Teachers' Retirement System 2001 Compliance Audit

REPORT DIGEST
TEACHERS’ RETIREMENT SYSTEM

COMPLIANCE AUDIT

For the Year Ended:
June 30, 2001

Summary of Findings:

Total this audit 2
Total last audit 1
Repeated from last audit 0

Release Date:
February 28, 2002

State of Illinois

Office of the Auditor General

WILLIAM G. HOLLAND

AUDITOR GENERAL

Iles Park Plaza
740 E. Ash Street
Springfield, IL 62703
(217) 782-6046
To obtain a copy of the Report contact:
Office of the Auditor General
Attn: Records Manager
Iles Park Plaza
740 E. Ash Street
Springfield, IL 62703

(217)782-6046 or TDD (217) 524-4646

This Report Digest is also available on
the worldwide web at
http://www.state.il.us/auditor

SYNOPSIS

The System’s internal audit program did not meet the requirements of the Fiscal Control and Internal Auditing Act.

An amendment to the Illinois Pension Code required the System to add an additional annuitant trustee to the System’s Board of Trustees. The amendment noted one elected trustee shall be elected in 2001. It is not clear whether this means within the statutory timeframes for elections set forth in the Illinois Pension Code, or that an election should be held regardless of the statutory timeframes.

{Financial Data and Activity Measures are summarized on the reverse page.}

TEACHERS' RETIREMENT SYSTEM OF ILLINOIS
INFORMATION FROM FINANCIAL AND COMPLIANCE AUDITS
YEAR ENDED JUNE 30, 2001

OPERATING STATEMENT ANALYSIS	FY 2001	FY 2000
Revenues: Contributions - Members Contributions - State of Illinois Contributions - School Districts Total Contributions Investment Income - Appreciation in Fair Value Investment Income - Income From Investments Total Investment Income Investment Expense Total Revenues Expenses: Total Benefits Other Expenses Total Expenses Revenues in Excess of Expenses	$ 643,563,304 724,007,792 97,617,613 $ 1,465,188,709 (1,860,498,992) 1,061,629,965 (798,869,027) (216,386,210) $ 449,933,472 $ 1,566,793,231 48,906,765 $ 1,615,699,996 $(1,165,766,524)	$ 619,622,840 639,298,949 91,298,290 $1,350,220,079 1,451,074,361 1,052,084,793 2,503,159,154 (166,942,031) $3,686,437,202 $1,402,246,044 40,487,550 $1,442,733,594 $2,243,703,608
INVESTMENT PORTFOLIO ANALYSIS - Fair Value	JUNE 30, 2001	JUNE 30, 2000
Total Government Obligations Total Corporate Obligations International Notes Preferred Stock (U.S. & International Combined) Common Stock - U.S. Common Stock - International Short Term Investments Real Estate Investments Private Equity Foreign Currency Total Investment Portfolio	$ 3,895,484,138 3,125,058,898 1,797,319,661 112,594,835 6,301,664,623 4,601,292,055 1,238,861,490 2,424,554,513 689,740,876 26,752,464 $24,213,323,553	$ 3,653,438,948 3,330,485,861 1,861,842,857 98,489,594 6,490,541,514 4,954,547,913 1,322,283,789 2,428,110,937 877,028,687 39,495,154 $25,056,265,254
ADMINISTRATIVE EXPENSES	FY 2001	FY 2000
Personal Services Professional Services Postage Machine Repair and Rental Other Contractual Services Commodities Occupancy Expense Provision for Depreciation Loss on Disposal of Equipment Total Administrative Expenses	$ 9,195,997 844,265 414,273 409,675 769,075 270,924 168,563 561,158 6,665 $12,640,595	$ 8,521,781 714,495 295,742 422,198 811,625 257,348 175,305 465,024 17,129 $11,680,647
SELECTED ACCOUNT BALANCES	JUNE 30, 2001	JUNE 30, 2000
Cash Receivables Accrued Investment Income Receivable Investments Collateral from Securities Lending Prepaid Expenses Property and Equipment Total Assets Total Liabilities Net Assets Held in Trust for Pension Benefits Actuarial Accrued Liability Unfunded Actuarial Accrued Liability	$ 7,889,353 198,872,583 202,756,810 24,010,566,743 2,288,995,477 968,066 3,658,427 $ 26,713,707,459 3,398,061,376 $ 23,315,646,083 39,166,697,000 $(15,851,050,917)	$ 3,213,679 255,139,390 232,706,956 24,823,558,298 1,952,295,799 368,526 3,420,592 $ 27,270,703,240 2,789,290,633 $ 24,481,412,607 35,886,404,000 $(11,404,991,393)
SUPPLEMENTARY INFORMATION	FY 2001	FY 2000
Total investment manager fees Total time weighted return on investments Average Number of System Employees Number of Retirement Annuitants Total Brokerage Commissions Paid	$69,666,589 (4.2)% 171 56,549 $13,690,437	$62,078,971 10.6% 166 54,040 $12,718,390
EXECUTIVE DIRECTOR(S)
During Audit Period : Keith Bozarth to March 31, 2001; Kimberly Pollitt, Acting , April 1, 2001 to August 8, 2001; Jon Bauman, effective August 9, 2001 Currently: Jon Bauman

The System does not have a current two-year audit plan

During a portion of the audit period, the System did not have a staffed internal audit department

An amendment to the Illinois Pension Code requires a second annuitant be elected in 2001. The System did not conduct an election

The amendment to the Code was effective February 6, 2001. The Board voted and added a new annuitant member on August 9, 2001

System management indicated there was not sufficient time to have an election based on timeframes set forth in the Code

INTRODUCTION

This digest covers our State compliance audit of the System for the year ended June 30, 2001. A financial audit covering the year ended June 30, 2001 is issued under a separate cover.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

INTERNAL AUDIT PROGRAM

The Teachers’ Retirement System’s (System) internal audit program did not meet the requirements of the Fiscal Control and Internal Auditing Act (Act).

The System does not have a current two-year audit plan.

The internal audit manager position became vacant in August 2001 and as of the close of our audit had not been filled. Furthermore, the staff auditor also left the System, leaving the System with no internal audit function.

The Act notes that designated state agencies shall establish a full-time program of internal auditing. The System has been designated as an agency required by the Governor to establish a full-time program of internal auditing. In addition, the Act sets forth that each designated state agency shall ensure that the internal auditing program includes a two-year audit plan, identifying audits scheduled for the pending fiscal year, approved by the chief executive officer before the beginning of the fiscal year.

System management indicated the two-year audit plan was not approved because the internal audit manager and executive level management were not able to agree on certain aspects of the audit plan. (Finding No. 1, pages 13 & 14)

We recommended the System appoint a new internal auditor. Further, the System should put into place an approved two-year audit plan and the internal audit function should devote sufficient resources to completing audits of major internal control systems within the two-year period covered by the audit plan.

The System concurred with the recommendation and indicated a qualified internal auditor had been hired as of December 10, 2001. In addition, a two-year audit plan for fiscal year 2002 and 2003 was approved on January 16, 2002.

ELECTION OF A NEW ANNUITANT TRUSTEE

Public Act 91-0941 (Act) amended the Illinois Pension Code (Code) to add an additional annuitant member to the Board of Trustees of the Teachers’ Retirement System (System). The Act set forth that one annuitant trustee shall be elected in 2001; the System did not conduct an election.

The Act was signed by the Governor on February 6, 2001, and was effective upon the Governor’s signature. The System’s Board of Trustees (Board) met numerous times, and at the August 9, 2001 Board meeting, a motion was made to elect an annuitant trustee. The motion passed on a 5 to 4 vote. Based on the vote of the Board, a new annuitant trustee was added to the Board for a term ending July 15, 2005.

Per the Code, as amended by the Act, the elected annuitant position created by this amendatory Act shall be filled as soon as possible in the manner provided for vacancies, for an initial term ending July 15, 2001. One elected annuitant trustee shall be elected in 2001, and in every fourth year thereafter, for a term of 4 years beginning July 15 next following his or her election.

System management indicated that based on when the Act was signed and per advice from the Board’s legal counsel, the System did not have sufficient time to have an election based on votes from annuitants within the timeframes established in the Code. Per the Code, elections shall be held on May 1, and candidates must file nominating petitions with the Board’s secretary not less than 90 days nor more than 120 days prior to May 1. The Governor signed the Act on February 6^thand, there are only 83 days from February 6^th to May 1^st. (Finding No. 2, pages 15 & 16)

We recommended the System request a written opinion from the Illinois Attorney General to determine if an election based on votes from annuitants shall be held in 2001 not taking into consideration statutory timelines for having elections, or if an election shall be held in accordance with the timelines as set forth in the Pension Code. Furthermore, if it is determined an election based on votes from annuitants is not required to be held in 2001, what is the term the new Board annuitant trustee is to serve.

System officials stated they requested an opinion from the Illinois Attorney General and received a letter from that Office dated November 26, 2001. The letter from the Illinois Attorney General’s Office indicated that the actions taken by the Board of Trustees satisfied all legal requirements set out in the Illinois Pension Code pertaining to the election of the new annuitant member, and the new annuitant member’s term would not expire until July 15, 2005.

The Auditor General commented on the System’s response since the opinion obtained by the System and cited by it in its response is an informal opinion not signed by the Attorney General. Because of the potential significance of this issue, we continue to recommend that the System seek a formal written opinion on this matter from the Attorney General.

Mr. John Bauman, Executive Director, provided the response to our recommendation on January 16, 2002.

____________________________________

WILLIAM G. HOLLAND, Auditor General

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SPECIAL ASSISTANT AUDITORS

McGladrey & Pullen LLP were our special assistant auditors for this audit.