REPORT DIGEST

STATE EMPLOYEES’ RETIREMENT SYSTEM

OF ILLINOIS

FINANCIAL AUDIT

For the Year Ended:

June 30, 2008

Release Date:

January 15, 2009

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 and the Full Report are also available on

the worldwide web at

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

SYNOPSIS

¨ The unfunded liability of the State Employees’ Retirement System of Illinois (System) was $12,846 million at June 30, 2008. The System’s funded ratio at that date was 46.1%.

¨ The System did not have a process to review financial journal entries independent of the person who initiates and posts them to the financial records.

¨ Subsequent to the System’s June 30, 2008 fiscal year end the overall investment portfolio managed by the Illinois State Board of Investment, which includes the System’s investments, experienced a significant decline due to unprecedented unfavorable market conditions.

{Financial data is summarized on the reverse page}

STATE EMPLOYEES’ RETIREMENT SYSTEM OF ILLINOIS

FINANCIAL AUDIT

FOR THE YEAR ENDED JUNE 30, 2008

OPERATING STATEMENT ANALYSIS	FY 2008	FY 2007
REVENUES: Contributions - Participants........................................ Contributions - State Agencies & Appropriations........... Total Contributions................................................... Increase / (Decrease) in Fair Value of Investments...... Investment Income – Net of Management Expenses.... Interest Earned on Cash Balances.............................. Total Investment Income / (Loss) ............................. Total Revenues...................................................... EXPENSES: Benefits.................................................................... Refunds..................................................................... Administrative Expenses.............................................. Total Expenses....................................................... Revenue Over / (Under) Expenses................................	$ 249,955,208 587,732,407 $ 837,687,615 (968,688,184) 274,524,210 13,404,255 $ (680,759,719) $ 156,927,896 $ 1,214,115,627 16,817,433 9,537,305 $ 1,240,470,365 $(1,083,542,469)	$ 224,722,599 358,786,650 $ 583,509,249 1,500,507,144 266,766,628 12,633,405 $1,779,907,177 $2,363,416,426 $1,161,291,038 14,261,872 8,807,627 $1,184,360,537 $1,179,055,889
INVESTMENT SUMMARY – (All investments held in the Illinois State Board of Investment commingled fund at fair value)	JUNE 30, 2008	JUNE 30, 2007
Government and Agency Obligations................................................. Foreign Obligations........................................................................... Corporate Obligations....................................................................... Common Stock & Equity Funds........................................................ Preferred Stock (Domestic & Foreign).............................................. Foreign Equity Securities.................................................................. Hedge Funds................................................................................... Real Estate Investments................................................................... Private Equity.................................................................................. Money Market Instruments............................................................... Infrastructure Funds......................................................................... Bank Loans..................................................................................... Forward Foreign Currency Contracts................................................ Total Investment Portfolio............................................................ Other ISBI Assets Less Liabilities..................................................... ISBI Net Assets.............................................................................. ISBI assets owned by other retirement systems, JRS & GARS........... State Employees’ Retirement System Investment in ISBI..............	$ 852,045,701 113,005,430 1,058,164,332 4,241,685,933 5,094,532 1,984,314,463 598,985,402 1,332,081,349 524,628,589 307,481,504 209,975,518 202,137,983 (72,622) $11,429,528,114 (114,474,953) $11,315,053,161 (661,079,640) $10,653,973,521	$ 1,184,275,884 72,189,687 1,228,970,012 6,059,409,027 1,865,020 1,365,647,941 496,404,578 1,189,614,911 563,366,021 535,699,912 108,436,449 0 (108,696) $12,805,770,746 (253,574,585) $12,552,196,161 (742,058,666) $11,810,137,495
ADMINISTRATIVE EXPENSES	FY 2008	FY 2007
Personal Services............................................................................. Retirement, Insurance & Social Security............................................ Contractual Services........................................................................ Electronic Data Processing............................................................... Printing............................................................................................ Telecommunication.......................................................................... Travel............................................................................................. Commodities.................................................................................... Provision for Depreciation................................................................ Automotive...................................................................................... Other Expenses (Net)...................................................................... Total Administrative Expenses...................................................	$ 3,740,484 1,827,713 1,438,261 2,119,167 77,075 62,341 32,450 27,261 211,508 18,535 (17,490) $9,537,305	$3,450,579 1,543,569 1,338,551 2,048,396 31,553 63,704 43,884 21,472 278,553 16,686 (29,320) $8,807,627
FUNDING PROGRESS	JUNE 30, 2008	JUNE 30, 2007
Actuarial Accrued Liability................................................................. Actuarial Value of Assets................................................................... Unfunded Actuarial Accrued Liability.................................................. Funded Ratio.....................................................................................	$23,841,280,102 10,995,366,485 $12,845,913,617 46.1%	$22,280,916,665 12,078,908,954 $10,202,007,711 54.2%
EXECUTIVE SECRETARY
During Engagement Period: Tim Blair, Acting Currently: Tim Blair, Acting

Unfunded liability at June 30, 2008 totals $12,846 million

Same individual prepares and posts the financial journal entries

Original accounts receivable information was understated $26.8 million

ISBI investment portfolio decreased approximately $2.1 billion subsequent to June 30, 2008

INTRODUCTION

This digest covers our financial audit of the State Employees’ Retirement System of Illinois (System) for the year ended June 30, 2008. A report on the results of our compliance attestation examination for the year ending June 30, 2008 is being issued separately.

UNDERFUNDING OF THE SYSTEM

The actuarial accrued liability was valued at $23,841 million at June 30, 2008. The actuarial value of assets (at fair value) totaled approximately $10,995 million at June 30, 2008. The difference between the liability and the assets of $12,846 million reflects the unfunded liability of the System at June 30, 2008. The System had a funded ratio of 46.1% at June 30, 2008.

FINDING, RECOMMENDATION AND SYSTEM RESPONSE

During our testing, we noted the same individual prepares and posts the financial journal entries. During our testing of the System’s accounts receivable we identified a journal entry did not include all the accrued payroll contributions that should have been recorded at June 30, 2008. As a result, the accounts receivable balance information originally presented to the auditors was understated by approximately $26.8 million as of June 30, 2008.

System personnel indicated the journal entry omission was the result of a formula error in a spreadsheet used to generate the amounts for the journal entry. System personnel went on to note the information provided to the auditors was not final and believed the omission of the payroll contributions would have been discovered during their review process of the System’s financial statements. Because of the significance of the omission and the lack of an independent review of journal entries, we are considering this to be a significant deficiency in the System’s internal control.

We recommended someone other than the person preparing and posting the journal entries review the journal entries and the related supporting documentation for accuracy and that the review be documented. (Finding 08-1, page 25)

System management concurred with the recommendation and indicated they will institute a system to have all financial journal entries and supporting documentation reviewed by a person independent of the person that initiates them.

SUBSEQUENT EVENT

Subsequent to the System’s June 30, 2008 fiscal year end the overall investment portfolio managed by the Illinois State Board of Investment (Board), which includes the System’s investments, experienced a significant decline due to unprecedented unfavorable market conditions. Based on unaudited information the Board’s investment portfolio declined approximately $2.1 billion from the June 30, 2008 balances based on the readily determinable market values provided by the Board.

AUDITORS' OPINION

Our auditors state the June 30, 2008 financial statements of the System are fairly presented.

____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:RPU:pp

SPECIAL ASSISTANT AUDITORS

BKD LLP was our special assistant auditor for this audit.

SYNOPSIS

FOR THE YEAR ENDED JUNE 30, 2008

FUNDING PROGRESS

JUNE 30, 2008

JUNE 30, 2007

EXECUTIVE SECRETARY

UNDERFUNDING OF THE SYSTEM

FINDING, RECOMMENDATION AND SYSTEM RESPONSE