The case of the missing Illinois CAFR
Illinois is the only state that has not yet published its fiscal 2018 comprehensive annual financial report and the officials who manage the process can’t put a date on its expected release.
The absence of a CAFR is a blot on the credit of the nation's lowest-rated state, though it was able to adopt a budget on time this year and releases other reports and updates about its finances.
“Unfortunately, we are unable to discuss on-going audits and we are also unable to project release dates for our on-going audits,” Auditor General Frank Mautino’s office said in a statement this week. The tardy filing this year veers from the first-quarter filings of the last two years, but it’s consistent with other recent years.
No market consequences are expected.
“Illinois is an example of why there needs to be some teeth in the expectation that audited financials have to be delivered faster. Here you have a credit that is under the microscope because of its financial challenges and you can’t get access to the latest audit to know whether there are findings that are pertinent and material to the assessment of bonds,” said Richard Ciccarone, president of Merritt Research Services LLC, which tracks state and local government CAFR data. “There's material information that could be revealed in an audit and investors need to know that for proper pricing of the state's bonds.”
Banning broker-dealers from working on deals for issuers without current audits would be a tough sell, as would monetary penalties on issuers. The current shortage of bonds in the primary market make any market-driven sanctions all the harder to impose, market participants say.
The delayed filing won’t draw any rating actions and that just leaves the reputational stain as incentive to file in a timely fashion. A pattern of tardy filings raises the specter of Puerto Rico, now in bankruptcy, which was a chronic late filer of fiscal reports.
Illinois is rated at one notch above junk by two rating agencies and two notches by a third.
State Comptroller Susana Mendoza blames the administration of former Gov. Bruce Rauner, who handed off power to Gov. J.B. Pritzker in January after losing his re-election bid.
“The lateness this year does not fall on the comptroller’s office, the auditor general, or the current leadership of the state agencies. It appears there are issues from this audit period dating from the previous administration's management. The current administration and leadership of those agencies are working to resolve them and account for them in their reports to the auditor general,” she said in a recent news release. “I am highly concerned and disappointed that this process is taking so long.”
Mendoza, whose office compiles the CAFR from reports submitted by state agencies that are audited by Mautino’s office, has sought to highlight that other pertinent financial information like the size of the state’s bill backlog is available at her agency's website.
The General Assembly’s non-partisan Commission on Government Forecasting and Accountability posts monthly tax and revenue reports with the most recent update offering fiscal 2019 tallies.
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. In 2009, it came out in July. Mendoza’s notes that during her tenure over the last two years it’s been published in March.
Past auditor general reports have warned of the financial reporting and internal control flaws that delay timely reviews; since 2005, CAFR release dates have been as early as March 7, in 2017, and as late as August 24 in 2006, 420 days after the close of fiscal 2005 according to the auditor general's office.
The Government Accounting Standards Board recommends 180 days as a standard, which would be by the end of December for Illinois.
Ciccarone dismisses the notion that a transfer of power should cause such a long delay.
"That shouldn't matter and if it does then an issuer has something that needs to be improved in a more systematic way,” he said.
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.
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 District of Columbia came in at 115 days, New York at 116 days and South Carolina at 138 days, followed by Kansas and Washington. New York and D.C. use private auditors while South Carolina used a combination. Kansas used a private auditor and Washington uses the state auditor.
While Illinois tops the list of tardy filers, California is next at 333 days after the close of the fiscal 2018 followed by New Jersey at 304 days. All three use the state auditor. New Mexico, which uses a private auditor, followed in fourth place at 297 days, then Mississippi, which uses the state auditor, at 286 days.
The Illinois comptroller and auditor general declined to comment on the idea of changing the model.
Rating agency analysts track the CAFR filings and may note delays in rating reports, but it’s a minor factor for a state credit profile that is strained by a $133.7 billion unfunded pension tab and an unpaid bill backlog that stood at $6.3 billion Tuesday.
“The state’s late CAFR in and of itself is not a particularly critical factor in our rating. We are focused on the state’s ability to make prudent fiscal decisions and work towards structural balance in its budget, which includes addressing its sizable long-term liability burden,” said Fitch Ratings lead Illinois analyst Eric Kim.
“Generally, a delayed CAFR is less of a concern for Fitch at the state level than at the local level — even without the CAFR we have significant data available to review for most states including monthly revenue reports, and regular budget updates,” Kim said. “That is not always the case for local governments where the CAFR is sometimes the only document available with meaningful financial data.”
Kim said Alabama provides an example of a state a state that saw a significant delay in its 2017 review. While the state’s fiscal year ends on Sept. 30, it did not release its fiscal 2017 CAFR until November 2018. “We noted the delay in our rating commentaries at the time but the delay did not directly affect our rating on the state,” Kim said.
“At this time, we believe we have sufficient information to continue to rate Illinois and understand their financial situation,” said S&P Global Ratings lead Illinois analyst Carol Spain. "While the audit is late, it is currently within the timeframe that we consider to have sufficient information quality."
Moody’s Investors Service lead Illinois analyst Ted Hampton said the CAFR filing time is a factor in the governance assessment that is part of the state’s credit profile but sufficient other financial information is currently available. Considering the state’s already low Baa3 rating the late filing is not something that would drive any action now, he said at a recent Moody’s credit forum in Chicago.
The state closed out fiscal 2019 with base general funds finishing $817 million higher than the prior year, according to the latest COGFA posting. Gross personal income tax ended “with respectable gains” of $1.8 billion, or $1.5 billion net. Gross sales tax receipts finished up “an impressive” $641 million, or $599 million net. Gross corporate income taxes ended with an increase of $419 million, or $372 million net and all other tax sources combined added $115 million in gains.
The state’s 2017 CAFR showed a ramping up of fiscal woes as the two-year budget impasse that ended at the start of fiscal 2018 took its toll on the state’s books. The state’s worsening fiscal health ensured it remained in the worst position among the 43 states with available information about a key accounting measurement.
The state’s general fund deficit, which presents a near-term picture of the state’s health, worsened by $5 billion in fiscal 2017, growing to a negative $14.6 billion from negative $9.6 billion. In the previous year’s report, it grew by $2.7 billion to $9.6 billion.
In a measurement that provides a bigger, longer-term picture of its fiscal condition, the state’s net position of governmental activities eroded by $10.1 billion to reach a negative $141.7 billion. 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.