Montana Public Radio

Auditors Find Serious Errors In State Financial Report

Jun 24, 2015

Budget officials from the Montana Governor’s office faced an angry panel of state lawmakers Wednesday morning. Members of the Legislative Audit Committee demanded to know why a crucial report on the state’s finances was issued in May instead of March, but also contained multiple mistakes, with the potential to cost taxpayers money.

Cindy Jorgenson from the Legislative Audit Division said their examination of the report revealed multiple problems.

“We communicated over 125 significant items," Jorgenson said. "Many of those amounted to hundreds of millions of dollars in error. The audit team caught them, not the agency’s control system, and for that reason we classified this as a material weakness."

One of the errors found by auditors concerns the fund the state uses to pay worker’s compensation claims filed before 1991. According to Jorgenson, the so-called “Old Fund” could owe a lot more money than the original report estimated.

"An independent actuary estimates that at June 30, 2014 the liability could be in the neighborhood of $127 million rather than the $45 million that’s used in the financial report."

Lawmakers on the Audit Committee voiced harsh reaction to the many errors auditors found in the state’s financial statement. This is Huntley Republican Senator Taylor Brown.

"When I first read this, I thought this was extraordinary, but when I hear you say that this is the first time you’ve ever seen this kind of adverse opinion and this material and pervasive report, I’m quite concerned about that."

Republican Dee Brown of Hungry Horse agreed.

"We haven’t seen a report like this, and it’s very disturbing to we who have been on this committee to see this.”

She pointed to one estimate of the state’s liability for infrastructure needs, the report pegged the amount as $1.2 billion, but auditors revised downward to just over $200 million; a billion dollar mistake.

The Governor’s budget Director, Dan Villa, agreed the report was riddled with errors.

"I’m not pleased," Villa said. "Director Hogan is not pleased. And we are taking every available means to make sure that this fluke is not a pattern."

Villa mentioned multiple times that a key member of the state’s accounting team was recently replaced.

"I’d like to take this opportunity again mister chairman to introduce our new state accountant, Cody Pierce, who I have every confidence will implement the appropriate controls…"

The head of the Department of Administration, Sheila Hogan, was also called before the committee.

"I’m embarrassed, I just have to say I’m embarrassed."

Hogan laid the blame for the mismanaged report on staffing problems in her department.

"We’ve had 100 percent turnover, from the administrator, to the state accountant, to the accountant in the last 24 months. I don’t want to offer a lot of excuses, because I don’t want to pass the buck."

And Villa said corrective action is already underway.

"We’re taking every needed step, reasonable and unreasonable, to make sure that this is not a pattern."

Villa took pains to say out that while the report had multiple problems, the underlying financial health of the state is not in question.

"The strength of the state’s finances are not impacted, but we owe the reader and we owe the users of these reports better than what you see."

Villa says he’s confident that bond rating companies will see past a single bad report and continue to give the state a good rating. Legislative Auditor Tori Hunthausen is skeptical. Hunthausen heads the agency that found the deficiencies in the state financial report. She says hiring a new lead accountant is not a guarantee the problems will be fixed.

"This is bigger than one person," Hunthausen said.

"That particular position isn’t the answer, you know, the end-all to everything. It’s a whole procedural team approach to preparation of these financial statements."

And while the Bullock Administration says the bad report is a "fluke" Hunthausen says there’s no guarantee that that bond rating agencies will see it that way.

"They’re the only ones that get to determine whether they’re going to adjust the state’s bond rating, and of course it depends on which rating service."

One possible outcome of having a poorly-done financial statement is that Montana will have to settle for a lower bond rating, which means its bonds will carry higher interest rates. That could ultimately cost taxpayers millions of dollars.

This is an annual report. The next one is due to be released at the end of next March. If that report gets a clean bill of health from the auditors, then "that adverse opinion will away," Hunthausen says. Whether the embarrassment felt by state officials will go away is another question.