REPORT DIGEST

TEACHERS’ RETIREMENT SYSTEM

COMPLIANCE EXAMINATION
FOR THE YEAR ENDED JUNE 30, 2017

Release Date:  April 5, 2018

FINDINGS THIS AUDIT:  1

CATEGORY:  NEW -- REPEAT -- TOTAL
Category 1:  0 -- 0 -- 0
Category 2:  0 -- 0 -- 0
Category 3:  0 -- 1 -- 1
TOTAL:  0 -- 1 -- 1

FINDINGS LAST AUDIT: 1

Category 1: Findings that are material
weaknesses in internal control and/or a
qualification on compliance with State laws
and regulations (material noncompliance).
Category 2: Findings that are significant
deficiencies in internal control and
noncompliance with State laws and
regulations.
Category 3: Findings that have no internal
control issues but are in noncompliance with
State laws and regulations.

State of Illinois, Office of the Auditor
General
FRANK J. MAUTINO, 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 and Full Report are also
available on the worldwide web at
www.auditor.illinois.gov

INTRODUCTION

This digest covers our Compliance Examination
of the Teachers’ Retirement System of the
State of Illinois for the year ended June 30,
2017.  A separate Financial Audit as of and
for the year ending June 30, 2017, was
previously released on January 9, 2018.  This
report contains one finding.  The Financial
Audit report contained no findings.

SYNOPSIS

• (17-1) The Teachers’ Retirement System of
the State of Illinois did not always obtain
fully completed disclosures from investment
managers as required in the Illinois Pension
Code.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

NONCOMPLIANCE WITH CERTAIN DISCLOSURES
REQUIRED BY THE ILLINOIS PENSION CODE

The Teachers’ Retirement System of the State
of Illinois (System) did not always obtain
fully completed disclosures from investment
managers as required by the Illinois Pension
Code.

During testing, the auditors noted ten of
thirty (33%) investment manager disclosures
returned to the System where the investment
manager did not properly disclose the number
of employees who are minority, women or
persons with disabilities or the number of
contracts with businesses owned by a
minority, a woman or a person with a
disability and the number of contracts with
other than those businesses owned by a
minority, a woman or a person with a
disability.  (Finding 1, pages 10-12)

We recommended the System work with their
investment managers to comply with the
disclosure requirements of the Illinois
Pension Code or seek legislative remedy.

System officials objected in the most
strenuous manner possible to both the
conclusion drawn and the appearance of
disregard for the requirements of the law
that the finding presents.  System officials
stated the information presented in the
investment manager questionnaires fully
responded to the law and allowed the System
to make a fully informed judgment on the
manager’s commitment to diversity.

System officials also stated that after
discussing similar findings last year, with
which they also disagreed and at the
direction of the Auditor General’s staff they
had their managers change “N/A” responses to
zero (0) where number counts were requested.
Columns that show a zero total without
individual entries were deemed noncompliant.
System officials stated they stand by their
position that adding zeros into any empty
boxes in a column that sums to zero adds no
additional information or value to the
analysis.

In an auditor’s comment we noted last year’s
audit was the first year of compliance
testing for this requirement, which went into
effect January 2, 2015.  The auditors noted
as exceptions in Finding 2016-1 any questions
that were left blank by the asset management
firm or for which the asset management firm
indicated they did not have the requested
information.

During the course of conducting this year’s
audit, the auditor’s noted that, before
sending the disclosure forms to the asset
management firms for completion, the System
was now pre-populating all disclosure forms
with a macro formula that sums the disclosure
total columns.  If an asset management firm
makes no disclosure the total column
automatically sums to zero.  If an asset
management firm provided a disclosure, such
as the number of contracts it has with
minority-owned firms, then the macro formula
automatically replaces the zero with the
total number of minority-owned firms inserted
by the asset management firm on the
disclosure form.

The auditors agree that “zero” is a number
and, in fact, may be a valid number in
response to some of the requested
information.  Where, however, there is
conflicting information on the form that
would indicate that the number “zero” which
was pre-populated on the form by System staff
was not accurate, the auditors did count the
disclosure as an exception.

To the extent that the System believes the
auditors agreed that anything less than an
accurate disclosure would be acceptable, we
do not agree with the System’s
characterization.

ACCOUNTANT’S OPINION

The accountants conducted a compliance
examination of the Teachers’ Retirement
System for the year ended June 30, 2017, as
required by the Illinois State Auditing Act.
The accountants stated the Teachers’
Retirement System complied, in all material
respects, with the requirements described in
the report.

This compliance examination was conducted by
BKD LLP.

JANE CLARK
Division Director

This report is transmitted in accordance with
Section 3-14 of the Illinois State Auditing
Act.

FRANK J. MAUTINO
Auditor General

FJM:JAF