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State of Texas Financial Portion of the Statewide Single Audit Report for the Year Ended August 31, 2015

March 2016

Report Number 16-555

Overall Conclusion

In our audit opinion dated February 22, 2016, we concluded that the basic financial statements for the State of Texas presented fairly, in all material respects, the financial position and activities of the State for the fiscal year ended August 31, 2015. The Office of the Comptroller of Public Accounts published our audit opinion as part of the Comprehensive Annual Financial Report (CAFR) for fiscal year 2015, which it posted on its Web site at

The consolidated financial statements provide a comprehensive view of the State's financial activities during the fiscal year and an overall picture of the financial position of the State at the end of the fiscal year. Compiling the State's consolidated financial statements is a major undertaking and consists of financial information for more than 200 state agencies and higher education institutions.

For fiscal year 2015, the State implemented Governmental Accounting Standards Board (GASB) Statement No. 68 – Accounting and Financial Reporting for Pensions – an amendment of GASB Statement No. 27 and GASB Statement No. 71 – Pension Transition for Contributions Made Subsequent to the Measurement Date – an amendment of GASB Statement No. 68. Those standards require governments to begin recording on the face of their financial statements a liability for pension plans administered through trusts, rather than disclosing those amounts in the notes to their financial statements. Specifically, a government will incur a "net pension liability" if the total obligation to members exceeds the value of the net assets the government has set aside to pay those benefits. As a result of implementing those new standards, the State recognized $35.8 billion in net pension liability. Additionally, the State's ending net position was $147.7 billion, a decrease of $27.9 billion, which was primarily due to the decrease of $24.8 billion in unrestricted net position as a result of the implementation of GASB Statements Nos. 68 and 71.

The fiscal year 2015 consolidated financial statements convey the use of approximately $133.7 billion during the fiscal year, an increase of $6.6 billion or 5.2 percent since the prior fiscal year. The State's assets on August 31, 2015, totaled $270.2 billion, an increase of $9.9 billion or 3.8 percent since the prior fiscal year. The State's cash and cash equivalents increased by $4.8 billion, total capital assets increased by $6.7 billion, and noncurrent unrestricted investments decreased by $1.1 billion.

On August 31, 2015, the Economic Stabilization Fund balance was $9.6 billion. That amount consisted of $8.5 billion in cash and cash equivalents, as well as $1.1 billion due from the General Revenue Fund. The $1.1 billion due from the General Revenue Fund was transferred to the Economic Stabilization Fund in November 2015. The Economic Stabilization Fund is reported in the General Fund on the governmental fund financial statements and in Governmental Activities on the governmentwide financial statements.

Auditing financial statements is not limited to reviewing the numbers in those statements. Conducting this audit also requires the State Auditor's Office to obtain a sufficient understanding of the agencies and higher education institutions and their operating environments—including obtaining an understanding of the internal controls over systems and processes that the agencies and higher education institutions use to record their financial activities—to assess the risk of material misstatement of the financial statements. Through that effort, auditors identified specific weaknesses that three agencies should correct to improve the reliability of their financial information. Those weaknesses are discussed in Chapter 2-A and Chapter 2-B of this report.

The State Auditor's Office also audited the State's Schedule of Expenditures of Federal Awards (SEFA) in relation to the CAFR for fiscal year 2015. The Office of the Comptroller of Public Accounts prepares the SEFA by using self-reported SEFA data from all state agencies and higher education institutions that made federal expenditures during the fiscal year. The State Auditor's Office and KPMG LLP (KPMG) audited the processes for preparing SEFA information at 13 agencies and 14 higher education institutions. Auditors identified errors related to the SEFA information at 1 agency and 14 higher education institutions. Those errors are discussed in Chapter 2-C of this report.

To avoid duplication of effort, the State Auditor's Office relies on KPMG's testing of the internal controls over certain systems and processes. While testing the State's compliance with federal requirements, KPMG identified a material weakness in the managed care program at the Health and Human Services Commission that was caused by inadequate segregation of duties and access rights to modify capitation rates, which are the basis for payments to managed care organizations. The managed care program is material to the State's financial statements, and payments to managed care providers for fiscal year 2015 totaled approximately $16.7 billion. The material weakness KPMG identified was related to both financial processes and federal compliance. For more information, see finding 2015-023 in the State of Texas Federal Portion of the Statewide Single Audit Report for the Fiscal Year Ended August 31, 2015, by KPMG.

The State Auditor's Office conducts this audit so that the State can comply with federal legislation (the Single Audit Act Amendments of 1996); state statute (Texas Government Code, Section 403.013(c)); and grant requirements to obtain an opinion regarding the fair presentation of its basic financial statements and a report on internal controls related to those statements. The results of this audit are used primarily by companies that review the State's fiscal integrity to rate state-issued bonds, the Legislature, and federal agencies that award grants.

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