REPORT DIGEST ILLINOIS STUDENT ASSISTANCE COMMISSION - ILLINOIS DESIGNATED ACCOUNT PURCHASE PROGRAM FINANCIAL AUDIT For the Year Ended: June 30, 2013 Release Date: February 6, 2014 Summary of Findings: Total this audit: 2 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 report covers our financial audit of the Illinois Student Assistance Commission (Commission) - Illinois Designated Account Purchase Program (IDAPP) as of June 30, 2013 and for the year then ended. SYNOPSIS • IDAPP was not in compliance with two of the covenants relating to the Commission’s revolving line of credit agreement. • IDAPP depository accounts with funds in excess of the Federal Deposit Insurance Company’s coverage amount were not properly collateralized. FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS DEBT COVENANT VIOLATION The Illinois Student Assistance Commission (Illinois Designated Account Purchase Program) was not in compliance with two of the covenants relating to the agency’s revolving line of credit agreement. During our audits of the agency’s June 30, 2009, 2010, 2011, and 2012 financial statements, we noted that IDAPP was in violation of one or more debt covenants related to the agency’s revolving credit (loan) agreement. In addition, the facility matured on July 27, 2010 and has not been repaid. Per the agreement, the minimum required coverage condition ratio is 104%, while the ratio as of June 30, 2013 was 101.04%. Also per the agreement, the default ratio is set at a maximum of 6.25%, but at June 30, 2013 this ratio was 7.17%. As a result of the debt covenant violation and the maturity of the facility, the bank has certain remedies available to it under the terms of the loan agreement, principal of which would be rights 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 the maturity of the loan and has not communicated to IDAPP any intent to exercise the remedies available to it under the terms of the loan agreement. The balance of the line of credit with the bank was $240,606,827 at June 30, 2013. According to Commission management, the coverage condition and default issues are due to the poor performance of the portfolio. The portfolio continues to experience a high level of delinquent accounts. The line of credit has not been refinanced because of the conditions in the private loan credit market. (Finding 1, page 29) This finding was first reported in 2009. Commission officials accepted our finding and recommendation to continue to monitor the loan covenant violations and continue seeking remedies from the lender involved. Commission officials indicated the loan covenants are reviewed on a monthly basis and that they continue to talk to Citibank about the portfolio. (For the previous IDAPP response, see Digest Footnote #1.) INADEQUATE COLLATERAL COVERAGE The Illinois Student Assistance Commission (Illinois Designated Account Purchase Program) did not properly collateralize excess funds over the Federal Deposit Insurance Company (FDIC) coverage amount, in certain of the Agency’s depository accounts. Prior to December 31, 2012, the FDIC insured all deposits in non-interest bearing accounts. Beginning January 1, 2013, the coverage was reduced to $250,000, per depositor, per institution. IDAPP had funds invested in certain banks that exceed $250,000. As a result, the agency began the process to collateralize these excess deposits. Per review of the provided collateral agreements, the agreements did not go into effect until August 5, 2013, leaving a balance of $5,543,230 uncollateralized as of June 30, 2013. According to Commission management, they assumed the bank went back to the pre-financial crisis method of collateralizing Commission accounts. When it was determined that they did not, the collateral agreement process was started, but was not finalized prior to year end. While no loss took place, without adequate collateralization of funds, the funds could be susceptible to custodial credit risk losses in the event of a bank failure. (Finding 2, page 30) Commission officials accepted our finding and recommendation to more closely monitor its collateral requirements to ensure that new agreements are approved timely to allow for proper collateralization of all deposits. Commission officials indicated that the existing collateral agreement will be in place until the accounts are closed and collateral requirements will be reviewed on an annual basis. AUDITORS’ OPINION Our auditors stated the financial statements of IDAPP are fairly presented in all material respects. WILLIAM G. HOLLAND Auditor General WGH:DJB SPECIAL ASSISTANT AUDITORS Our special assistant auditors for this audit were McGladrey LLP. DIGEST FOOTNOTE #1 - DEBT COVENANT VIOLATION 2012 – ISAC agrees with the recommendation. IDAPP will continue to monitor these loan covenants and will work with our external servicers to try to bring the coverage condition and default ratios back into compliance. This credit facility matured on July 27, 2010. Due to the tight credit markets for student loans and the performance of the portfolio, neither Citibank nor ISAC have been able to refinance the facility. ISAC management has been in regular contact with the lender and continues to explore options on the refinancing. At this time however, there are no imminent plans to refinance the facility.