REPORT DIGEST

ILLINOIS STATE BOARD OF INVESTMENT

COMPLIANCE EXAMINATION

For the Year Ended:

June 30, 2004

Summary of Findings:

Total findings this report 1

Total findings last report 0

Repeated findings 0

Release Date:

April 28, 2005

State of Illinois

Office of the Auditor General

WILLIAM G. HOLLAND

AUDITOR GENERAL

To obtain a copy of the Report contact:

Office of the Auditor General

Iles Park Plaza

740 E. Ash Street

Springfield, IL 62703

(217) 782-6046 or TTY (888) 261-2887

This Report Digest is also available on

the worldwide web at

http://www.state.il.us/auditor

SYNOPSIS

· The Illinois State Board of Investment entered into professional services contracts with two former employees that did not adequately specify the final work product.

{Financial information and activity measurers are summarized on the reverse page.}

ILLINOIS STATE BOARD OF INVESTMENT

INFORMATION FROM FINANCIAL AUDIT AND COMPLIANCE EXAMINATION

YEAR ENDED JUNE 30, 2004

FINANCIAL STATEMENT ANALYSIS	FY 2004	FY 2003
Revenues: Investment Income - Interest................................................. Investment Income - Dividends.............................................. Investment Income - Securities Lending................................. Total Investment Income................................................... Expenses: Operating Expenses.......................................................... Net Investment Income................................................................. Realized Gain (Loss) on Investments.............................................. Unrealized Gain on Investments..................................................... Change in Investments........................................................ Member Systems’ Contributions (Withdrawals)............................... Net Assets, at Beginning of Year................................................... Net Assets, at End of Year...........................................................	$ 95,062,599 89,316,960 2,351,632 $ 186,731,191 17,905,540 $ 168,825,651 729,227,862 608,739,087 $ 1,506,792,600 1,134,924,744 $ 7,801,021,210 $10,442,738,554	$ 118,115,302 68,679,534 1,931,644 $ 188,726,480 16,756,528 $ 171,969,952 (608,949,507) 449,672,264 $ 12,692,709 (140,000,000) 7,928,328,501 $7,801,021,210
INVESTMENT PORTFOLIO ANALYSIS – Fair Value	JUNE 30, 2004	JUNE 30, 2003
Total Government Obligations........................................................ Total Corporate Obligations........................................................... Foreign Obligations........................................................................ Convertible Bonds......................................................................... U.S. Common Stock & Equities..................................................... Convertible Preferred Stock .......................................................... Preferred Stock ........................................................................... Foreign Equity Securities............................................................... Real Estate Investments................................................................ Alternative Investments................................................................. Money Market Investments........................................................... Forward Foreign Currency Contracts............................................. Total Investment Portfolio........................................................	$1,472,563,096 1,384,436,108 141,984,456 2,745,915 5,087,663,744 0 4,590,819 1,087,681,488 616,134,095 441,033,580 425,397,983 (425,690) $10,663,805,594	$ 862,128,328 695,789,042 181,133,769 861,871 3,772,803,315 4,263 4,402,445 1,174,665,480 614,846,458 441,537,163 283,727,618 (17,720) $8,031,882,032
OPERATING EXPENSES	FY 2004	FY 2003
Salaries........................................................................................ Benefits........................................................................................ Rent and Utilities........................................................................... Audit............................................................................................ Other........................................................................................... External Support: Custody................................................................................... Consulting and Professional...................................................... Investment Advisors/Managers................................................. Investment Services and Research............................................ Total Operating Expenses.....................................................	$ 659,861 228,229 145,717 95,300 123,398 357,000 771,065 15,285,305 239,665 $17,905,540	$1,003,424 280,235 147,239 93,200 115,974 357,750 334,708 14,202,759 221,239 $16,756,528
SUPPLEMENTARY INFORMATION	FY 2004	FY 2003
Compounded Annual Rate of Return, Since July 1, 1982 (unaudited)..... Annual Time Weighted Return on Investments (unaudited)................. Average Number of System Employees......................................... Total Brokerage Commissions Paid................................................ Total Investment Manager Fees.....................................................	10.8% 16.4% 7 $5,245,618 $15,285,305	10.5% .3% 8 $8,174,036 $14,202,759
EXECUTIVE DIRECTOR
During Audit Period: William R. Atwood Currently: William R. Atwood

Professional services contracts entered into with two former employees

Contracts did not adequately specify final work product

Final work products should be specified in contracts

State sold $10 billion of bonds to make contributions to designated retirement systems

Estimated return on pension bond proceeds for fiscal year 2004 was 15.39%

INTRODUCTION

This digest covers our compliance examination of the Illinois State Board of Investment (Board) for the year ended June 30, 2004. A financial audit covering the year ending June 30, 2004 was issued separately.

FINDING, CONCLUSION, AND RECOMMENDATION

FINAL WORK PRODUCT NOT SPECIFIED IN PROFESSIONAL SERVICES CONTRACTS

In January 2004, the Board entered into professional services contracts with two former employees of the Board. Each individual would be paid $4,000 monthly from February through June 2004 for total contract amounts of $20,000 each.

The contract terms failed to adequately specify the details of the final work product. Based on inquiries with management, the work product was primarily information verbally communicated to management. Additionally, there was minimal documentation provided by the contractors and retained by the Board to support the work performed.

Good business practice would require a contract to specify the final work product(s) to ensure the services were adequately provided. (Finding 1, pages 9-10)

We recommended the Board ensure all contracts adequately specify the final work product. We further recommended the Board receive adequate documentation from the contractor prior to payment to ensure the work was adequately performed.

Board management accepted our recommendation and agreed that all personal services contracts should adequately specify the final work product. Further, the Board agrees and will obtain documentation from contractors prior to payment.

Board management also noted the final work products resulting from the two professional services contracts entered into by the Board were acted upon by the Board’s Trustees at numerous meetings.

PENSION BONDS

On April 7, 2003, Governor Rod Blagojevich signed House Bill 2660 into law as Public Act 93-0002. This new law authorized the State of Illinois to issue $10 billion of General Obligation Bonds for the purpose of making contributions to designated retirement systems, which included the State Employees Retirement System, General Assembly Retirement System, and the Judges Retirement System.

On July 2, 2003, the Board received an allocation of $1,554,924,744 from the respective retirement systems resulting from the pension bond proceeds. The Board initially approved investing the pension bond proceeds in separate index funds. These index funds were subsequently liquidated and combined with the Board’s other investments and invested in accordance with the asset allocation policy of the Board. The Board estimated the pension bond proceeds earned an annual rate of return of 15.39% during the year ended June 30, 2004.

AUDITORS’ OPINION

We conducted a compliance attestation examination of the Board for the year ended June 30, 2004 as required by the Illinois State Auditing Act. A financial audit covering the year ending June 30, 2004 was issued separately.

____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:RPU:pp

SPECIAL ASSISTANT AUDITORS

KPMG, LLP were our special assistant auditors for this audit.