REPORT DIGEST ILLINOIS STUDENT ASSISTANCE COMMISSION – ILLINOIS DESIGNATED ACCOUNT PURCHASE PROGRAM FINANCIAL AUDIT For the Year Ended: June 30, 2009 Summary of Findings: Total this audit………………3 Total last audit………………2 Repeated from last audit…….1 Release Date: March 3, 2010 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 the Full Report are also available on the worldwide web at www.auditor.illinois.gov

INTRODUCTION This digest covers our financial audit of the Illinois Student Assistance Commission (Commission) – Illinois Designated Account Purchase Program (IDAPP) for the year ended June 30, 2009. SYNOPSIS ¨ The Commission was not in compliance with one of the covenants relating to the agency’s revolving credit line agreement. ¨ The Commission did not apply cash collections in a timely manner. ¨ The Commission did not provide the auditors with complete and accurate financial statements on a timely basis. {Expenditures and Activity Measures are summarized on the reverse page.}

ILLINOIS STUDENT ASSISTANCE COMMISSION

ILLINOIS DESIGNATED ACCOUNT PURCHASE PROGRAM

FINANCIAL AUDIT

For the Year Ended June 30, 2009 (in thousands)

FINANCIAL OPERATIONS	2009	2008
OPERATING REVENUES Interest - student loans..................................................... Interest - investments........................................................ Total..........................................................................	$ 49,495 1,314 $50,809	$ 70,770 4,142 $74,912
OPERATING EXPENSES Interest and other student loan expenses.......................... Salaries and employee benefits........................................ ISAC shared expenses................................................... Management and professional services............................ External loan servicing..................................................... Other operating expenses................................................ Total........................................................................	$ 39,005 6,101 4,167 3,596 3,515 1,617 $58,001	$ 77,794 9,691 - 5,119 5,992 2,578 $101,174
OPERATING (LOSS).........................................................	$(7,192)	$(26,262)
NONOPERATING REVENUES Federal special allowance and student interest subsidy....... SPECIAL ITEMS AND TRANSFERS Special item..................................................................... Transfers in...................................................................... Transfers out........................................................................................... Change in net assets...................................................	(1,891) (2,730) - - $ (11,813)	20,829 (10,855) 682 (2,500) $ (18,106)
SELECTED BALANCE SHEET ACCOUNTS	2009	2008
Unrestricted current assets: Cash and investments....................................................... Restricted current assets: Cash and cash equivalents................................................ Investments (including interest accrual)................................. Notes receivable.............................................................. Student loans and interest receivable................................. Federal special allowance and interest subsidy.................. Restricted noncurrent assets: Notes receivable.............................................................. Student loans receivable, net............................................. Current liabilities: Current portion of revenue bonds payable and Revolving line of credit................................................................. Accounts payable and accrued expenses.......................... Due to other funds............................................................ Noncurrent liabilities: Revenue bonds payable.................................................... Net Assets...........................................................................	$1,131 61,822 138,999 35,693 242,917 (2,677) 7,516 982,669 495,047 3,474 3,234 931,200 39,506	$6,108 58,204 - 51,585 229,248 1,786 42,206 932,355 390,770 2,971 1 879,441 51,319
AGENCY DIRECTOR
During audit Period: Mr. Andrew Davis Currently: Mr. Andrew Davis

Noncompliance with debt covenants Matter related to the coverage condition ratio Bank report produced an inaccurate ratio Bank remedies Balance of loan approximately $396 million at June 30, 2009 First covenant violation triggered default with another bank $760,113 in unapplied student loan payments at year end Agency attributes condition to loan sales Financial statements were not provided to auditors timely

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS NEED TO COMPLY WITH Debt CovenantS The Illinois Student Assistance Commission (Illinois Designated Account Purchase Program) was not in compliance with one of the covenants relating to the agency’s revolving credit line agreement. During our audit of the agency’s June 30, 2009 financial statements Agency management disclosed they had potentially violated one of the covenants relating to the agency’s revolving credit line (loan) agreement with a bank. The non-compliance pertained to a “coverage condition ratio” covenant. The line of credit agreement with the bank defines the “Forbearance Excess Amount”. It is the aggregate value of all eligible student loans that are subject to forbearance. This amount is to be used in the calculation of the coverage condition ratio covenant. When Agency management completed the report the result was an inaccurate calculation for the amount for the loans in forbearance. Once the error was discovered and the coverage condition ratio was recalculated. This recalculation showed a lack of compliance with the Coverage condition ratio. As a result of the violation the bank has certain remedies available to it under the terms of the loan agreement. Specifically, the right to call the loan and take possession of the collateral (the underlying student loan portfolio). The bank has been made aware of the event of default and, as of the end of fieldwork had not communicated any intent to exercise the remedies available to it under the terms of the loan agreement. Agency management believes the bank has little incentive to call the line of credit and begin servicing the student loans itself, particularly because the Agency has made all of its required payments in a timely fashion. The balance of the line of credit with the bank was $395,956,827 at June 30, 2009. The debt covenant violation with the bank also triggered a default condition with one of the covenants in the loan agreement with another bank. This other bank granted the Agency a deferment from exercising its rights in connection with such default until January 30, 2010. The balance in the line of credit with this bank was $2,990,109 at June 30, 2009. (Finding 1, pages 30-31) Agency management accepted our recommendation to improve controls over calculation of and monitoring of debt covenants. NEED TO APPLY CASH COLLECTIONS IN A TIMELY MANNER The Illinois Student Assistance Commission (the Designated Account Purchase Program) did not apply cash collections in a timely manner. During our analysis of the deferred credit fees account and a review of the year-end reconciliation for this account, we noted unapplied student loan payments totaling $760,113. This condition relates to cash received that had not yet been applied to the respective borrower loan accounts or returned to sender as of June 30, 2009. Based upon a review of the detailed report for these cash receipts, we noted that some of the amounts that were unapplied date back to fiscal year 2003. The cash amount fluctuates daily. Historically, month-to-month changes can occur in the hundreds of thousands of dollars. According to Agency management, loan sales have occurred over the last several years. As a result, many payments, vouchers and wires were sent to the Agency with no supporting information or sender contact information. Agency officials tracked down the remitter and found that in many instances they no longer own or never owned the underlying loans associated with the funds. Until the Agency is instructed by the remitter on what to do with the cash receipts, the funds will remain unapplied. (Finding 2, pages 32-33) We recommended that cash collection be posted to the respective accounts in a timely manner and that all significant accounts be reconciled and reviewed on a regular basis by an additional Agency employee to ensure that the information is accurately reported. Agency management accepted our recommendation and indicated they had addressed the situation by creating a team of employees whose primary focus was to resolve the unapplied items. By December 31, 2009 the unapplied list was below $15,000 and the oldest items on the list are from mid-2007. NEED TO IMPROVE TIMELINESS IN PREPARATION OF Draft Financial Statements The Illinois Student Assistance Commission (Illinois Designated Account Purchase Program) did not provide the auditors with complete and accurate financial statements on a timely basis. During the audit entrance conference on May 26, 2009, a timeline for submission of the Illinois Designated Account Purchase Program (IDAPP)’s draft financial statements was determined and agreed to by the auditors and IDAPP management. The deadline for delivery of the complete draft financial statements to the auditors for fiscal year 2009 was October 2, 2009. An initial draft was provided to the auditors on October 9, 2009. However, the information was incomplete and had not been fully reviewed by the agency and all parties involved with the preparation and approval of the financial statements. Changes and adjustments to the initial draft occurred as late as November 17, 2009. According to Agency management, changes subsequent to the initial delivery of the draft financial statements were the result of the ongoing review of the financials by the agency officials and the Illinois State Comptroller’s office. (Finding 3, page 34) We recommended the Agency take a comprehensive look at the entire financial reporting process and make changes needed to timely release financial reports to users and to auditors. Agency management accepted our recommendation and indicated that they committed to completing financial statements accurately and in a timely manner. Many of the reporting issues were the result of revisions being made to the Statement of Cash Flows. AUDITORS’ OPINION Our auditors stated the financial statements of IDAPP were fairly presented in all material respects. ____________________________________ WILLIAM G. HOLLAND, Auditor General WGH:JAF:pp SPECIAL ASSISTANT AUDITORS Our special assistant auditors for this audit were McGladrey & Pullen, LLP.