REPORT DIGEST

Summary of Findings:

SYNOPSIS

¨ Based upon the extent of noncompliance noted during testing, it was concluded that there is more than a relatively low risk that there exists other noncompliance in areas not tested by the auditors.

¨ ISAC incorrectly applied a fixed rate of interest instead of a variable rate of interest to certain defaulted student loans guaranteed and held by ISAC.

¨ ISAC incorrectly accrued interest on certain defaulted loans due to a computer programming change without the change being fully tested.

¨ ISAC used State funds to purchase cafeteria supplies and also subsidized employee lunches by providing free space and utilities to a vendor operating a cafeteria in its Deerfield office building.

¨ ISAC reviews of Monetary Award Program grants did not provide assurances that schools minimized grants to ineligible students. Audit tests at three schools showed that approximately 22% of Monetary Award Program grants were provided to students who were either ineligible or did not prove residency as required by ISAC rules.

{Expenditures and Activity Measures are summarized on the next page.}

 

FY 1997

FY 1996

FY 1995

• Total Expenditures (All Funds)

OPERATIONS TOTAL
% of Total Expenditures
Personal Services
% of Operations Expenditures
Average No. of Employees
Other Payroll Costs (FICA, Retirement)
% of Operations Expenditures
Contractual Services
% of Operations Expenditures
All Other Operations Items
% of Operations Expenditures

DISTRIBUTIONS FOR UNCOLLECTIBLE LOANS
% of Total Expenditures
GRANTS TOTAL
% of Total Expenditures

• Cost of Property and Equipment (All Funds)
• PROPRIETARY FUND FINANCIAL OPERATIONS
  REVENUES
  Interest on loans and Investments
  Federal Special Allowance and interest
  Other
  Total
  
  EXPENSES
  Salaries and employees benefits
  Outside loan servicing
  Line of credit fees
  Note and bond interest expense
  Other
  Total
  
  SELECTED PROPIETARY FUND BALANCES
  Cash and cash equivalents
  Investments
  Receivables
  Revenue notes and bonds payable
  Retained Earnings

$483,810
$25,083
5.2%
$11,455
45.7%
537
$3,102
12.4%
$8,008
31.9%
$2,518
10.0%

$155,496
32.1%
$303,231
62.7%


$28,135


$61,056
15,960
684
$77,700


$5,729
4,826
1,905
54,401
8,356
$75,217


$169,926
$199,696
$769,596
$1,046,947
$79,396

$445,098
$25,393
5.7%
$11,546
45.5%
521
$3,122
12.3%
$8,042
31.7%
$2,683
10.5%

$133,987
30.1%
$285,718
64.2%


$28,047


$57,973
15,875
1,133
$74,981


$4,956
3,749
1,665
52,226
5,682
$68,278


$128,206
$192,561
$725,254
$955,302
$76,913

$459,021
$28,343
6.2%
$11,668
41.2%
532
$3,348
11.8%
$9,564
33.7%
$3,763
13.3%

$160,425
34.9%
$270,253
58.9%


$28,169


$51,039
15,132
3,238
$69,409


$4,489
3,119
1,657
49,265
5,514
$64,044


$81,372
$216,455
$623,223
$836,274
$70,210

ISAC incorrectly applied fixed interest rates to defaulted loans instead of variable rates

ISAC's ability to identify and correct balances has been impaired by its computer system

60,000 loan accounts identified

Identification of incorrect balances and corresponding adjustments continue

Determination has not yet been made as to whether ISAC will be required to reimburse the U.S. Department of Education

Computer programming change implemented without being fully tested

Incorrect calculations of balances due on approximately 71,000 defaulted loans

ISAC provided supplies, free space, free utilities, and insurance coverage to the cafeteria vendor in its Deerfield building

Audit tests showed 23 of 105 (22%) of grants reviewed went to ineligible students or to students who did not provide documents to prove eligibility

INTRODUCTION

The Illinois Student Assistance Commission (ISAC) was created to establish and administer a system of financial assistance, through loan guarantees, scholarships and grant awards for residents of the State of Illinois to enable them to attend qualified public or private institutions of their choice within Illinois.

 

Based upon the extent of noncompliance noted during State Compliance audit tests, it was concluded that there is more than a relatively low risk that there exists other noncompliance in areas not tested by the auditors.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

INCORRECT INTEREST RATES FOR DEFAULTED LOANS

 

ISAC incorrectly applied a fixed rate of interest instead of a variable rate of interest to certain defaulted PLUS, SLS and Stafford student loans guaranteed and held by ISAC.

 

Defaulted loans are held by ISAC after the U.S. Department of Education (ED) paid the principal plus capitalized interest on such loans to the lender in cases of borrower default in order to attempt to collect the balance on behalf of ED. ISAC is required to continue collection efforts in accordance with federal regulations.

 

The 1986 reauthorization of the Higher Education Act established variable interest rates for PLUS and SLS loans effective for loans disbursed July 1, 1987 and thereafter. Stafford loans, previously made at fixed rates, became eligible for variable rates as of October 1, 1992. At the time of default on variable interest rate student loans ISAC froze the variable interest rate being applied. This rate was applied to the loan balance using a fixed rate convention rather than a variable rate convention. These defaulted student loans should have continued to apply a variable interest rate even after default by the borrower.

 

Effective July 1, 1995, all variable interest rate loans in ISAC's portfolio were calculated at the applicable variable rate. Variable interest rate loans which had been in default prior to ISAC's system changes, required retroactive adjustments for every year they had been in default prior to July 1, 1995. ISAC began these modifications in June of 1996 which continue to the present time. ISAC's ability, however, to identify and correct balances has been impaired by its computer system. The system did not maintain previous account balances and changes in balances after payments were made. In order to reconstruct an account history of accrued interest and other manual adjustments such as refunds, ISAC needed to conduct manual calculations outside the system which is a cumbersome and time consuming process.

 

As of May 1998, ISAC provided preliminary documents that showed of the 60,000 loan accounts identified, about 13,000 accounts were potentially lower than appropriate by approximately $274,000. About 47,000 accounts were potentially higher than appropriate by about $2.7 million.

 

ISAC is refunding overpayments to some accounts and made a decision to forgive increased balances for accounts which have already been paid or forgiven. Due to the difficulty and size of this project, identification of incorrect balances and corresponding adjustments continued as of the end of fieldwork.

 

ISAC is providing refunds to borrowers who were overcharged interest. As of January 1998, 3,274 accounts were identified as due refunds totaling approximately $233,000.

 

The full financial effects of account balance adjustments had not been determined as of the end of the audit. We note that the loans were in default and adjustments would not affect the account receivable balances within ISAC financial statements. However, it is not yet determined whether ISAC will be required to reimburse the U.S. Department of Education for amounts related to adjusted, increased balances on defaulted loans in accordance with federal regulations. (Finding 98-1, pages 20-26)

 

We recommended ISAC ensure that adjustments to loans are performed so that the correct interest is posted to the accounts where a fixed rate was applied instead of a variable rate after default. Further, ISAC should determine the proper method of resolving the matter by seeking guidance from the U.S. Department of Education.

 

ISAC officials responded, in part, that in the absence of regulations or guidance from the U.S. Department of Education, they interpreted the ever changing laws regarding interest rates in good faith with information available to it at the time.

INCORRECT ACCRUAL OF INTEREST ON CERTAIN DEFAULTED LOANS

 

ISAC incorrectly accrued interest on certain defaulted loans due to a computer programming change without this change being fully tested.

 

The incorrect accruals resulted in the incorrect calculations of balances due on approximately 71,000 defaulted loans. ISAC staff discovered and corrected the accounts that were incorrectly accruing interest within six months.

 

This situation occurred because ISAC did not adequately test the programming changes prior to implementation of the new system. ISAC did not have formal procedures in place to ensure that programming changes to the system were appropriate and resulted in proper application of interest rate accruals. (Finding 98-2, pages 27-28)

 

We recommended that ISAC ensure through sample testing and inquiry of system consultants that adjustments and modifications to accounts will not cause unintended results before those adjustments are made.

 

ISAC officials stated that in 1996, as part of a cost containment effort, they attempted to reduce the time in which billing statements ceased to go out to non-paying defaulted borrowers. Unfortunately, the computer programming solution resulted in an unintended consequence, specifically, the erroneous accrual of interest charges on select accounts in June 1996. At that time, ISAC staff discovered this problem and immediately moved to remedy it. Today, the majority of accounts affected by the interest problem have been corrected. The accounts still left to be corrected are those accounts which require manual recalculation due to factors unique to each loan.

USE OF STATE FUNDS AND SPACE FOR THE ISAC CAFETERIA

 

ISAC used State funds totaling approximately $12,622 to buy supplies for the private vendor operating the cafeteria in the ISAC Deerfield building. In addition, ISAC subsidized employee lunches by providing the cafeteria operator with the free use of space, free utilities, and insurance coverage. Estimated costs for the space and utilities amounted to over $23,000 annually.

 

ISAC signed a contract with the cafeteria vendor in February 1992 and renewed the contract in February 1993. The renewal extended the contract through 1999. Contract language requires ISAC to provide a portion of space, utility costs, and property insurance; however, the contract does not address ISAC's responsibility to purchase supplies for the cafeteria vendor.

 

An ISAC document showed the cafeteria used 1,266 square feet within the ISAC building. ISAC estimates showed the annual leasing cost was approximately $16.18 per square foot. Applying these figures, the cost of the cafeteria space amounted to approximately $20,484 annually. In addition, ISAC estimated utility costs apportioned to the cafeteria amounted to $2,800 annually.

 

Supplies purchased for the cafeteria vendor included plastic eating utensils, condiments, and spices. ISAC documents showed that the Purchasing section received a list of items needed from the cafeteria vendor, ordered the supplies from a local vendor, and then paid the supply vendor from appropriated funds. ISAC spent $12,622 in the two fiscal years on supplies for the cafeteria. (Finding 98-3, pages 29-31)

 

We recommended that ISAC evaluate the cost effectiveness of purchasing supplies for the cafeteria vendor and its current subsidy of employee lunches.

 

ISAC officials partially agreed with the finding stating it would re-evaluate the current contract. They also noted that the loss of on-site food service may result in a loss of employee productivity.

MONETARY AWARD PROGRAM GRANTS TO INELIGIBLE RECIPIENTS

 

Colleges and universities have provided Monetary Award Program (MAP) grants to ineligible recipients. Current ISAC audit coverage cannot identify all non-compliance with MAP requirements by colleges and universities. Audit tests showed 23 of 105 students, who received grants and were selected for review, did not meet residency requirements or did not provide sufficient documentation to prove residency.

 

The General Assembly provides annual funding for the MAP grants: appropriations in Fiscal Year 1997 amounted to $264 million while Fiscal Year 1996 appropriations were $255 million. Illinois statutes 110 ILCS 947/35(a)(1) and ISAC rules 23 IL Adm. Code 2700.20 require the parents of a dependent student to reside in Illinois or if the student is independent, the student to have lived in Illinois for the past 12 continuous months. ISAC rules 23 IL Adm. Code 2700.50(g)(3) require applicants to provide proof of residency by tax returns, an Illinois drivers license, utility bill receipts, or a lease signed in the applicant's name etc.

 

A sample of 105 student files at three colleges and universities in the Chicago area showed that 5 of 105 grants were given to students who did not meet residency requirements. In addition, the schools could not provide proof of residency for 18 of the 105 students.

 

ISAC performs audits of MAP grants at every eligible institution every 2 to 3 years. ISAC auditors noted that some schools have very few problems (i.e. providing grants to ineligible students); however, our testing and ISAC audit results showed other schools have more than a "potential" problem of providing grants to ineligible students. In consideration of this condition, ISAC could allocate more resources to schools which have a history of giving awards to ineligible students. (Finding 98-4, pages 32-34)

 

We recommended that ISAC consider methods to expand testing of MAP awards at schools which have historically been found, or have the potential, to distribute awards to ineligible students.

 

ISAC partially agreed with the finding stating that the auditor's sample at three institutions was not representative of the total population of colleges and universities in Illinois. However, ISAC agreed that it is important that the agency examine its audit procedures and methodologies.

OTHER FINDINGS

 

Other findings involved issues such as failure to provide reports in a timely manner to comply with bond covenants, failure to account for tax liabilities related to employees' use of State cars, and inadequate collateral for ISAC deposits. These findings are less significant and are being given appropriate attention by ISAC.

 

Responses to the recommendations were provided by Marcia Thompson, Fiscal Officer.

 

 

AUDITOR'S OPINION

The auditors have stated the financial statements for the Illinois Student Assistance Commission as of and for the year ended June 30, 1997 are fairly presented in all material respects.

 

___________________________________
WILLIAM G. HOLLAND, Auditor General

WGH:PW:ak

AUDITORS ASSIGNED

Pandolfi, Topolski, Weiss & Co. were our special assistant auditors for this audit.