Yesterday, the State of Illinois released its annual financial report for fiscal 2015 (June). This is the first year the state’s balance sheet included the “net pension liability” required under new government accounting standards.
For fiscal 2014, the state reported an unrestricted net position (basically assets less liabilities, less assets restricted by law or contract) at a negative $66 billion at year-end. However, with the implementation of these new accounting standards, the state revised this amount downward sharply – and at year-end 2015, the unrestricted net position was reported at a negative $141 billion.
The massive deterioration in reported results isn’t necessarily a massive deterioration in a single year, however. It only arrives because the yardstick has changed, and in a correct direction, in our view.
So we have a good news, bad news story. The good news is the bad news is now news. The bad news is how bad the good news is, reflecting the consequences of decades of false reporting.
In the private sector, restatements of prior period accounting results can happen for a few reasons. One of the most important is that a company may not have been following GAAP (generally accepted accounting principles). Once discovered, depending on how material the mistake was, prior period balance sheet amounts might be restated, because the company hadn’t been “following the rules.”
In this case, however, the restatements is because the “company” (Illinois) had actually been following the rules! The rules themselves were leading to falsehoods, and were changed.
Illinois received a clean (unmodified) opinion on its report this year. Illinois also received a clean (unmodified) opinion on its report last year. But from year to year, it also reported a massive downward restatement in its net position.
A reminder that good news can be bad news, and that clean audit opinions can be dirty opinions.