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Illinois Issues
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State of the State: Illinois' Financial Tracking Systems Are Out of Date and Incompatible

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mattpenning.com 2014
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WUIS/Illinois Issues

Some shocking numbers associated with the state’s finances came out recently. They didn’t represent the deficit, the unfunded pension liability — which continued to grow over the last fiscal year — or new revenues from the recent income tax increase. Instead, the numbers are associated with the way the state tracks its finances, and they represent a system that Auditor General William Holland describes as “highly fragmented.” 

Illinois uses more than 263 reporting systems to track money throughout all areas of state government, according to a recent auditor general review of the state’s accounting systems. Holland notes that the number is likely higher in practice because two agencies did not respond to the audit, and seven other systems were identified but not included in the analysis. “The State of Illinois’ financial reporting ‘system’ is comprised of over 260 individual financial systems, many of which are not interrelated, are antiquated and are costly to operate. The lack of a centralized financial reporting system has considerable negative consequences, including untimely financial reporting of the true financial position of the State. The lack of timely financial reporting limits effective oversight of State finances, [and] adversely affects the State’s bond rating and jeopardizes federal funding,” the audit says. 

According to Holland’s findings, Illinois’ complicated budgeting system, which included about 900 separate funds as of 2009, makes accounting all the more difficult. “A complex fund structure increases the level of effort necessary to account for and report transactions and increases the risk of errors and omissions,” he says in the audit.

Half of the systems being used are more than 10 years old; many are more than 20 years old. The older those systems get, the more difficult they are to maintain and update. Some older systems also cannot be used in concert with newer ones, making the entire accounting operation less flexible and adding extra time and cost needed to convert data to suit different platforms. 

Only 16 percent of the systems comply with Generally Accepted Accounting Principals (GAAP). The audit says that in reality, the number of compliant systems may even be less than 16 percent and explains why a shift to GAAP would be beneficial — especially when the state is having trouble paying bills and looking for all the revenue it can find: “GAAP reporting provides a more complete picture of an entity’s true financial position by capturing expenses that the government owes but has not yet paid, as well as revenue which it is owed but has not yet received.” Illinois does not complete a set of GAAP compliant reports on its finances — known as the Comprehensive Annual Financial Reports — until almost a year after the end of a fiscal year. Holland contrasts that practice with the practices of corporations and businesses that conduct GAAP compliant quarterly reports.

More than 50 percent of the state’s reporting systems are not interconnected. So if information is to be shared between them, staff has to convert it. “When data is converted or manually re-entered, it adds time to the process and increases the likelihood of errors. This duplicate work also adds substantial costs in operating the systems,” the audit says. Holland and his team were unable to determine the total annual cost associated with converting and sometimes re-entering information that cannot be translated across systems. However, the audit says for 17 percent of the systems, the estimated cost to the state for “duplicated data entry” was more than $11 million in fiscal year 2010. For the 17 percent of the systems represented in the audit, the cost of converting information for the annual GAAP compliant report alone was $3.7 million. 

Holland proposes that the state move toward working with GAAP standards throughout the fiscal year, so accountants aren’t playing a massive game of catch-up when compiling the annual report. “A statewide system that maintains information on a GAAP basis or routinely converts information to a GAAP basis would drastically reduce the amount of time spent by agencies during the year-end GAAP conversion process.”

About one in three of the agencies that responded to the audit said the lack of staff and proper training is a major hurdle to completing their fiscal reporting accurately and on time. Holland recommends that Gov. Pat Quinn consult with agencies to make sure they have enough staff and expertise to keep their financial books in line. “Sufficient staff, which are qualified and adequately trained in financial reporting, are critical for any reporting system to be successful,” Holland’s analysis says. 

The comptroller’s office has to sort out all the information from the disjointed system and try to keep an accurate and timely picture of the state’s finances. However, the comptroller has no control over how executive agencies conduct their financial accounting or any teeth to enforce deadlines. According to the audit, agencies face no penalties if they do not cooperate with the comptroller. Holland recommends that Quinn work with the comptroller’s office to establish due dates for agencies’ accounting reports and work to make sure they can be met. 

A representative of the comptroller’s office was not surprised by the auditor’s findings. “The report confirmed what we believed, which is the system desperately needs to be upgraded,” says Brad Hahn, a spokesman for Comptroller Judy Baar Topinka. “We have different agencies, different offices, and all of our reporting systems speak different languages. … The different systems cannot talk to each other.”

Holland says the problems with the overall reporting system, especially the amount of time needed to compile the annual report, cause some substantial ill effects for the state. “Legislative and oversight bodies are one of the primary users of financial reports. When financial reports are not available, legislative and oversight officials are forced to use outdated information or unaudited numbers,” the audit says. “The untimely release of the state’s [Comprehensive Annual Financial Reports are] not in compliance with the most basic of financial reporting objectives.” Bond rating agencies also use materials from the annual reports, and they are starting to take notice of Illinois’ slow system. Two recent reports by Moody’s note Illinois’ “untimely” financial reporting as a negative aspect when determining the state’s bond rating, which is used to determine the interest rate Illinois must pay on its borrowing. 

But it is difficult to make the case to spend more dollars on upgrades to the state’s financial reporting system while agencies are cutting back and potentially painful cuts to health care and human services are on the table. “That’s been an ongoing dilemma,” Hahn says.

The system is so disjointed that the audit was unable to accurately estimate how much it currently costs to maintain it. Some agencies provided cost estimates that added up to $24 million in fiscal year 2010. However, that number only represents 56 percent of the state’s accounting system. “There were also instances where agencies provided cost information for one cost component but either didn’t know or could not calculate other cost components, which further understates the total cost of maintaining the systems,” the audit says. More than 20 agencies also use contractors to help with their financial reporting and preparation for the GAAP compliant report. According to the audit, that contracted accounting work cost almost $1 million in fiscal year 2010. 

Hahn says the comptroller agrees with Holland’s assessments and recommendations. He says that money invested in upgrading the system would pay off in the long run, both in reduced waste and improved oversight. The investment would pale in comparison to the long-term savings that would be realized through greater accountability and transparency, he says. “If you can’t track dollars, you can’t hold government accountable.”

When it comes to appealing to legislators for an upgrade, Hahn says it is in line with the political agendas of members on both sides of the aisle. “There’s universal agreement that we need to address spending and government waste, and modernized technology is critical to doing that effectively.”

Sen. Dan Kotowski, a Park Ridge Democrat, sponsored recently enacted budget reforms that require state spending to be justified through tangible results. He says the accounting system may require an upgrade, and the state should look to being able to document not just the numbers but also the effectiveness of its spending.

“Currently in our state, we audit numbers and services. We don’t audit performance. We need to be able to audit performance. Our cost-based budgeting — the way we’ve done it — just leads to more costs,” says Kotowski. “We’re starting over right now. We have a brand new budget process and a new way of measuring things and accounting for dollars that are spent. And we need to look at this as we’re going through the budget process — if the accounting practices are disparate, if they’re separate, if they’re not uniform.” 

He says data collection on both the “outcomes and the expenses” is one of the greatest challenges to efficient budgeting. Upgrades to the state’s accounting system are comparable to data technology investments in the state’s Medicaid system, which were pitched as efficiency upgrades that would save the state money in the long term and approved as part of an overall Medicaid reform package. 

“If the comptroller’s office needs some kind of mechanism to fund this to make sure we do a better job of measuring [budget data], I think that’s something that we’d be willing to talk with them about. … Technology will improve efficiency, and it will save money, and it will improve our effectiveness as a state.”

 

Half of the systems being used are more than 10 years old; many are more than 20 years old. The older those systems get, the more difficult they are to maintain and update.

Illinois Issues, April 2011

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