Interim Illinois audit figures show more fiscal deterioration

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Even with more tax revenue in hand, Illinois’ financial position deteriorated in the last fiscal year due to spending growth and a rising pension tab.

That’s according to an “interim comprehensive annual financial report” posted Jan. 31 by Illinois Comptroller Susana Mendoza.

The state’s net position based on governmental activities which takes into account long-term liabilities and assets worsened to a negative net position of $193.1 billion for fiscal 2019 ending last June 30, from a negative $189.1 billion for fiscal 2018.

With an official CAFR behind schedule, Illinois Comptroller Susana Mendoza posted interim fiscal 2019 financials.

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.

At $4 billion, the erosion was less than the $6 billion recorded in the previous year.

Mendoza cautions that the results are preliminary and subject to change when the final audited results are published. The office will eventually publish the comprehensive annual financial report based on audits of state agencies completed by Auditor General Frank Mautino’s office.

The preliminary numbers underscore just how deep the state’s fiscal troubles run despite an income tax hike that bolstered revenues as part of the fiscal 2018 budget package that ended the two-year impasse between former Gov. Bruce Rauner, a Republican, and the General Assembly’s Democratic majority that left the state without enacted budgets.

The tax rate on individual income increased to 4.95% from 3.75% and the corporate income tax rate grew to 7% from 5.25%.

"The bleeding has slowed but we are still bleeding," said Richard Ciccarone, the Illinois-based president of Merritt Research Services, which tracks audit timing.

Gov. J.B. Pritzker, a Democrat, is counting on voters approving a constitutional amendment in November allowing the state to shift to a progressive income tax structure from the current flat one. If approved, the state would raise more than $3 billion in additional revenue by hiking rates on top earners. If it fails, Pritzker has warned of deep spending cuts.

The state targets Dec. 31 as the release date for the previous year’s audit but it’s rarely achieved. Last year Illinois was the last state to release a comprehensive audit, publishing it in August, 425 days after the close of the fiscal year and 92 days behind California, the second-slowest state.

The Governmental Accounting Standards Board recommends 180 days as a standard.

“Until the Auditor General is able to complete the financial audits, the CAFR cannot be completed. Therefore, the IOC is exercising its statutory authority to issue an interim CAFR report. The information in the summary is subject to change,” the report published last week says.

Mautino’s office continues to work on the audit and can’t “estimate a date by which our audit of the state’s CAFR will be completed,” a spokesperson said in an email.

Mendoza and other state officials blame the delay of the fiscal 2018 CAFR on delays and difficulties in compiling individual departmental results from the prior Rauner administration citing data lost by that administration’s IT contractor as a primary reason.

“All state agencies are working to ensure a timelier release this year, though residual problems from that data loss contributed to preventing a December release,” said Mendoza spokesman Abdon Pallasch. “This interim CAFR is meant to reassure outside evaluators including the bond rating agencies that the state is keeping pace with its financial obligations. We stand ready to promptly issue the final CAFR as soon as the final audits are completed and delivered to our office.”

The numbers
Assets totaled $53 billion, down $857 million from June 30, 2018. Capital assets, which include items such as land, buildings, equipment, and infrastructure, accounted for more than $22.3 billion of the state’s total assets. Deferred outflows of resources were about $19 billion, a decrease of $963 million.

Deferred outflow of resources is a consumption of net assets by the government that is applicable to a future reporting period. Pension and other post-employment benefits-related deferred outflows of resources totaled $17.8 and $1.2 billion, respectively.

Liabilities totaled $248.7 billion, an increase of $603 million from the previous year. “The state’s largest liability balances are the net pension liability” of $138 billion and the other post-employment benefits liability of $54 billion, the report said.

Total deferred inflows of resources were approximately $11.1 billion, an increase of $1.3 billion from a year earlier. A deferred inflow of resources is an acquisition of net assets by the government that is applicable to a future reporting period. Pension and OPEB-related deferred inflows of resources totaled $4.3 billion and $6.7 billion, respectively.

Total revenue rose to $72.5 billion from $68.8 billion with income taxes growing to $24.9 billion from $22.4 billion while sales taxes increased to $12.2 billion from $11.9 billion. Expenses rose to $77.3 billion from $75.9 billion.

Retiree and bonded debt rose to $225.7 billion from $223.8 billion. General obligation debt outstanding declined to $27.8 billion from $30 billion. The state’s share of the net pension liability grew 3.8% to $138.6 billion from $133.5 and the state’s share of OPEBs fell slightly to $54.5 billion from $55.2 billion.

The overall net position has steadily worsened. The negative $182.6 billion figure from 2017 grew from a negative $131.6 billion in 2016. The 2017 figure was originally set at $141.7 billion when published in 2018. 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, that required the state to report entire net other postemployment benefits liability on the face of the statements.

“There is value” in putting the preliminary numbers out there “as they should be in the ballpark and it helps the market and political leaders gain an appreciation of where a government stands," Ciccarone said. “It diminishes the value of an audit when it comes out too late,” he said.

It’s a common practice in the healthcare sector and among some governments to post interim results and while valuable is no replacement for the level of detail and precision of numbers in the published CAFR that provides detail on what influenced the numbers, Ciccarone said.

The audit Mautino’s office posts on its website typically includes the state’s ranking among counterparts on the net position of governmental activities. Illinois came in the second worst behind only New Jersey in that assessment for fiscal 2018.

The comptroller's office lists CAFR publication dates since fiscal 2005, and the 2019 report marked the latest release ever, besting the 420 days needed for the FY 2005 report. The timeliness of the Illinois CAFR has been an issue since 1999 and in six of the last 12 years, the CAFR has come out in June or later. Prior to the 2018 record, the CAFR came out in March for the two previous years.

The Merritt report concludes that investors and rating agencies have the tools to penalize non-compliance on timely audits, but they have to choose to use them.

Illinois did not face any yield penalties or credit action for last year’s late CAFR as market participants said sufficient other information on the state’s finances was readily available and it was a seller's market in any case. Illinois is rated Baa3 by Moody’s Investors Service, BBB by Fitch Ratings, and BBB-minus by S&P Global Ratings. All assign a stable outlook.

The state’s yield penalties have narrowed thanks to a combination of the state’s near-term fiscal stability, political harmony, and investor demand for higher yielding paper. The state’s 10-year is currently at a roughly 130 basis point spread to the Municipal Market Data’s AAA benchmark but some recent trades have landed closer to — and even under — 100 bps.

In the absence of market consequences there are actions governments can take. Some states require audits be released within a specified time frame. In New York’s case, it’s 120 days. New York and Columbus, Ohio, are perennially ranked as top performers for their quick turnaround, Ciccarone said.

One potentially positive step issuers can adopt is the use of a private auditor or a combination model, Ciccarone said. The states with the shortest publish times fall into either of those categories, Merritt’s research shows.

The most recent Merritt survey covered about 10,700 issuers and found fiscal 2018 the slowest median audit time recorded over the past eleven years at a median 156 days, two days longer than the previous year.

The poorer showing was seen despite regulatory pressur es. It has been more than a year since Securities and Exchange Commission Chairman Jay Clayton first publicly expressed concern about municipal market investors relying on stale information, and he has urged the industry and its regulators to work toward a solution.

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Audits Public pensions Illinois Municipal disclosure State of Illinois Susana Mendoza State budgets Financial reporting