REPORT DIGEST
EAST ST. LOUIS FINANCIAL ADVISORY AUTHORITY
FINANCIAL AUDIT
For the Year Ended: June 30, 2010
COMPLIANCE ATTESTATION EXAMINATION
For the Two Years Ended: June 30, 2010
Summary of Findings:
Total this audit: 12
Total last audit: 7
Repeated from last audit: 5
Release Date: February 24, 2011
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 financial audit for the year ended
June 30, 2010 and the compliance examination for the two years ended June 30,
2010.
SYNOPSIS
• The Authority inappropriately expended funds from locally
held funds for the expenses of its daily operations.
• The Authority’s Board of Directors inappropriately paid
the Executive Director for the “breach” of employment contract.
• The Authority did not appropriately reconcile its
investment statements to the general ledger.
• The Authority did not ensure financial records used to prepare the year-end financial statements and the Office of the Comptroller Generally Accepted Accounting Principles packages were accurate.
FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
INAPPROPRIATE EXPENDITURE OF FUNDS
The Authority inappropriately expended funds from locally
held funds for the expenses of its daily operations.
In March 2010, the Authority exhausted the $120,000
appropriated to them from the General Assembly.
From March until June 30, 2010, the Authority expended $139,814 from
locally held funds for the payment of payroll, legal, and general operating
costs.
In February 2010, House Bill 6299 was introduced to amend
the State Finance Act to allow a special trust fund to be established in order
for the Authority to continue to expend money for the day to day
operations. However, the Bill did not
pass; therefore, the Authority was not authorized to expend funds outside of
the funds appropriated to them.
The Financially Distressed City Law (65 ILCS 5/8-12-6(c))
states “Money in the revolving fund may be used by the Authority to support
activities leading to a restructuring of the distressed city’s debt and may be
pledged by the Authority as a security for any new debt incurred by the
distressed city with the approval of the Authority.”
We recommended the Authority work with the General Assembly
to obtain sufficient appropriations.
Additionally, we recommended the Authority implement appropriate
controls to ensure the Authority operates within its appropriated budget.
(Finding 1, pages 11-13)
The Authority disagreed with our finding and recommendation
and stated that the auditors only referenced one provision within the
Financially Distressed City Law as an authorized use of locally held
funds. The Authority’s legal counsel
cited several provisions contained in the Illinois Municipal Code that permits
the use of locally held funds. Those
provisions are: (1) Section 5/8-12-6(b)(6), as the law provides for the
Authority to have the power necessary to meet its responsibility to carry out
its powers and purposes, including paying the expenses of its operations. Subsection (b) of Section 5/8-12-6 is an
allowable condition for the use of the locally held funds, as well as,
Subsection (c) of Section 5/8-12-6, which provides for the use to support the activities
leading to the restructuring of the distressed City’s debt.
The Authority also responded the Financially Distressed City
Law states that the Authority is not abolished until 30 days after the City’s
Debt Restructuring Bonds are paid off as referenced in Subsection (c) of
Section 5/8-12-22 in the Financially Distressed City Law. According to the City’s Debt Restructuring
Schedule, the final bond payment is not scheduled until November 2014. Upon verbal and written recommendation of the
legal counsel, the Board of Directors on February 26, 2010, unanimously
approved, by resolution, the transfer of $250,000 to pay for the personnel and
operating expenses of the agency as applicable within the provisions outlined
in the Financially Distressed City Law.
In an auditor’s comment, we noted Section 8-12-5 of the
Financially Distressed City Law designates the Authority as "an agency of
State government." [65 ILCS 5/8
-12-5] As a State agency, the Authority
is a creature of statute and its powers emanate from those expressly granted to
it by statute. In this case, the Law provides
that the Authority may use "amounts appropriated by the General
Assembly" to carry out its statutory responsibilities. [65 ILCS 5/8-12-5] Further, the Illinois Constitution of 1970
sets forth the general principle that "[t]he General Assembly by law shall
make appropriations for all expenditures of public funds by the State."
The General Assembly appropriated a sum total of $120,000
for the Authority's FY10 operations. In
February, 2010, the Authority's Board authorized the transfer of $250,000 from
an investment account to a locally-held bank account for the purpose of paying
"personnel and operating expenses."
Also in February 2010, HB6299 was introduced. On April 30, 2010, HB6299 was defeated in the
Senate. At its May, 2010 Board meeting,
members discussed the failure of HB6299.
According to minutes of that meeting, one director inquired whether
"the State could come back and say that this is an area where funds should
not have been utilized."
In fact, the Authority expended $139,814 from the
locally-held fund in FY10 for agency operations. $55,976 of that amount was used for a
"severance" payment to the Executive Director, as outlined in Finding
10-2. These expenditures were in
addition to the $120,000 amount appropriated to the Authority by the General
Assembly. In total, the Authority spent
$259,749 for its FY10 operations.
At its May 21, 2010 Board meeting, the Executive Director
discussed plans to expend further amounts from the locally-held bank account
for its FY11 operations. At June 30,
2010, the Authority's investment account balance totaled $6.4 million. If the Authority continues to believe its
expenditures are not limited to amounts appropriated by the General Assembly,
we further recommend it obtain a formal written opinion from the Attorney
General's Office regarding its authority to expend amounts from its investment
account or other locally-held monies for operational and personnel
expenses.
INAPPROPRIATE SEVERANCE PAYOUT
The Authority’s Board of Directors inappropriately paid the
Executive Director for “breach” of employment contract.
During the audit period the Authority and Executive Director
entered into two employment agreements:
• Agreement one effective June 1, 2009, but not signed until
June 2, 2009, and
• Agreement two effective June 1, 2010, but not signed until
June 9, 2010.
On March 15, 2010 the Executive Director was terminated from
the State’s payroll due to the lack of appropriations. As a result, on June 8, 2010, the Executive Director requested payment from
the Authority for vacation, retirement contributions, and six months of
severance pay, totaling $55,976, based on the severance payment section of the
June 1, 2010 Agreement. The request for
severance was based on the Authority’s inability to pay the retirement
contributions due to insufficient appropriations.
During our review, we noted:
• There was no documentation indicating the Executive
Director afforded the Authority formal written notification of the breach and
opportunity to cure the breach as required.
• The Authority paid the Executive Director $6,050 for
missed retirement contributions.
However, the contract did not provide for such payment.
• The Authority paid the Executive Director $12,523.19 for
356.38 hours of accrued and unused vacation time. However, the auditors calculated the correct
amount as $12,207.99 for 347.41 hours of accrued and unused vacation time.
• For purpose of the State’s payroll, the Executive Director
was terminated on March 15, 2010. As a
result, the Executive Director was paid six months of salary, but was
reinstated to the State’s payroll on July 1, 2010. As a result the Executive Director
essentially received double salary for six months.
• The Illinois Municipal Code (65 ILCS 5/8-12-12(b))
required affirmative votes of at least three Directors to “adopt any rule or
regulation, and for any other actions required by this Division to be taken by
resolution, directive, or ordinance.”
However, at the June 9, 2010 special meeting of the Board of Directors,
the required three affirmative votes were not received.
Some of the conditions noted, which led to the declaration
of the breach and the resulting severance payment, were within the Executive
Director’s area of responsibility.
We recommended the Authority seek reimbursement from the
Executive Director for the improper payments, and implement appropriate
controls to ensure the Authority operates within its budget. Additionally, we recommend the Board ensure
affirmative votes from three Directors is obtained on matters as required by
law. (Finding 2, pages14-18)
The Authority disagreed with our finding and recommendation
and stated the Authority did not inappropriately pay the Executive
Director.
The Authority’s opinion differs from that of the auditor, in
that, the finding states that the request for severance was based on the
Authority’s inability to pay the retirement contributions due to insufficient
appropriations.
The Executive Director presented the Board of Directors with
a proposal on how to cure the breach of contract on June 8, 2010, which was
approved on June 9, 2010.
According to the Authority upon discussion with the Board of
Directors, the legal counsel drafted the resolution approving the payout to the
Executive Director. The resolution
approved by the Board of Directors states that the East St. Louis Financial
Advisory Authority Board has agreed to make the Executive Director whole by
continued payment of vacation time, retirement and severance while ensuring
continuity of the agency. The Board also
factored into the settlement the costs and savings of avoiding litigation. The Executive Director was paid out of the
employment agreement and currently serves without a contract. There were no double payments made to the
Executive Director.
In an auditor’s comment, we noted the Executive Director was
terminated from the State’s payroll on March 15, 2010. At that time, the Executive Director was
under an employment agreement dated June 1, 2009, not the June 1, 2010
employment agreement.
The June 1, 2009 employment agreement stated the “breach of
contract declared by either party with a 30 day cure period of either Employee
or Employer. Written notice of a breach
of contract shall be provided.” The
Executive Director did not provide the Authority’s Board written notification
in order to cure the breach. The
Executive Director stated that on June 8, 2010 she presented to the Board of
Directors a proposal on how to cure the breach of contract. However, the proposal was actually the
severance calculation determined by the Executive Director. The proposal did not outline the breach or
provide the Board the opportunity to cure the breach.
The June 1, 2009 employment agreement stated the Executive
Director was only entitled to two months severance pay and all vacation and
holiday pay in the event of termination due to breach of contract. However, the Executive Director received six
months severance pay, and vacation and holiday pay per the retroactive June 9,
2010 agreement. In addition, she also
received the missed retirement payments, which were not provided as a component
of severance pay in either contract.
Further, the Authority stated “there were no double payments
made to the Executive Director.”
However, the Executive Director continued to receive her monthly salary
from March 15, 2010 to June 30, 2010, in addition to the six month severance
payment. The monthly salary payments
were part of the $139,814 spent from the Authority’s locally-held funds (See Finding
10-1).
Finally, the Law provides that the “affirmative votes of at
least 3 Directors shall be necessary for adopting any rule or regulation, and
for any other action required by this Division to be taken by resolution,
directive or ordinance.” In fact, as the
Authority states in its response, only 2 Directors voted for the payout at the
June 9, 2010, special meeting.
INADEQUATE RECONCILATION OF INVESTMENT STATEMENTS TO GENERAL
LEDGER
The Authority prepares investment analysis on a quarterly basis
for reporting purposes and enters the investment data into the general
ledger. However, the Authority does not
update its accounting records to reflect the monthly changes in fair market
value. The investment balances at June
30, 2009 and 2010 were $6,543,791 and $6,488,794 respectively.
We recommended the investment accounts be reviewed and
reconciled monthly to the general ledger so that the ending balance of the
investment statement agree to the ending balance per the general ledger as well
as income analysis reports given to the Board on a quarterly basis. (Finding 3, page 19) This finding was first
reported in 2004.
The Authority agreed with our recommendation and stated the
investment account will be reviewed and reconciled monthly to the general
ledger so that the ending balance of the investment statement agrees to the
ending balance per the general ledger as well as income analysis reports given
to the Board on a quarterly basis.
(For previous Authority responses, see Digest Footnote)
INADEQUATE CONTROLS OVER FINANCIAL REPORTING
The Authority did not ensure financial records used to
prepare the year-end financial statements and the Office of the Comptroller
Generally Accepted Accounting Principles (GAAP) packages were accurate.
During our review we noted:
• The Authority recorded all cash disbursements from its
Locally Held Funds using the date the check was posted to the bank
account. As a result current assets and
current liabilities were overstated by $37,217.
• The Authority provided a schedule of pay rates and hourly
balances related to Compensated Absences to the firm who prepares the annual
submission. However, the firm did not
take into consideration the payout of 356.38 accrued and unused vacation hours
to the Executive Director. Compensated
absences was overstated by $14,378 at June 30, 2010.
We recommended the Authority designate an individual with
suitable skill, knowledge, or experience to ensure financial information is
properly recorded and accounted for to permit the accurate preparation of
financial information. (Finding 4, pages
20 -21)
The Authority agreed with our finding and recommendation and
stated the Authority will designate an individual to gain the skills necessary
to accept responsibility for functions related to the financial statements and
the related notes. The Authority has
submitted a revised GAAP Package to the Comptroller’s Office and they will
ensure future GAAP Package submissions are materially correct.
OTHER FINDINGS
With regards to the other findings noted in our report,
Authority management responded that corrective action has been or will be
taken. We will review the Authority’s
progress towards the implementation of all our recommendations in our next
audit.
AUDITOR’S OPINION
Our auditors stated the financial statements of the East St.
Louis Financial Advisory Authority as of and for the year ended June 30, 2010
are fairly presented in all material respects.
WILLIAM G. HOLLAND
Auditor General
WGH:MKL:pp
AUDITORS ASSIGNED
Schorb & Schmersahl, LLC were our special assistant
auditors for this audit.
Digest Footnote
INADEQUATE RECONCILATION OF INVESTMENT STATEMENTS TO GENERAL
LEDGER-PREVIOUS AUTHORITY’S RESPONSE
Authority officials
agreed with our recommendation, and stated they will review and reconcile
monthly statements to the general ledger.