15-6) The Authority did not timely and
accurately submit transaction reporting for
bond principal and interest payments to the
Office of the State Comptroller.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

NEED TO LIMIT THE AUTHORITY’S USAGE OF
RESOURCES TO RESTRICTIONS IMPOSED BY STATE
LAW

The Illinois Finance Authority (Authority)
did not comply with statutory provisions
regarding the use of assets within the
Authority’s Fire Truck Revolving Loan Fund
(Authority’s Fund).

During testing, the auditors noted the
following timeline regarding the $8 million
Fiscal Year 2015 appropriation the Office of
the State Fire Marshal (Fire Marshal)
received to deposit moneys from the Fire
Prevention Fund into the State Treasury’s
Fire Truck Revolving Loan Fund (State
Treasury’s Fund).

07-01-14: Public Act 098-0681 appropriated
$8 million from the Fire Prevention Fund to
the Fire Marshal for deposit into the State
Treasury’s Fund.

12-04-14: The State Comptroller processed a
voucher submitted by the Fire Marshal to
completely expend the entire $8 million
appropriation from the Fire Prevention Fund.
The $8 million was deposited into the State
Treasury’s Fund.

01-12-15: The State Comptroller processed a
voucher submitted by the Fire Marshal to
expend the entire $8 million now on deposit
in the State Treasury’s Fund to the
Authority’s Fund. To process this
transaction, the Fire Marshal charged this
expenditure against the continuing
appropriation authorized by the Illinois
Finance Authority Act to distribute the
amount, if any, of cash received into the
State Treasury’s Fund to the Authority’s
Fund so long as the Fire Marshal and
Authority entered into an interagency
agreement that the moneys distributed would
be used “for loans to fire departments and
fire protection districts to purchase fire
trucks and brush trucks and for no other
purpose.”

01-12-15: The Governor signed Executive
Order 2015-08 requiring the Governor’s
Office of Management and Budget to review
all grants requiring the expenditure of
State funds to determine whether the grant
is essential to operations.

01-15-15: The Authority received the $8
million warrant from the State Treasury’s
Fund for deposit into the Authority’s Fund.

01-20-15: The Authority deposited the $8
million warrant into the Authority’s Fund.

01-26-15: The Governor’s Office of
Management and Budget finished its review of
the Fire Marshal’s grants and determined the
Fire Truck Revolving Loan Program was not
essential. The Fire Marshal sent the
Authority a letter requesting the Authority
return the $8 million.

01-27-15: An official with the Governor’s
Office of Management and Budget e-mailed the
Authority’s Executive Director stating the
$8 million “will not (be) available for use
by the Illinois Finance Authority. Please
contact me with any concerns, as I
understand there may be audit issues.”

02-20-15: The Authority’s Executive Director
sent an e-mail to officials with the Fire
Marshal and Governor’s offices indicating a
“legal obstacle” to returning the $8
million.

03-26-15: Public Act 099-0002 authorizes a
transfer of $23 million from the Fire
Prevention Fund into the General Revenue
Fund by the conclusion of Fiscal Year 2015.

04-17-15: An official with the Governor’s
office sent an e-mail to the Authority’s
Executive Director that the Governor’s legal
team has reviewed the transaction and
requested compliance with the letter from
the Fire Marshal to the Authority dated
January 26, 2015.

04-21-15: The Authority’s Executive
Director, after briefing both the
Authority’s Chair of the Board of Directors
and the Audit Committee Chair about the
“potential for audit or legal exposure to
the Authority by complying with this
request,” directs the Authority’s Chief
Financial Officer to return the $8 million
to the Fire Marshal. The Authority
authorizes the return of the $8 million to
the Fire Marshal.

05-12-15: The State Comptroller processed
the $8 million Expenditure Adjustment
Transmittal, classified by the Fire Marshal
as an overpayment, to redeposit these moneys
against the appropriation from the Fire
Prevention Fund, not the State Treasury’s
Fund. In accordance with the Statewide
Accounting Management System, the Fire
Marshal should have returned the $8 million
from the original appropriation that
generated the payment being refunded, which
was the State Treasury’s Fund as it was the
appropriated fund that paid the moneys to
the Authority’s Fund. If this had been done,
however, the Fire Marshal would have been
obligated to return the money deposited into
the State Treasury’s Fund back to the
Authority’s Fund under the continuing
appropriation provisions of the Illinois
Finance Authority Act. Therefore, the Fire
Marshal did not charge the return of the $8
million against the proper fund and
appropriation.

06-03-15: The State Comptroller processed a
fund transfer from the Fire Prevention Fund
into the General Revenue Fund for $12.5
million.

06-24-15: The State Comptroller processed a
fund transfer from the Fire Prevention Fund
into the General Revenue Fund for $5.7
million. The total transfers were $18.2
million.

08-31-15: The Fire Marshal lapsed the $8
million appropriation from the Fire
Prevention Fund for deposit into the State
Treasury’s Fund. However, the Fire Marshal
continues to show the $8 million
appropriated expenditure from the State
Treasury’s Fund for deposit into the
Authority’s Fund.

During testing, the auditors noted the
Authority used moneys deposited within the
Authority’s Fund for an unauthorized purpose
by returning the $8 million.

Authority officials documented that they
complied with the request to return the $8
million because “the pressing public policy
need by the Authority to contribute to
resolving the State’s fiscal crisis
overrides the risk of audit or legal
exposure to the Authority connected with
this transfer.”  (Finding 3, pages 26-30)

We recommended the Authority limit its usage
of resources to any restriction imposed upon
their use by law, or seek a legislative
remedy if management perceives a need to
address some other public policy concern.

Authority officials stated they “cannot run
the fire truck loan program without the
assistance of the State Fire Marshal to
initiate and manage the program.”  They
noted the Authority would not have been able
to loan money to purchase fire trucks if the
Fire Marshal was unable to continue
operations.

Fire Marshal officials stated they agreed
with the auditors’ finding, but they believe
they acted in the best interests of the
State to preserve their ability to maintain
the Fire Marshal’s operations.

NEED TO ENHANCE MONITORING OF COVENANT
COMPLIANCE FOR CONDUIT BONDS

The Authority did not have adequate internal
controls to properly maintain records for
monitoring covenant compliance for conduit
bonds. Some of the more significant
exceptions included the following:

Authority Functions and Duties

During testing of the Authority’s records
for 60 conduit bonds outstanding issued
subsequent to January 1, 2004, the auditors
noted the Authority could not substantiate
the receipt of required documentation from
borrowers or show evidence of the
Authority’s monitoring of the following
significant bond covenants:

• Seven of 60 (12%) bond issuances tested
did not have a certification stating the
project funded by the bond issuance had been
completed. Within the auditor’s sample,
eight (88%) bond issuances contained this
provision.
• 35 of 60 (58%) bond issuances tested were
missing the borrower’s audited financial
statements. Within the auditor’s sample, 44
(80%) bond issuances contained this
provision.
• Nine of 60 (15%) bond issuances tested
were missing a separate written
certification from the independent auditors
certifying the auditors have obtained no
knowledge of any default by the borrower in
the terms, covenants, provisions, or
conditions of the agreement. Within the
auditor’s sample, 18 (50%) bond issuances
contained this provision.
• 27 of 60 (45%) of bond issuances tested
did not have an annual certification that
the borrower has performed a review of its
activities during the preceding year to
determine the borrower has kept, observed,
performed, and fulfilled every covenant and
the borrower is not in default with any
covenant. In the event the borrower is in
default with one or more covenants, the
borrower must specify the nature and detail
of each default to the Authority.

Bond Compliance Monitoring Checklists

During Fiscal Year 2014, the Authority
developed a new monitoring checklist to
better monitor the Authority’s compliance
requirements within outstanding bonds.
During testing, the auditors noted 39 of 60
(65%) bond issuances tested did not have a
compliance checklist prepared by the
Authority.

Bond Trustee Service Organization Control
Reports (SOC-1)

During the auditors review of the
Authority’s monitoring and covenant
compliance functions for the 60 bonds
tested, the auditors noted two of the six
(33%) bond trustees’ SOC-1 reports were not
obtained and reviewed by the Authority.
(Finding 4, pages 31-34)  This finding has
been repeated since 2012.

We recommended the Authority establish and
maintain adequate controls over its
monitoring of conduit covenant compliance
and secure and review SOC-1 reports from the
Authority’s bond trustees.

Authority officials agreed with our
recommendations. (For the previous Authority
response, see Digest Footnote #1.)

NEED TO IMPROVE THE AUTHORITY’S INTERNAL
AUDIT FUNCTION

The Authority failed to adhere to the
internal auditing provisions of the Fiscal
Control and Internal Auditing Act.

On June 27, 2014, the Authority’s Executive
Director appointed a public accounting firm
to serve as the Authority’s internal auditor
for a five-year term effective on July 1,
2014. The internal auditor did not develop a
two-year internal audit plan until June 11,
2015. The plan contemplated performing eight
audits over three fiscal years, with two
audits scheduled for Fiscal Year 2015, four
audits scheduled for Fiscal Year 2016, and
two audits scheduled for Fiscal Year 2017.

The auditors noted the following
deficiencies:

• The Authority did not have an internal
auditor nor have any internal audits
performed during Fiscal Year 2014.
• During the auditor’s review of the two-
year internal audit plan adopted on June 11,
2015, the auditors noted the plan did not
have any audit coverage of the Authority’s:
– receipt processing functions;
– grant programs, including certain federal
agricultural loan programs accounted for in
the Rural Development Revolving Loan Fund;
and,
– the Metro East Police District Commission
Fund, an agency fund.
Additionally, the plan did not include one
special audit begun during Fiscal Year 2015
covering bond compliance and monitoring
functions.
• The Authority’s appointed internal auditor
conducted only one of the three Fiscal Year
2015 engagements (two scheduled audits and
one special audit), the annual GAAP audit,
for a total of 80 professional hours of
work. Further, the appointed internal
auditor did not perform reviews of the
Authority’s two major new electronic data
processing systems installed during Fiscal
Year 2015. In order to obtain assurance, the
Authority entered into contracts with
another public accounting firm to review
whether the new systems had adequate audit
trails and accountability.
• Neither the appointed internal auditor or
the other public accounting firm hired to
review the two new electronic data
processing systems prepared a written report
on the internal auditor’s Fiscal Year 2015
activities to the Authority’s Executive
Director by September 30, 2015. (Finding 5,
pages 35-37)

We recommended the Authority work with its
appointed internal auditor to ensure
compliance with the requirements of State
law in planning and performing the
Authority’s internal audits. Further, we
recommended the internal auditor should
prepare a timely written report on internal
audit’s activities during the previous
fiscal year.

Authority officials agreed with our
recommendations.

NEED TO ENHANCE CONTROLS OVER REPORTING OF
BOND TRANSACTIONS

The Authority did not timely and accurately
submit transaction reporting for bond
principal and interest payments to the
Office of the State Comptroller.

During testing of 60 bond issuances with 544
distinct payments requiring the filing of a
Notice of Payment of Bond Interest and/or
Principal report (Form C-08) during Fiscal
Year 2014 and Fiscal Year 2015, the auditors
noted the following:
• 66 of 544 (12%) Form C-08s tested were
submitted to the Office of the State
Comptroller between one to 348 days late. In
accordance with the official documents for
each bond, the bond trustees are responsible
for completing and filing the information
with both the State Comptroller and the
Authority.
• 48 of 544 (9%) Form C-08s were missing.
The Authority was unable to provide the
auditors with the Form C-08s for the
scheduled bond payments.
• 189 of 544 (35%) Form C-08s tested
contained discrepancies between the amounts
reported on the Form C-08 and the Bond
Interest and Redemption Schedule (Form C-05)
filed with the Office of the Comptroller.
(Finding 6, pages 38-39)   This finding has
been repeated since 2010.

We recommended the Authority continue to
monitor and work with the bond trustees to
improve compliance with principal and/or
interest reporting requirements.

Authority officials agreed with our
recommendations. (For the previous Authority
response, see Digest Footnote #2.)

OTHER FINDINGS

The remaining findings pertain to inadequate
internal controls over personal services and
travel expenses. We will review the
Authority’s progress towards the
implementation of our recommendations in our
next audit.

ACCOUNTANT’S OPINION

The accountants conducted a compliance
examination of the Illinois Finance
Authority for the two years ended June 30,
2015, as required by the Illinois State
Auditing Act. The accountants qualified
their report on State compliance for
Findings 2015-001, 2015-003, and 2015-004.
Except for the noncompliance described in
these findings, the accountants stated the
Agency complied, in all material respects,
with the requirements described in the
report.

FRANK J. MAUTINO
Auditor General

FJM:djn

SPECIAL ASSISTANT AUDITORS

Our Special Assistant Auditors for this
examination were E. C. Ortiz & Co., LLP.

DIGEST FOOTNOTES

#1 - Inadequate Controls over Monitoring
Conduit Covenant Compliance

2013 - The Authority accepts this finding.

As a self-funded, non-appropriated State
agency that operates on an enterprise/
business model, the Authority has endured
declining revenues in fees derived from
federally tax-exempt debt issuances directly
attributable to (1) a general decline in the
dollar volume of tax-exempt bond issuance
across sectors; (2) a general decline in the
number of tax-exempt projects  across
sectors; and (3) a general decline in the
economic benefit to borrowers from tax-
exemption due to economic conditions and the
national interest rate environment over the
same time period from calendar year 2008 to
calendar year 2013.

Between calendar year 2008 and calendar year
2014, staff head count at the Authority, has
declined from 31 to 15. Authority staff does
not participate in any State defined-benefit
pension fund and the Authority has procured
its own employee benefits.

Since the close of the audit period on June
30, 2013, the Authority has increased staff
assigned to compliance generally (as well as
to other financial, audit, procurement
duties) from one to five. This team oversees
compliance of 1,475 bonds each with their
own covenants. In addition to staffing
increases, the Authority has implemented or
is in the process of implementing digital
systems to:
• Better monitor covenant compliance with
respect to conduit debt;
• Better manage and retrieve documents with
respect to conduit debt; and
• Better track and calendar covenant
obligations of the Authority under the
conduit bond documents.

#2 - Delinquent and Inaccurate Reporting of
Bond Activity

2013 - The Authority accepts this finding.

The Authority has allocated additional
staffing to increase communication with the
bond trustees and the Office of the
Comptroller. As with the Response to
Compliance Finding 2013-005, in addition to
increasing staffing, the Authority has
implemented or is in the process of
implementing digital systems to:
• Promote more timely notification of delays
and/or noncompliance in the submission of
compliance documents
• Increase the accuracy of reports submitted
to the Office of the State Comptroller
• Better track and calendar covenant
obligations of the Authority under the
conduit bond documents.

As a result, the Authority anticipates more
timely notification of late C-08 submissions
by borrowers and/or discrepancies in
borrower’s/bond trustee’s reporting to the
Authority of the borrower’s bond principal
and interest payments. Authority staff can
then work with the bond trustee, the
borrower and the Office of the Comptroller
to accurately resolve these issues in a
timely manner.