| OPERATING STATEMENT ANALYSIS |
FY 1998 |
FY 1997 |
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 |
$ 441,016,391
466,948,418
35,985,379
$ 943,950,188
2,054,735,011
996,269,001
3,051,004,012
(177,902,545)
$3,817,051,655
$1,209,957,247
34,314,918
$1,244,272,165
$2,572,779,490 |
$ 416,739,369
385,129,987
36,049,201
$ 837,918,557
1,929,166,394
859,322,775
2,788,489,169
(144,715,051)
$3,481,692,675
$1,160,917,183
31,594,466
$1,192,511,649
$2,289,181,026 |
| INVESTMENT PORTFOLIO ANALYSIS - Fair Value |
JUNE 30, 1998 |
JUNE 30, 1997 |
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
Alternative Investments
Currency Investment
Total Investment Portfolio |
$3,763,739,965
3,009,332,951
1,412,854,121
106,840,757
6,336,877,264
2,104,340,857
1,315,152,039
2,465,432,457
458,118,826
9,969,850
$20,982,659,087 |
$ 2,718,749,692
1,718,215,909
1,317,103,023
106,809,956
5,498,625,628
1,736,440,411
2,213,381,354
2,348,125,078
364,577,923
69,333,815
$18,091,362,789 |
| ADMINISTRATIVE EXPENSES |
FY 1998 |
FY 1997 |
Personal Services
Professional Services
Postage
Machine Repair and Rental
Other Contractual Services
Commodities
Occupancy Expense
Provision for Depreciation
Gain on Disposal of Equipment
Total Administrative Expenses |
$ 6,754,240
807,808
374,988
306,077
569,345
233,925
235,241
481,297
(1,611)
$9,761,310 |
$6,765,101
543,217
374,413
261,311
525,198
226,453
240,032
532,828
0
$9,468,553 |
| SELECTED ACCOUNT BALANCES |
JUNE 30, 1998 |
JUNE 30, 1997 |
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 |
$ 1,129,919
129,755,536
234,214,755
20,748,444,332
1,841,099,038
637,835
3,184,221
$22,958,465,636
2,992,578,231
$19,965,887,405 29,908,241,000
$(9,942,353,595) |
$ 6,706,525
230,947,823
228,713,016
17,862,649,773
1,349,674,873
701,819
3,426,543
$ 19,682,820,372
2,289,712,457
$ 17,393,107,915
26,951,585,000 $ (9,558,477,085) |
| SUPPLEMENTARY INFORMATION |
FY 1998 |
FY 1997 |
Total investment manager fees
Total time weighted return on investments
Average Number of System Employees
Number of Retirement Annuitants
Total Brokerage Commissions Paid |
$70,424,071
16.6%
155
51,472
$14,282,151 |
$65,217,816
18.3%
156
51,995
$13,354,850 |
| EXECUTIVE DIRECTOR |
During Audit Period: Mr. Robert Daniels through August 15,
1997, Mr. John Day, Interim Executive Director, effective August 18, 1997
Currently: Mr. Keith Bozarth, Executive Director, effective September 9, 1998 |
Sixty-five investment manager transactions were tested from 1993 through 1998
Investment manager was overpaid $3,217,329
Investment manager contract amendment effective date ambiguous
Average market value not defined, and applied consistent to standard System practice
Investment manager underpaid $120,972
$1,067,150 in legal services for real estate related transactions provided without a
contract
Contracts must be reduced to writing and filed with the Comptroller |
INTRODUCTION
This digest covers our State compliance audit of the System for the year ended
June 30, 1998. A financial audit covering the year ended June 30, 1998 is issued under a
separate cover.
FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
INVESTMENT MANAGER FEE MISCALCUALTIONS
We examined sixty-five investment manager transactions from 1993 through 1998. As
part of examining the investment manager transactions we tested investment manager fees to
determine they were properly calculated in accordance with contractual terms. The System
contracts with investment management companies for portfolio management services. We noted
the following circumstances as a result of our testing:
- TRS policy requires Board approval for any new contracts or amendments to contracts
which result in economic changes with investment managers. TRS management granted an
amendment to an investment manager contract which changed the fee calculation methodology;
however, Board approval was not obtained for this change. Therefore, the fee change did
not appear to be valid. TRS management disclosed this overpayment at their last
Legislative Audit Commission hearing. The total amount overpaid was $3,217,329. Management
indicated that all overpayments to this investment manager have been refunded to TRS with
interest.
- An investment manager contract was amended on March 24, 1994 to provide for an increase
in the management fee from 25 basis points on the portfolio balance to 45 basis points.
The amendment did not identify an effective date for the implementation of the new fee
calculation, and, as such, the effective date was ambiguous. The 45 basis point
calculation was used by the System for the entire quarter (January 1 - March 31, 1994)
resulting in a management fee payment to the investment manager of approximately $253,000.
Using the 25 basis point calculation, prorated for only seven days at the new rate, would
have yielded an investment manager fee of approximately $150,250, a difference of
$102,750.
- Two fee payments utilized an average of the beginning and ending quarterly market values
of the portfolios for the fee payment calculations. The standard practice, in most cases,
is to use a calculation based on the average of the ending monthly market values of the
portfolio during the quarter, unless otherwise specified in the contract. The original
contract did not contain a clear definition as to how to apply the term "average
market value". Using the standard definition of average market value, the System
underpaid the investment manager approximately $54,000. This manager was terminated by the
System in fiscal year 1994.
- The market values of portfolios often require minor changes, as calculated by the
trustee, after month end as a result of post period adjustments. We noted that with one
investment manager there were substantial differences between the adjusted market values
and the market values used to calculate the investment manager's fee. This situation
resulted in a $120,972 underpayment to this investment manager. The System subsequently
paid this amount.
The System has implemented internal policies, procedures and controls to verify fee
payments are accurate. Following these procedures during the processing of investment
manager fee payments should ensure accurate and timely payments. (Finding 98-2, pages
14-15)
We recommended the System follow its current policies and procedures to prevent and
detect payment errors and continue to standardize its compensation agreements with its
investment managers. Further, the System should have all approvals present on each fee
payment to ensure the proper calculation was made and reviewed.
System officials stated they will continue to follow existing policies and procedures
for fee calculation and review and, when possible, will continue to simplify and
standardize compensation agreements.
LACK OF CONTRACT FOR CERTAIN LEGAL SERVICES
The System requires its real estate investment managers to obtain legal services
from a specified law firm pursuant to a clause included in each real estate investment
manager contract. We noted there was not a formalized contract between the specified law
firm and the System relating to these services. The System does have a formalized contract
with the designated law firm for direct legal services, but the contract language pertains
only to direct legal services provided to the System, and the contract did not appear to
include any services provided on behalf of the System to real estate investment managers.
The legal fees incurred are paid by the real estate investment managers from the operating
cash of the System's investments they manage. Total fees paid by real estate investment
managers from System assets to the designated law firm amounted to approximately
$1,067,150 in 1998.
According to the Illinois Purchasing Act, contracts involving an expenditure of $5,000
or more for services involving professional or artistic services must be reduced to
writing and filed with the Comptroller. In addition, good business practice dictates that
whenever a significant relationship exists for providing services on behalf of the System,
this relationship should be reduced to writing in either an annual contract or another
document that is officially presented and approved by the Board.
System management indicated the law firm has been providing high quality services for
numerous years and that, because of the length of the relationship and System awareness of
the capabilities of the law firm, they chose to forgo the contracting process for these
services. There was formal approval by the Board for the law firm to provide these
services in January 1992. There has been no update since that time. (Finding 98-4, pages
17-18)
We recommended the System follow the statutes and good business practice of reducing
agreements to writing for professional or artistic skills that involve expenditures of
more than $5,000.
System officials agreed that the business practices would be improved by documenting
the relationship through an annual contract.
OTHER FINDINGS
The remaining findings were less significant and the System's responses indicate
that it is addressing the conditions. We will review the System's progress in implementing
our recommendations in our next audit.
Mr. John Bauman, Chief Operating Officer, provided responses to our recommendations on
December 23, 1998.
____________________________________
WILLIAM G. HOLLAND, Auditor General
WGH:RPU:pp
SPECIAL ASSISTANT AUDITORS
KPMG Peat Marwick, LLP were our special assistant auditors for this audit. |
