REPORT DIGEST TEACHERS’ RETIREMENT SYSTEM COMPLIANCE EXAMINATION FOR THE YEAR ENDED JUNE 30, 2019 Release Date: April 15, 2020 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, 2019. A separate Financial Audit as of and for the year ending June 30, 2019, was previously released on January 14, 2020. This compliance report contains one finding. The Financial Audit report contained no findings. SYNOPSIS • (19-1) The Teachers’ Retirement System of the State of Illinois did not always obtain fully completed disclosures from investment managers and consultants as required by the Illinois Pension Code. FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS NONDISCLOSURE 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 and consultants as required by the Illinois Pension code. Before the System hires a new investment manager, they require the entity to complete the Firm Employment and Use of Professional Service Providers form. The form includes all of the disclosures required by the Pension Code for its investment and senior staff (Form A) and its contractors (Form B). In addition the form requests additional comments and certifications from the prospective investment manager related to their diversity initiatives that the System takes into consideration when hiring new investment managers. In the instance of an investment consultant, they are required to complete an Investment Consultant Disclosure form. Additionally, the System’s agreement for Professional Services for Investment Consultants includes a Consultant Disclosure provision that ensures the contracted party has made all required disclosures. Illinois Pension Code 40 ILCS 5/1-113.21 During testing, the auditors noted 11 of 33 (33%) 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 persons with a disability. The investment managers informed the System that not all of this information was tracked. For certain investment managers, multiple exceptions were noted. Specifically, we noted the following: • 1 (9%) investment manager did not track any of the required disclosure items required by the Pension Code. • 1 (9%) investment manager was an international firm that does not have defined diversity initiatives to track under its laws. •3 (27%) investment managers did not track the number of their investment and senior staff who are persons with a disability. • 9 (82%) investment managers did not track the number of contracts for investment services, consulting services and professional services with minority-owned businesses, women-owned businesses or businesses owned by persons with a disability. Illinois Pension Code 40 ILCS 5/1-113.22 During testing, we noted one of nine (11%) investment consultants did not properly disclose the number of searches for investment services made by the consultant. The investment consultant informed the System that not all of this information was tracked. (Finding 1, pages 10-12) This finding has been repeated since 2016. We recommended the System work with their investment managers and consultants to comply with the disclosure requirements of the Illinois Pension Code or seek legislative remedy from the statutory requirement. 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. ACCOUNTANT’S OPINION The accountants conducted a compliance examination of the Teachers’ Retirement System for the year ended June 30, 2019, 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