ACC 545 Governmental Case (Completed in Pairs as Shown on D2L)
The primary objective of this case is to enhance your understanding of governmental
financial reporting through a detailed analysis of the Comprehensive Annual Financial Report
(CAFR) for the State of Illinois and its pension-related disclosures. The case chronicles a large
increase in the State’s unfunded pension liability since 1973 and largely unsuccessful legislative
measures taken to stem its growth. This provides an opportunity to examine governmental
accounting in a striking real-world setting. You will examine the State’s CAFRs from multiple
perspectives – of taxpayer/citizen, state legislator, and investor – and will compare it to another
state’s CAFR. We pay particular attention to pensions because you spend substantial time in
intermediate accounting courses studying accounting for defined benefit pension plans for
corporate entities. However, defined benefit plans are becoming less important in corporations. On
the other hand, they are common in state and local governments, and state legislatures expend
considerable resources in assessing the funding requirements of these plans. Further, an analysis
of pension liability and expense are essential to any assessment of a state’s financial condition due
to the large numbers involved.
complete case study is attached below
Requirement 1: Role of Accounting
One reason stated for the increase in Illinois’ unfunded pension obligation is that legislators did not understand the full financial impact of granting benefit enhancements (refer to the cost of living increase granted in 1989) and lower than required State pension contributions (refer to the pension holidays granted in 2006 and 2007).
A. Is deficient financial reporting responsible for this flawed decision-making?
B. Explain the potential role of accountants in mitigating this problem.
C. Who is responsible for developing the state’s budget? How is the budget voted on and implemented?
D. Who was the auditor for the state? What audit opinion did the financial statements receive for
fiscal years ended June 30, 2015-2019? How does the audit opinion given to this county by
its independent auditors differ from the audit opinion rendered on the financial statements for
a for-profit business?
Requirement 2: Overview of the CAFR
List one item of information from each of the following sections of Illinois’ CAFR for the fiscal year ended June 30, 2019. Briefly explain why each item you list is useful in evaluating the state’s financial health. Provide the page number on which the information appears. https://illinoiscomptroller.gov/financial-data/find-a-report/comprehensivereporting/comprehensive-annual-financial-report-cafr/:
A. Comptroller’s Letter
B. Management’s Discussion and Analysis Section
C. Government-wide Financial Statements
D. Governmental Funds Financial Statements
E. Notes to the Financial Statements
F. Required Supplementary Information other than MD&A
G. Statistical Section
Requirement 3: Analysis of Financial Condition
A. Find the total assets, total liabilities, net assets, and unrestricted net position for the State from 2015 to 2019. Identify the primary reasons for any observed trends.
B. For the General Fund, which assets and what amounts are reported? Overall, did the size of the General Fund balance increase or decrease from 2015 to 2019? By how much?
C. Compute cash (sum of cash equity with state treasurer, cash & cash equivalents, and deposits held by the federal government); short-term liabilities (total liabilities minus long-term obligations due subsequent to one year); current ratio (cash divided by short-term liabilities); and long-term financial leverage (total liabilities divided by total assets) for the State from 2015 to 2019. Highlight the trends for the three measures, comment on the State’s ability to meet its short-term financial commitments, and discuss the primary driver of the trend in the long-term financial leverage.
D. Find the schedule in the Statistical Section of the CAFR that provides details of bonds and other long-term financial obligations. Comment on any changes in the State’s ability to repay its long-term debt from 2015 to 2019. Explain how total primary government debt per capita and as a percentage of personal income assist in reaching your conclusion.
E. A reconciliation should be presented to explain the difference between the net changes in fund
balances for the governmental funds (fund-based financial statements) and the change in net
assets for the governmental activities (government- wide financial statements). What were
several of the largest reasons for the difference from 2015 to 2019?
Requirement 4: Resource Inflows and Outflows
A. For the primary government, tabulate the total general revenues, total expenses (net of program revenues), and change in net position using the government-wide Statement of Activities from 2015 to 2019. List the two largest revenue sources and two largest expenses (net of program revenues) reported in the statement per year. Comment on where the State collects its revenues and where it spends its money. Are the State’s revenues sufficient to support its spending?
B. What was the total expenditures recorded by the General Fund only during from 2015 to 2019? How were those expenditures classified? How much was specifically spent on public education, higher education, health, welfare, public safety, transportation, unemployment, and interest on debt? If these expenditures are missing on the primary financial statements are they in a separate set of financial statements?
C. Calculate the risk ratios (see bottom) from 2015 to 2019, and report your findings. Discuss
the trends and use charts or graphs to illustrate.
Requirement 5: Pension Funding
A. Refer to the pension/retirement sections. Tabulate the ratio of pension expense to total governmental activities expenses from 2015 to 2019. Use total annual pension cost for all the State’s retirement systems to approximate pension expenses. Comment on the trend.
B. Refer to the tables in the pension/retirement and OPEB sections. Show the fiduciary net position, total pension liability, net pension liability, plan funded percentage, contributions, net pension obligation, net pension liability as a percentage of covered payroll, and Other Post-Employment Benefit cost from 2015 to 2019. Interpret these amounts, and explain how they are related to each other.
C. The State funded its pension plans at the statutory amounts for the year ended June 30, 2017 (Illinois 2017, Table 16-2, p. 144). However, the contributions to GARS, JRS and SERS were deemed to be deficient in 2017 (Illinois 2017, 192). Explain why the actuarially determined contribution is higher than the statutory contribution.
D. Explain the impact on the net pension liability of the 1995 plan to “resolve” the pension crisis.
Is this plan consistent with the concept of interperiod equity?
Requirement 6: CAFR Disclosures on SERS Pension Fund
A. Refer to the tables in the pension/retirement section for 2019 and look for the reported information about SERS measured on June 30, 2019. Show the fiduciary net position, total pension liability, net pension liability, plan funded percentage, contributions, net pension obligation, and net pension liability as a percentage of covered payroll. Explain why a large fiduciary net position and net pension liability exist at the same time.
B. As of June 30, 2019, what is the long-term expected return on SERS’ plan assets? What is
the actuarial assumption on the investment rate of return? What is the discount rate used
to compute the total pension liability for SERS?
Requirement 7: Using Proceeds from Bond Issues to Fund Pensions
The State issued general obligation bonds in 2004, 2010, 2011, and 2017 to fund payments to its pension systems. Refer to Schedule 10 in the Statistical Section for 2017 and comment on
: A. The impact and desirability of using bond proceeds to make General Fund payments to reduce the net pension liability
B. The impact and desirability of using bond proceeds to make the statutory annual payments to the state pension funds
C. The State’s ability to issue additional general obligation bonds to fund its pension systems.
Requirement 8: Second State:
Repeat Requirements 3, 4, and 5 (A and B) for your assigned state.
Requirement 9: State Comparison
Using the memo format, write a comparative analysis of Illinois and your state incorporating your
answers for Requirements 3, 4, 5, and 8. Discuss some of the pre-pandemic fiscal and operational
challenges faced by the two states and how has the pandemic worsened the economic conditions
for the two states. Support your argument with news stories. Memo should be limited to two
pages, single-spaced with one-inch margins, using 12-point font.