Legislative auditor chides budget agency for lack of disclosure of 2014 tax penalty

State Legislative Auditor Jim Nobles on Tuesday said his office temporarily withdrew its satisfactory opinion of the state budget office's year-end financial statement, saying the agency had failed to disclose a 2014 tax penalty it paid.

The Star Tribune first reported that the Minnesota Management and Budget agency had quietly paid a $537,000 settlement to the Internal Revenue Service in September of last year.

The settlement came after the board that handles state investments accidentally purchased the state's own debt and then resold it, a violation of federal tax rules for tax-exempt bonds.

Nobles said that his office had just given the final signoff on the budget agency's financial statement on Friday, but he learned late Monday about the tax settlement.

"We considered it a pretty serious issue and withdrew the opinion we provided them to them," Nobles said. "We would not allow them to use our opinion. … The resolution has to be a disclosure on their financial statement."

The disclosure was added late Tuesday morning, and the auditor's office has since given the signoff on the budget agency's financial statement.

Minnesota Management and Budget Commissioner Myron Frans said he was "disappointed this was not reported at the time of the settlement."

Nobles said the lack of disclosure could have threatened the state's credit rating.

"One of the important principles in preparing audit statements is you disclose all noncompliance issues and potential liabilities," Nobles said. "It's a mechanism for transparency and accountability."

The auditor said it is a "highly technical" issue in the grand scheme of things.

"Not a lot of people pore over financial statements, but bond buyers do," Nobles said. "That's why we took the action we did … to send a signal that this sort of thing cannot happen again."