REPORT DIGEST ILLINOIS FINANCE AUTHORITY Financial Audit For the Year Ended June 30, 2015 Release Date: January 28, 2016 FINDINGS THIS AUDIT: 2 CATEGORY: NEW -- REPEAT -- TOTAL Category 1: 1 -- 0 -- 1 Category 2: 0 -- 1 -- 1 Category 3: 0 -- 0 -- 0 TOTAL: 1 -- 1 -- 2 FINDINGS LAST AUDIT: 2 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 financial audit as of and for the year ended June 30, 2015. The Authority’s compliance examination for the two years ended June 30, 2015, will be issued at a later date. SYNOPSIS • (15-1) The Authority had financial reporting problems within the Industrial Project Insurance Fund, the Illinois Agricultural Loan Guarantee Fund, and the Illinois Farmer and Agribusiness Loan Guarantee Fund. FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS NONCOMPLIANCE IMPACTING THE AUTHORITY’S FINANCIAL REPORTING PROCESS The Illinois Finance Authority (Authority) had financial reporting problems within the Industrial Project Insurance Fund, the Illinois Agricultural Loan Guarantee Fund, and the Illinois Farmer and Agribusiness Loan Guarantee Fund. These financial reporting problems, if not identified and corrected, would have resulted in a material misstatement of the Authority’s financial statements. During testing, some of the financial reporting issues noted by the auditors included the following: • The Authority improperly classified an actuary’s calculation of potential liabilities from guarantee claims, totaling $562,675, as a liability of the Industrial Project Insurance Fund as opposed to a liability of the Illinois Farmer and Agribusiness Loan Guarantee Fund. • The Authority improperly classified a claim arising from the settlement of litigation regarding a guarantee claim, totaling $155,000, as a liability of the Industrial Project Insurance Fund as opposed to a liability of the Illinois Agricultural Loan Guarantee Fund. Further, the Authority ultimately improperly paid this liability in September 2015 from the Industrial Project Insurance Fund. • The Authority improperly accrued a potential contingent liability within the Industrial Project Insurance Fund arising from the Authority’s guarantee of the indebtedness of an agribusiness, totaling $494,851. Authority officials accrued the liability on the basis of significant concentration risk; however, the actuarial report commissioned by the Authority for this particular borrower only noted general operational risks. • The Authority failed to recognize a restriction on the uses of the resources within the Industrial Project Insurance Fund. The Authority’s draft financial statements reported the net position of the Industrial Project Insurance Fund as unrestricted when its net position should have been reported as restricted for locally-held agricultural guarantees. The auditors proposed adjusting entries to correct these financial reporting errors, which the Authority recorded in its final financial statements. (Finding 1, pages 60-68) We recommended the Authority recognize liabilities and pay claims arising from its agricultural guarantees from the Illinois Agricultural Loan Guarantee Fund and the Illinois Farmer and Agribusiness Loan Guarantee Fund, or seek a legislative remedy. Further, the Authority should enhance its procedures to review any changes to its regulatory environment for any potential impact on the Authority’s financial reporting process and accrue contingent liabilities only when the potential for loss meets the requirements of Governmental Accounting Standards Board Statement No. 62. Finally, we recommended the Authority, if it continues to disagree with the auditors’ position, seek a formal written opinion from the Attorney General. The Authority did not accept this finding because, in its opinion, the finding is based upon an incorrect legal interpretation. The Authority provided an analysis of its ability to record and pay liabilities arising from agricultural guarantees from the Industrial Project Insurance Fund. In an auditors’ comment, we noted Article 830 of the Illinois Finance Authority Act (Act) authorizes the Authority to issue State Guarantees for farmers’ existing debts held by a lender [20 ILCS 3501/830-30(a)], creates the Illinois Agricultural Loan Guarantee Fund [20 ILCS 3501/830-30(c)], and directs that “[a] ll payments by the Authority shall be made from the Illinois Agricultural Loan Guarantee Fund to satisfy claims against the State Guarantee” [20 ILCS 3501/830-30(c)]. Parallel provisions authorize the Authority to issue State Guarantees to lenders for loans to eligible farmers and agribusinesses [20 ILCS 3501/830-35(a)], establishes the Illinois Farmer and Agribusiness Loan Guarantee Fund [20 ILCS 3501/830-35(c)], and directs that “[a] ll payments by the Authority shall be made from the Illinois Farmer and Agribusiness Loan Guarantee Fund to satisfy claims against the State Guarantee” [20 ILCS 3501/830-35(c)]. Article 805 of the Act created the Industrial Project Insurance Fund to provide bond or loan insurance for approved industrial projects. There is approximately $11.8 million in the Industrial Project Insurance Fund, but there are no outstanding bonds or loans and no further projects have been approved under this program; therefore, the money in the Industrial Project Insurance Fund is available for other uses. Consequently, Public Act 096-0897, effective May 24, 2010, amended the Act to allow the use of moneys in the Industrial Project Insurance Fund to pay claims on the State Guarantees made pursuant to Article 830 of the Act. The finding acknowledges the Authority’s ability to transfer amounts in the Industrial Project Insurance Fund to either the Illinois Agricultural Loan Guarantee Fund and the Illinois Farmer and Agribusiness Loan Guarantee Fund in order to pay claims on the State Guarantees made under Article 830. However, we do not agree that this ability to use amounts in the Industrial Project Insurance Fund makes claims under the State Guarantee programs liabilities of the Industrial Project Insurance Fund since the statute specifically provides that payments for claims under the State Guarantee programs must be made from the Illinois Agricultural Loan Guarantee Fund and the Illinois Farmer and Agribusiness Loan Guarantee Fund. Any other interpretation of Public Act 096-0897 creates conflict among the provisions and renders language existing prior to Public Act 096-0897 meaningless. As the Authority disagrees with the statutory interpretation conclusions reached by the auditors, we continue to recommend the Authority refer this matter to the Attorney General who, by law, is charged with rendering opinions to State officials on matters of statutory interpretation. 15 ILCS 205/4. In areas of disagreement over statutory interpretation, the Auditor General’s Office defers to a formal written opinion from the Attorney General on the matter. OTHER FINDING The remaining finding pertains to failing to write-off uncollectible balances from non-conduit debt and investments in partnerships and companies with no value. This finding is reportedly being given attention by the Authority. We will review the Authority’s progress towards the implementation of our recommendations in our next audit. AUDITOR’S OPINION The auditors stated the financial statements of the Illinois Finance Authority as of and for the year ended June 30, 2015, are fairly stated in all material respects. FRANK J. MAUTINO Auditor General FJM:djn SPECIAL ASSISTANT AUDITORS Our Special Assistant Auditors for this audit were E.C. Ortiz & Co., LLP.