The calendar has flipped to 2022 and California's state government stands in a league of its own, for the wrong reason.
It's the only state yet to publish its annual comprehensive financial report for fiscal 2020, more than a year and a half after the year closed.
Officials involved have pointed to the troubled rollout of FI$CAL, a state government-wide financial management system, for three years of increasingly late ACFRs, but California needed improvement on the timeliness of its audited financial statements long before it launched the electronic system, according to one investment researcher.
The state has been among the latest in rolling out its audited comprehensive financial reports for 20 years, said Richard Ciccarone, president of Merritt Research Services.
It's been three years since the state's agencies began in earnest to implement the new Financial Information System for California, called FI$CAL. The project combines the state’s accounting, budgeting, cash management, procurement, and other operations into a single, modernized system.
For fiscal years 2018-2019 and 2019-20, the federal government extended financial reporting deadlines to Sept. 30, according to the state auditor’s report. The April 1 date set in California’s state bond agreements for publishing financial statements, including the audited statements, if available, did not change.
If the argument for California taking several months to produce its ACFR — even prior to problems with FI$CAL’s roll out — is the complexities of producing audited financials for the largest state by population, then it begs the question as to why New York and New York City, the nation’s most heavily populated city, are able to produce theirs in four months, Ciccarone said.
New York has historically had timely audits because New York City was in danger of going bankrupt in the late 1970s-early 1980s, which put the state at risk, so lawmakers spent time solidifying the city’s and the state’s financial structure, said Howard Cure, director of municipal bond research for Evercore Wealth Management.
“Part of California’s problem is the change to the financial system,” Cure said. “New York has an embedded system of good auditing practices through the years.”
New York passed a law after it's largest city flirted with insolvency in the late 1970s-early 1980s that mandated audited financial documents be released within 120 days, Cure said.
“It started them down the path of having strong internal financial auditing practices, and it just kept up over the years,” he said.
“There has been a lot of scrutiny of New York’s budget agencies from outside agencies like the Citizens Budget Commission and other agencies throughout the state,” Cure said.
New York has “met that legislative completion mandate timeframe of 120 days after the end of the fiscal year (Chapter 405 of the laws of 1981) every year since we have begun doing GAAP reports in 1982,” said Matt Ryan, deputy press deputy for New York State Comptroller Thomas P. DiNapoli. “We were even able to continue that success after we went live with the new SFS system in 2012,” referring to the
Many states have run into issues with new accounting systems and enterprise resource planning implementations that have not gone well, including Florida, Illinois and California, Ryan said.
Ryan wasn’t familiar with the details on why other states have had problems rolling out electronic financial systems, but added that “New York State has consistently been the leader among the states in completing our GAAP financial statements in the shortest amount of time.”
Though California has come under fire from California’s state auditor since implementation of FI$CAL began three years ago, Ciccarone said the state has actually been among the weakest over the past 20 years.
“I have data on all 50 states going back to 2021,” Ciccarone said. “If you look at the averages over the past 10 years, California is the third worst, only trailing Illinois and New Mexico.”
Illinois, long a financial reporting problem child, published its fiscal 2020 ACFR
California has consistently been one of the weakest for 25 years, Ciccarone said. He doesn’t know why, but said the sluggish performance began in 2002.
Just how important is the timely release of the ACFR for a state has a $26.6 billion surplus to begin its 2023 budget process?
Though the state auditor said the delays could affect the state’s bond ratings and access to federal funding, Cure said that currently investors are more interested in how the state plans to spend its surplus.
It would be different Cure said, if the state was in a more dire financial situation similar to Puerto Rico. Plus, California releases revenue estimates on a regular basis and has the non-partisan Legislative Analyst’s Office tracking the state’s finances and publishing reports, Cure said.
“California has problems with the timing of their audit, but they have a systemized way of looking at their revenues during the year,” Cure said. “It hurts to not have an audit, but California has a number of different groups monitoring the system internally as well as the independent LAO.”
“It would really be an issue if the state’s finances were in a more dire state,” Cure said. “The market is less concerned, because it believes that FI$CAL will help eventually.”
California hasn’t experienced a penalty from a market perspective, he said.
“I think the late audit would be a much greater concern if the state were also facing budget deficits as a result of the pandemic,” he said.
Producing timely audits is more of a concern for investors when it comes to smaller cities and counties that “don’t get the regular scrutiny that the state of California does,” Cure said.
Ciccarone agreed that it would be more of an issue if California were in worse financial shape, but not having the audited financials to investors means that hidden problems covered in the notes of the financial statements are not revealed.
“It’s not just a ratings agency issue, but an issue for investors too,” Ciccarone said.
In addition to problems rolling out FI$CAL, the state auditor raised concerns that retirements could be a problem in getting the schedule back on track.
“Boomer retirements could be a factor,” said Marc Joffe, a senior analyst with the Reason Foundation. “But, whatever the excuse, it is totally unacceptable that the biggest entity in the municipal market is over nine months late in filing audited financial statements. Just because the state has big surpluses on a budgetary basis, does not mean that its books are clean when accrued liabilities are included, and we need to see the ACFR to assess just where the state stands.”
