REPORT DIGEST

ILLINOIS FINANCE AUTHORITY

FINANCIAL AUDIT
For the Year Ended: June 30, 2013


Release Date:   January 29, 2014

Summary of Findings:
Total this audit: 4
Total last audit:  2
Repeated from last audit: 1

State of Illinois, Office of the Auditor General
WILLIAM G. HOLLAND, 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 Illinois Finance
Authority’s Financial Audit as of and for the
year ended June 30, 2013.  The Illinois Finance
Authority’s Compliance Examination covering the
year ended June 30, 2013 will be issued at a
later date.

SYNOPSIS

• The Authority did not have adequate internal
controls to properly monitor borrower covenant
compliance for bonds and loan agreements.

• The Authority lacked adequate internal control
over financial reporting.

• An intergovernmental agreement with the Office
of the State Fire Marshal was not entered into
timely, which impacted the disclosure of the
amount due to the primary government.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

NEED TO IMPROVE COVENANT COMPLIANCE MONITORING

The Illinois Finance Authority (Authority) did
not have adequate internal controls to properly
monitor borrower covenant compliance for bonds
and loan agreements reported on the face of the
Authority’s basic financial statements.

During testing of the Bond Bank Lending Program,
the auditors noted the following:

• For 53 of 53 (100%) local government borrowers
tested, the Authority could not provide the
local government’s latest audited financial
statements.

• For 22 of 53 (42%) local government borrowers
tested, the Authority could not provide the
required written notification to the Bond
Trustee and the Authority from the local
government borrower about whether the local
government reasonably believes that it will or
will not have sufficient moneys to make its next
two regularly scheduled principal and interest
payments.

• The Authority did not have a process or
procedure to monitor local government borrower
compliance for the 34 local governments with the
debt service coverage ratio requirement of 1.25
to 1 (annual revenues ÷ total annual debt
service).  After receiving a confirmation from
the Authority of this condition, the auditors
sought the audited financial statements of the
34 local government borrowers from the Office of
the State Comptroller.  The auditors noted the
following:

– From a review of each entity’s financial
reports, it appears 19 of 34 (56%) of the local
government borrowers may not have met the
required debt service coverage.

– The auditors were unable to make any
determination for five of the 34 (15%) local
government borrowers, as they had not filed
their financial statements with the Office of
the State Comptroller.

During testing of revenue bonds issued on behalf
of other State agencies and component units, the
auditors noted the following:

• The Authority did not complete an Officer's
Certificate for the $500,000 deposit made into
the Rebate Fund for the Series 2004 bonds issued
on behalf of the Environmental Protection
Agency’s Water Revolving Fund.

• The Authority did not ensure the Bond Trustee
for the Series 2006A and 2006B bonds issued on
behalf of the Illinois Medical District
Commission (Commission) deposited $65,000 into
the Replacement Reserve Fund, as the cash
balance in the replacement reserve fund was
below $325,000.

• The Authority did not seek payment of
delinquent annual fees, totaling $60,000, from
the Commission.  The auditors noted the
Authority had not billed the Commission for the
$15,000 fee due for 2009, 2010, 2011, and 2012.

• The Authority did not demand reimbursement of
legal fees, totaling $60,000, incurred in
relation to the Commission's prior year
noncompliance with its Debt Service Coverage
Ratio requirement.

• The Authority did not obtain an annual
certificate from the Northern Illinois
University Foundation in relation to their
compliance with the bond covenants.

During testing of 33 loan agreements within the
fire truck and ambulance revolving loan
programs, the auditors noted the following:

• For 28 of 33 (85%) loans tested, the Authority
could not provide a current certificate of
insurance coverage for the fire truck or
ambulance securing the loan agreement.  The
auditors noted 11 instances where the Authority
did not have any record of insurance coverage on
the fire truck or ambulance and 17 instances
where the Authority’s records indicated the
insurance had lapsed between December 31, 2006
and June 12, 2012.

• For 17 of 33 (52%) loans tested, the Authority
could not provide an original copy of title to
the fire truck or ambulance securing the loan.

• For 33 of 33 (100%) loans tested, the
Authority could not provide the fire truck or
ambulance’s Acceptance Memorandum from the State
of Illinois, Office of the State Fire Marshal
(Fire Marshal).  The Acceptance Memorandum is a
certificate issued by the Fire Marshal
indicating they have conducted a review and
approved the fire truck or ambulance for
purchase by the borrower.

According to Authority management, the Authority
is still in the process of implementing a
records management system and some covenants and
loan provisions may be outdated.  (Finding 1,
pages 70-75)

We recommended the Authority develop, establish,
and maintain a recordkeeping system capable of
documenting receipt of the required bond and
loan documents, which is capable of identifying
the location of documents retained by the
Authority.  Further, we recommended the
Authority monitor borrower compliance with
significant covenants to detect and
appropriately respond to any noted
noncompliance.

Authority officials agreed with our finding.

NEED TO MONITOR AND COMMUNICATE WITH OTHER STATE
AGENCIES TO IMPROVE FINANCIAL REPORTING

The Authority did not exercise adequate internal
control over financial reporting.

The Authority's financial statements include
transactions related to revenue bonds issued for
the benefit of other agencies and component
units of the State of Illinois, which are
required to be shown on the face of the
Authority's financial statements pursuant to
Interpretation No.2 of the Governmental
Accounting Standards Board. As a result of this
accounting interpretation, transactions and
events occurring at other agencies and component
units of the State of Illinois need to be
continuously monitored by the Authority for any
potential impact on the Authority's financial
statements.

During testing, the auditors noted the Authority
did not adequately monitor subsequent event
transactions occurring at a primary government
agency for any potential impact on the
Authority's financial statements. The auditors
identified a subsequent event material to the
Authority's financial statements which was not
identified by the Authority's internal control
structure. The auditors proposed an adjusting
journal entry of $1,227,090 to correct an
understated arbitrage liability accrual, which
the Authority subsequently recorded in its
financial statements.

According to Authority management, the
Authority’s reconciliation process omitted a
review of arbitrage calculations.  (Finding 2,
pages 76-77)

We recommended the Authority enhance their
internal controls and communications with other
agencies and component units of the State of
Illinois for continuously monitoring events and
transactions that could impact the Authority's
financial statements.

Authority officials agreed with our finding.

NEED TO ENTER INTO AN INTERAGENCY AGREEMENT AND
REVIEW FINANCIAL STATEMENT DISCLOSURES

The Authority did not timely enter into an
intergovernmental agreement with the Office of
the State Fire Marshal (Fire Marshal), impacting
the disclosure of the amount due to the primary
government at June 30, 2013.

During fieldwork, the auditors noted the
following:

• The Authority had not entered into an
agreement with the Fire Marshal by June 30,
2013, six months after the General Assembly
mandated the Authority and Fire Marshal enter
into an intergovernmental agreement to allow for
the transfer of moneys within the Fire Truck
Revolving Loan Fund, the Fire Station Revolving
Loan Fund, and the Ambulance Revolving Loan Fund
“as soon as practicable” after January 1, 2013.

• During reviews of the draft financial
statements, the auditors noted the Authority did
not disclose both the impact of failing to enter
into the intergovernmental agreement or indicate
any potential impact on the $19,042,264 due to
the primary government from fire truck and
ambulance loans when and if the Authority and
Fire Marshal eventually enter into the required
interagency agreement.  After notification from
the auditors, the Authority drafted additional
disclosures for inclusion within the Authority’s
financial statements.

As of June 30, 2013, the Ambulance Revolving
Loan Fund was holding a cash balance of
$3,661,593 and the Fire Truck Revolving Loan
Fund was holding a cash balance of $2,556,576.
Further, Public Act 97-0731 appropriated an
additional $8,000,000 to the Fire Marshal for
transfer to the Fire Truck Revolving Loan Fund
and the Ambulance Revolving Loan Fund during
Fiscal Year 2013.  The entire amount was
reappropriated by the General Assembly to the
Fire Marshal in Fiscal Year 2014.

According to Authority management, the Authority
and the Fire Marshal have not agreed to the
terms for inclusion within the intergovernmental
agreement.  (Finding 3, pages 78-79)

We recommended the Authority continue to work
with the Fire Marshal to finalize the terms of
the intergovernmental agreement.  In addition,
we recommended the Authority implement internal
controls to review the notes to the Authority’s
financial statements to ensure the disclosures
are appropriate, accurate, and fairly presented
in accordance with generally accepted accounting
principles.

Authority officials agreed with our finding.

OTHER FINDING

The other finding pertains to the Authority
failing to write-off uncollectible balances. We
will review progress toward implementation of
all our recommendations during our next audit.

AUDITORS’ OPINION

Our auditors stated the financial statements of
the Illinois Finance Authority as of and for the
year ended June 30, 2013, are fairly stated in
all material respects.

WILLIAM G. HOLLAND
Auditor General

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SPECIAL ASSISTANT AUDITORS

Our special assistant auditors for this audit
were E.C. Ortiz and Company, LLP.