California State Controller Betty Yee warned legislative budget committees that her office may miss the April 1 deadline for releasing its comprehensive annual financial report.
Yee cited problems the controller’s office has encountered in moving her office’s financial systems onto the state’s electronic Financial Information System for California, commonly referred to as FI$CAL. The March 18 letter was addressed to the Joint Legislative Budget Committee, the Senate Committee on Budget and Fiscal Review and the Assembly Committee.
The FI$CAL system was designed to create a comprehensive budget program to replace a patchwork of outdated accounting programs. Costs have soared by more than $200 million to $918 million since Palo Alto-based Accenture was selected in 2012 for the project that is supposed to be completed by July.
The controller wrote that the state auditor has noted on several occasions that several departments’ inability to provide accurate and timely year-end financial information could increase the risk of the state producing a late CAFR.
If the departments are forced to submit estimates to the controller’s office, it “increases the risk that the CAFR could receive a modified opinion from auditors,” Yee wrote.
“A modified opinion indicates that material accounting misstatements have been used to construct the CAFR, thereby eroding stakeholder and investor confidence in the state’s financial condition and potentially affecting the state’s borrowing costs,” Yee wrote.
The letter also raised concerns about the accuracy of revenue figures used to create the controller’s monthly cash report. That report lists how much revenue the state brings in on a monthly basis primarily from income tax, sales tax and corporate tax.
Yee wrote her staff “has encountered numerous challenges with the Financial Information System for California especially since the FI$CAL Department, last year decided on a new approach to implement the remaining SCO control functionality.”
The integrated solution attempts to join components of FI$CAL with the controller’s legacy system, according to the letter.
When the integrated solution was implemented in October, the controller’s office had problems getting the interfaces to work and other departments struggled to correctly code remittances, large transaction volumes overwhelmed the system, and there were countless complications with items being improperly sent to the controller’s office cash management staff, Yee wrote.
“As a result, I no longer have confidence in the accuracy of the revenue figures that are submitted into the SCO legacy system, which in turn are used to create the monthly cash report and serve as the state’s official book of record,” Yee wrote.
In a follow-up letter sent to the legislative committees on March 22, Yee tempered the comments she had made regarding the accuracy of the state’s revenue figures. She said her concerns were focused on a timing issue. The controller’s cash report is based on money actually deposited into the state treasury by the last day of the month. The DOF’s finance bulletin usually released shortly after reflects both funds that agencies say they have received that may have not been deposited in the treasury. As a result, the numbers in the two reports both focused on tax revenues can vary widely.
“It is important to reiterate the financial data in both the monthly cash reports and the monthly Department of Finance Revenue Bulletin are accurate at their respective points in time,” said Taryn Kinney, the controller’s press secretary. “The controller has no concern about the state’s cash position or overall fiscal health.”
The controller wrote that her larger concern was the CAFR that the controller’s office publishes on April 1.
Yee wrote she doesn’t believe the 154 departments currently on FI$CAL will be able to provide her office with accurate financial statements for the end of the 2018-19 fiscal year in order to prepare the state’s CAFR by that date.
“Since interfaces were implemented to link the legacy system to FI$Cal, there have been longer delays getting department data into the FI$Cal system,” Kinney said.
The state’s continuing disclosure documents require that the treasurer’s office file the CAFR by April 1, but the continuing disclosure agreements permit the state to file unaudited statements as long as they file by April 1, said Tim Schaefer, deputy treasurer for public finance.
“It has been done in the past, though I don’t know how often,” Schaefer said. “The sophisticated parts of the market know we have the right to do that.”
The state would file the CAFR on EMMA as soon as it became available, he said.
The state is pricing several billion dollars of bonds this spring including an $842.7 million competitive taxable sale slated for Tuesday. JPMorgan and Academy Securities priced $78 million in housing revenue bonds for the California Department of Veterans Affairs Friday.
The State Treasurer’s Office disclosed in the offering documents for both bond sales that it does not expect the CAFR for the fiscal year ended June 30, 2018 to be released on or before April 1, but the state does expect to file unaudited reports by then. As soon as the CAFR is released it will be posted on EMMA, according to the bond documents.
A Yee spokeswoman said the controller was not available to comment beyond what was included in the letter. But added that a budget subcommittee hearing on the matter has been scheduled for Tuesday at 1:30 p.m.
State Senator Holly Mitchell, a Los Angeles Democrat, who chairs the Senate Committee on Budget and Fiscal Review, responded in a statement that: “We are aware of the controller’s concerns and, through the Budget Committee’s work, will continue to work with both the controller and Administration to ensure the issues raised are appropriately addressed. Specifically, during the course of our budget subcommittee process we will continue to review the entire FI$Cal project, which includes the controller’s concerns.”