Illinois CAFR arrives, late and covered in red ink

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Illinois' overall fiscal condition continued to deteriorate in fiscal 2018, according to the overdue comprehensive annual financial report that was published Thursday by state Comptroller Susana Mendoza’s office

The state’s net position of governmental activities worsened by $6.4 billion to negative $189.1 billion, according to the CAFR, which was released along with Auditor General Frank Mautino’s opinion.

The numbers in the fiscal 2018 CAFR show just how deep the state’s fiscal troubles run, underscored by delays that made Illinois the last state out with a CAFR.

“The state continues to show an inability to generate sufficient cash from its current revenue structure to pay operating expenditures on a timely basis,” warns the CAFR. “These budgetary challenges along with the accumulated deficit in the general fund, continued growth in the net pension liability and OPEB liability, and ratings on debt issuances of the state may impact the state’s ability to access credit markets to pay operational expenditures more timely and may increase interest costs of those borrowings.”

Over time, increases and decreases in net position measure whether the state’s financial position is improving or deteriorating and the figure provides a more sweeping view of state assets and obligations because it counts liabilities such as bonded debt and pension obligations against assets such as cash, investments, and other state holdings.

Gov. J.B. Pritzker’s administration said the report highlights the troubles the governor inherited when he took office earlier this year after ousting Republican Bruce Rauner.

“Illinois faces enormous fiscal challenges, and four years of the Rauner administration only made our situation worse. This report identifies serious financial reporting issues, and this administration is committed to working with all parties to ensure more timely releases in the future,” administration spokeswoman Emily Bittner said in an emailed statement, adding that Pritzker was “determined to restore stability to our finances.”

Pritzker won approval for a $39 billion general fund fiscal 2020 budget that manages the books on a cash basis through the year. Longer-term prospects hinge on voter passage of a constitutional amendment moving to a progressive income tax structure.

The net position of governmental activities deficit swelled to negative $182.6 billion in 2017 from negative $131.6 billion in 2016; the 2017 figure was originally set at $141.7 billion when published last year. It was later restated to $182.6 billion “due to the implementation of GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions,” the auditor's opinion says. The Governmental Accounting Standards Board’s statement required the state to report entire net other postemployment benefits liability on the face of the statements.

The overall net position of governmental activities was a negative $125.3 billion in fiscal 2015 and negative $121. 2 billion in fiscal 2014. In fiscal 2013 it was only negative $47.9 billion.

The state chopped $6.8 billion of its fiscal 2018 general fund deficit, based on generally accepted accounting rules, leaving it at $7.8 billion compared to a negative $14.6 billion in 2017, the CAFR said. The deficit on a budgetary basis was $5.7 billion down from $7.9 billion in 2017.

The improvement reflected the state’s cut in its bill backlog that rose to record levels during the state’s two-year budget impasse but that was primarily due to the state’s $6 billion backlog borrowing that adds to overall bonded debt. The backlog on Thursday stood at about $6.4 billion.

The deficit swelled to $9.6 billion in 2016 from $6.9 billion in 2015 and then further ballooned to $14.6 billion as the balance sheet felt the full effects of the two-year budget impasse between Democratic lawmakers and Rauner.

“The bleeding hasn’t stopped even with the higher income tax revenue from the 2017 increase,” said Richard Ciccarone, president of Merritt Research Services LLC. The tax rate rose on individual income to 4.95% from 3.75% and the corporate income tax rate grew to 7% from 5.25%. “With the big tax increase I would have expected the state to get closer on a break-even number. They are not doing enough to control spending.”

Illinois collected $6 billion more in income taxes in 2018. The state is weighed down by a $133.7 billion unfunded pension tab and a $55.2 billion OPEB burden. The state had $30 billion in general obligation debt in 2018, up from nearly $24.8 billion.

Illinois’ net position of governmental activities is the second worst in among states, behind only New Jersey which closed out fiscal 2018 at negative $201.2 billion. Illinois held the distinction of carrying the largest negative figure among states and the District of Columbia in the prior year, according to the auditor.

Maine, California, Connecticut followed New Jersey and Illinois, with nine others reporting negative numbers and 35 in the black.

The Illinois CAFR arrived 425 days after the close of the fiscal year, 92 days behind California, the second-slowest state.

The auditor’s opinion warns that the state’s financial reporting process does not allow Illinois to prepare a complete and accurate 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,” reads the opinion.

Mendoza attributed the delay this year to the loss of data by an independent accounting vendor hired by the Rauner administration for work with the Department of Healthcare and Family Services and the Department of Human Services. Four months of data went missing.

“We should not expect outside consultants to perform critical government functions, especially regarding data involving eligibility determinations under the state’s Medicaid program serving the state’s most vulnerable citizens, without adequate controls to protect the state’s program and ultimately state taxpayers,” Mendoza said.

Mendoza said earlier this year her office launched new contract reporting requirements for such vendor agreements of more than $5 million.

In addition to the missing data, Mendoza said late adjustments relating to receivables were required as a result of the audit of the Department of Employment Security. Mendoza said she agreed with Mautino’s finding that the state needs a coordinated financial reporting system, although that did not cause this year’s delay.

Some issues have been corrected to avoid a repeat next year and the administration and comptroller accepted the findings, but Mautino and Mendoza remain concerned.

The comptroller's office lists CAFR publication dates since fiscal 2005, and this year's is the latest, besting the 420 days needed for the FY 2005 report. GASB recommends 180 days as a standard.

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