REPORT DIGEST TEACHERS’ RETIREMENT SYSTEM COMPLIANCE EXAMINATION FOR THE YEAR ENDED JUNE 30, 2018 Release Date: April 18, 2019 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, 2018. A separate Financial Audit as of and for the year ending June 30, 2018, was previously released on January 3, 2019. This report contains one finding. The Financial Audit report contained no findings. SYNOPSIS • (18-1) The Teachers’ Retirement System of the State of Illinois did not always obtain fully completed disclosures from investment managers as required by 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 twenty-five (40%) investment manager disclosures returned to the System where the investment manager did not properly disclose the number of contracts with minority, women or disabled person owned businesses and the number of contracts with other than those businesses owned by minority, women or disabled persons. The investment managers informed the System that not all of this information was tracked. (Finding 1, pages 10-11) This finding has been repeated since 2016. 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 stated in their response that as in all prior years where the Auditor General has presented this finding, they disagree with it in the strongest terms and believe that they have complied fully with the statute and they will continue to follow their existing practice. Based on the System’s conversations with the legislation’s Senate sponsor, the Senator confirmed the System’s approach to implementation and the System’s adherence to the intent of the law. (For the previous System response, see Digest Footnote #1.) ACCOUNTANT’S OPINION The accountants conducted a compliance examination of the Teachers’ Retirement System for the year ended June 30, 2018, 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 State 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 DIGEST FOOTNOTES #1 – Noncompliance with Certain Disclosures Required by the Illinois Pension Code TRS has carefully reviewed the finding and after discussing the matter with Auditor General staff, objects 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. The information presented in the manager questionnaire’s fully respond to the law and allow TRS to make a fully informed judgment on the manager’s commitment to diversity. TRS has been at the forefront of implementing all elements of the state’s diversity policies. After discussing similar findings last year, with which we also disagreed, and at the direction of the Auditor General’s staff we had our 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. We stand by our position that adding zeros into any empty boxes in a column that sums to zero adds no additional information or value to the analysis. Auditor’s Comment 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, TRS 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 TRS staff was not accurate, the auditors did count the disclosure as an exception. To the extent that TRS believes the auditors agreed that anything less than an accurate disclosure would be acceptable, we do not agree with the agency’s characterization.