REPORT DIGEST STATE UNIVERSITIES RETIREMENT SYSTEM COMPLIANCE EXAMINATION FOR THE YEAR ENDED JUNE 30, 2018 Release Date: February 14, 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 State Universities Retirement System (System) 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. In total, this report contains one finding, which was not reported in the Financial Audit. SYNOPSIS • (18-01) The System did not always obtain fully completed disclosures from investment managers as required in the Illinois Pension Code. FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS NONCOMPLIANCE WITH THE ILLINOIS PENSION CODE The State Universities Retirement System (System) did not always obtain fully completed disclosures from investment managers as required in the Illinois Pension Code. During testing, the auditors noted one of seven (14%) investment manager disclosures returned to the System where the investment manager did not properly disclose the number of contracts with minority, women and disabled person owned businesses and the number of contracts with other than those businesses owned by minority, women or disabled persons. The investment manager informed the System that not all of this information was tracked. (Finding 1, pages 11-13) This finding has been repeated since 2016. We recommended the System comply with the Illinois Pension Code or seek legislative remedy. System management disagreed with the finding. In their response to the finding System management stated they are required by law to operate under the broad financial and fiduciary standards set forth in 40 ILCS 5/1-109. They further stated that the investment manager referenced in the finding supplied a numerical response of 0 but supplemented their response that they do not track all of the requested information. (For the previous System response, see Digest Footnote #1.) ACCOUNTANT’S OPINION The accountants conducted a compliance examination of the System for the year ended June 30, 2018, as required by the Illinois State Auditing Act. The accountants stated the 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:TLK DIGEST FOOTNOTES #1 – Noncompliance with the Illinois Pension Code – Previous System Response 2017 The System respectfully disputes this finding again this year. The reasons for the System’s position were noted in last year’s response and are repeated below; however supporting references were not repeated. Investments staff was aware of this mandate last year and continues its formal process established last year that requests prospective service providers to disclose this information. The RFP form SURS uses, documents each data element required by this law and all prospective managers must submit a disclosure as required by 40 ILCS 5/1-113.21(a). Prior to last year’s audit, some of the manager responses did not contain numerical responses. Instead, a few of the managers indicated that they did not know, did not track or could not legally provide all of the requested information. Prior to last year, SURS accepted non-numerical responses. SURS process for new RFP’s has been updated and now requires a numerical response with no additional notations. Of the two findings noted this year, one was for a contract completed prior to the drafting of last year’s finding. The other finding was for a manager which supplied a numerical answer, however footnoted they don’t track all of the requested information. As their response stated 0, the actual number could not possibly be lower. The decision to retain the firm was based on the worst possible case. SURS is required by law to operate under the broad financial and fiduciary standards set forth in 40 ILCS 5/1-109. SURS believes the intent of 40 ILCS 5/1-113.21(a) is not to exclude managers solely on the basis of this reporting requirement. This is supported by the language in subsection (b) of the statute which requires these disclosures to be “considered within the bounds of financial and fiduciary prudence…” Finalist candidate RFP forms documenting the required disclosures are given, in their entirety, to each Board member for their use in the selection process. Therefore, all responses received (numeric or explanatory in nature) were given full fiduciary consideration prior to the awarding of each contract, consistent with 40 ILCS 5/1-113.21 (b) and 40 ILCS 5/1-109. In addition, 40 ILCS 5/1-113.21(a) does not require investment managers to create information they do not already possess. If they respond to the RFP by indicating that they do not track the requested information or do not have access to it, they are still making a disclosure as required by the statute even if they do not have specific numbers to include in their response to the RFP. Although their inability to provide the requested information is considered as part of the overall selection process, it should not be deemed to be noncompliance with the statutory disclosure requirements. SURS maintains its position that it complies with this law given the nature and intent of the statute when combined with the fiduciary prudence used by SURS in its manager selection process, as required by 40 ILCS 5/1-113.21(b) and 40 ILCS 5/1-109, however with the recent changes, believes it complies with the letter of the law as interpreted by the auditors.