REPORT DIGEST

OFFICE OF THE TREASURER

FISCAL OFFICER RESPONSIBILITIES

FINANCIAL AUDIT AND COMPLIANCE EXAMINATION

For the Year Ended:

June 30, 2006

Summary of Findings:

Total this audit                          0

Total last audit                          0

Repeated from last audit           0

Release Date:

March 6, 2007 

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 and Report Digest are also available on the worldwide web at

http://www.state.il.us/auditor

INTRODUCTION

      This digest presents our financial audit and compliance examination for the Office of the Treasurer Fiscal Officer Responsibilities for the year ended June 30, 2006.

AUDITORS’ OPINION

      The auditors stated the Office of the Treasurer, Fiscal Officer Responsibilities, as of and for the year ended June 30, 2006 present fairly, in all material respects the Statement of Assets, Liabilities and Accountabilities and the results of investment activity of the Treasurer, Fiscal Officer Responsibilities.  The auditors noted the financial statements have been prepared on a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America.

                  ___________________________________

                  WILLIAM G. HOLLAND, Auditor General

WGH:JSC:pp

SPECIAL ASSISTANT AUDITORS

      Our special assistant auditors on this audit were Crowe Chizek and Company LLC.

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

OTHER DISCLOSURES

ILLINOIS INSURED MORTGAGE PILOT PROGRAM TRUST                                    

      As of June 30, 2006 there were two properties in the Illinois Insured Mortgage Pilot Program Trust (Trust).  The Trust held the mortgage loans on the properties as underlying collateral for the State’s investment in the program.  The two properties are hotels, the Abraham Lincoln Hotel and Conference Center (formerly the Renaissance) in Springfield and the Holiday Inn in Collinsville.

      The recorded value for these investments was $7,439,000 as of June 30, 2006, and the loan balance was $29,298,000. 

        The mortgage loans on the two properties are considered nonperforming assets.  Accrued interest receivable at June 30, 2006 for the nonperforming assets approximated $29,280,000.  Interest on nonperforming assets is recognized when collected, and therefore has not been recorded on the financial statements.

      In 1995 the Treasurer authorized the Trustee to sell the mortgage notes to the hotel owners for $10 million.  The Illinois Attorney General opined that his consent to the proposed sale in 1995 was required, and he refused to give it.  As a consequence, the Treasurer did not proceed with the transaction.  Affiliates of the owners of the hotels filed a lawsuit against the Trustee and the Treasurer seeking specific performance of the buy-sell agreement on the terms agreed to. 

      On March 13, 2000 the Circuit Court in Madison County entered a judgment order requiring the Trustee and the Treasurer to sell the mortgage loans on the hotel properties to the plaintiffs.  The Court found that the plaintiffs were ready, willing and able to perform the buy-sell agreements at the time originally set for closing in 1995.  The Trustee and the Treasurer appealed the order.  Briefings on the appeal were completed in February 2001, and oral arguments followed.  The Illinois Appellate Court, Fifth District, affirmed the Circuit Court’s decision in all material respects.  An appeal of that ruling was petitioned by the Trustee to the Illinois Supreme Court and granted on October 7, 2003.  As of June 3, 2005, the Illinois Supreme Court reversed the Appellate Court’s decision on the basis of sovereign immunity.  The plaintiffs have requested that the Illinois Supreme Court reconsider its decision.  If the Illinois supreme Court declines to do so, the case will be remanded to the Madison County Circuit Court and the stays will be vacated. 

      The Trustee of the Illinois Insured Mortgage Pilot Program, at the direction of the Illinois State Treasurer, filed two lawsuits on October 31, 1997, one against the Collinsville Hotel Venture and the other against the President Lincoln Hotel Venture, for breaching their cash flow notes by improperly deducting capital expenditures from cash flow in violation of their respective loan agreements.  The loan agreements provide that capital expenditures may be deducted from cash flow only to the extent that payments pre-approved by the Trustee are made by the Ventures into a capital reserve account.  The Trustee claims that these violations of the loan agreements, and the failure of the Ventures to pay upon demand money they improperly deducted from cash flow, constitute a default of the notes making them immediately due and payable.         

      The two lawsuits were filed in Cook County.  The borrowers both asked the Court to stay the lawsuits while the Madison County action was pending, and their motions were granted.

      After the final judgment was entered in the Madison County case, the Judge in Cook County who was presiding over the Collinsville case lifted his stay.  Plaintiffs in the Madison County case then asked the Court to hold the Trustee and its counsel in contempt for pursuing the Cook County case.  Eventually, the Trustee petitioned the Illinois Supreme Court for a supervisory order to allow it to proceed prosecuting the Cook County case without being held in contempt by the Madison County Court.  The Supreme Court issued such a supervisory order in the fall of 2001, and the Cook County case is now proceeding.  However, the Cook County case against the Springfield Hotel remains stayed. 

      As a result of discovery in the Collinsville case, the Trustee has determined that there have been additional events of default, and as a result it has now filed an amended complaint.  In 2006, the Circuit Court of Cook County entered judgment in favor of the Trustee and against the borrowers declaring that the loan was in default and authorizing the Trustee to pursue collection proceedings against the personal guarantee.  The borrowers petitioned the Court to reconsider its order.  Collection proceedings cannot be commenced until the petition is rejected by the Court.  In 1997, the Trustee endeavored to draw on the letters of credit then in its possession.  That attempt was enjoined by orders entered in the lawsuit filed in 1995 seeking to compel the Trustee to sell the borrower’s loan documents.  As of April 24, 2006, such orders ceased to bind the trustee.  In July of 2006, the Trustee again presented drafts on all letters of credit.  As of October 20, 2006, the Trustee has collected $439,625 from the Bank of Edwardsville, $300,000 from U.S. Bank National Association and $260,000 from Bank of America.  The payments on the letters of credit will be recorded as a reduction of principal in fiscal year 2007.  Regions Bank is refusing to pay the letters of credit it holds, which total $1,637,375.  A suit against Regions Bank has been authorized by the Trustee but had not been filed as of October 20, 2006. 

EVENT SUBSEQUENT TO DATE OF AUDITORS’ REPORT (UNAUDITED)

On January 2, 2007, Park National Bank, Trustee of the Illinois Insured Mortgage Pilot Program Trust, filed a foreclosure complaint against the President Abraham Lincoln Hotel and Conference Center (Hotel) in the Sangamon County Circuit Court and against the Collinsville Hotel Venture (Venture) in the Madison County Circuit Court.  The foreclosure complaint was filed following a ruling in December 2006 by a Cook County circuit judge declaring the Hotel and Venture to be in default of its loans.  The compliant also requested the court appoint a receiver to operate the Hotel and Venture during foreclosure proceedings.  A receiver was appointed to manage the Venture on January 12, 2007 but a receiver has not yet been appointed to manage the Hotel.  Although a favorable outcome is expected, the Illinois Office of the Treasurer does not believe the effect on financial position resulting from these proceedings can be determined at this time.