REPORT DIGEST

ILLINOIS STATE BOARD OF INVESTMENT

COMPLIANCE EXAMINATION

For the Year Ended:

June 30, 2005

Summary of Findings:

Total findings this report 1

Total findings last report 1

Repeated findings 0

Release Date:

May 2, 2006

State of Illinois

Office of the Auditor General

WILLIAM G. HOLLAND

AUDITOR GENERAL

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Springfield, IL 62703

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are also available on

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SYNOPSIS

● The Illinois State Board of Investment (Board) identified deposits in their June 30, 2005 financial statements that were exposed to custodial credit risk. In addition, the Board disclosed they did not have a formal deposit policy to address custodial credit risk.

{Financial information and activity measures are summarized on the reverse page.}

ILLINOIS STATE BOARD OF INVESTMENT

INFORMATION FROM FINANCIAL AUDIT AND COMPLIANCE EXAMINATION

YEAR ENDED JUNE 30, 2005

FINANCIAL STATEMENT ANALYSIS	FY 2005	FY 2004
REVENUE: Investment Income - Interest.................................... Investment Income - Dividends................................. Investment Income - Securities Lending..................... Realized Gain on Investments.................................... Unrealized Gain on Investments................................. Total Investment Income....................................... External Support (Investment Expense) ..................... Total Revenue (Net Investment Income)................. EXPENSES: Operating Expenses................................................. Revenue over Expenses......................................... Member Systems’ Contributions (Withdrawals).......... Net Assets, at Beginning of Year.............................. Net Assets, at End of Year....................................	$ 142,444,438 119,713,292 3,674,829 505,168,829 260,921,934 $ 1,031,923,322 (23,025,047) $ 1,008,898,275 $ 1,457,162 $ 1,007,441,113 (547,700,000) $10,442,738,554 $10,902,479,667	$ 95,062,599 89,316,960 2,351,632 729,227,862 608,739,087 $ 1,524,698,140 (16,653,035) $1,508,045,105 $ 1,252,505 $ 1,506,792,600 1,134,924,744 $ 7,801,021,210 $10,442,738,554
INVESTMENT PORTFOLIO ANALYSIS – Fair Value	JUNE 30, 2005	JUNE 30, 2004
Total Government Obligations........................................................ Total Corporate Obligations........................................................... Foreign Obligations........................................................................ Convertible Bonds......................................................................... U.S. Common Stock & Equities..................................................... Preferred Stock ........................................................................... Foreign Equity Securities............................................................... Real Estate Investments................................................................ Alternative Investments................................................................. Money Market Investments........................................................... Forward Foreign Currency Contracts............................................. Total Investment Portfolio........................................................	$ 1,112,360,428 1,551,766,590 198,858,369 1,404,244 5,579,812,196 487,946 986,200,950 778,951,123 466,871,030 283,461,008 (497,874) $10,959,676,010	$ 1,472,563,096 1,384,436,108 141,984,456 2,745,915 5,087,663,744 4,590,819 1,087,681,488 616,134,095 441,033,580 425,397,983 (425,690) $10,663,805,594
OPERATING EXPENSES & EXTERNAL SUPPORT	FY 2005	FY 2004
Salaries........................................................................................ Benefits........................................................................................ Rent and Utilities........................................................................... Audit............................................................................................ Other........................................................................................... Total Operating Expenses........................................................ Custody........................................................................................ Consulting and Professional........................................................... Investment Advisors/Managers...................................................... Investment Services and Research................................................. Total External Support............................................................. Total Operating Expenses & External Support...........................	$ 767,248 315,097 156,066 100,650 118,101 $ 1,457,162 $ 197,857 647,218 22,010,299 169,673 $23,025,047 $24,482,209	$ 659,861 228,229 145,717 95,300 123,398 $ 1,252,505 $ 357,000 771,065 15,285,305 239,665 $16,653,035 $17,905,540
SUPPLEMENTARY INFORMATION	FY 2005	FY 2004
Compounded Annual Rate of Return, Since July 1, 1982 (unaudited)..... Annual Time Weighted Return on Investments (unaudited)................. Average Number of System Employees......................................... Total Brokerage Commissions Paid (unaudited)................................. Total Investment Manager Fees.....................................................	10.7% 10.1% 10 $3,316,588 $22,010,299	10.8% 16.4% 7 $5,245,618 $15,285,305
EXECUTIVE DIRECTOR
During Audit Period: William R. Atwood Currently: William R. Atwood

$13,501,974 of Board deposits were not insured or collateralized for amounts in excess of FDIC coverage

The Board does not have a formal policy to address custodial credit risk

A change in accounting standards now requires disclosure regarding various risks for deposits and investments

The State Officers and Employees Money Disposition Act notes when deposits are in excess of FDIC coverage other collateral shall be obtained

Auditors’ comment

Funding legislation was changed to reduce the required employer (State) contributions from participating retirement systems for fiscal years 2006 and 2007

INTRODUCTION

This digest covers our compliance examination of the Illinois State Board of Investment (Board) for the year ended June 30, 2005. A financial audit covering the year ending June 30, 2005 was issued separately.

FINDING, CONCLUSION, AND RECOMMENDATION

DEPOSIT CUSTODIAL CREDIT RISK

At June 30, 2005, the Board had $13,501,974 of deposits held in their investment related bank account. The deposits were neither insured nor collateralized for amounts in excess of the federal deposit insurance coverage of $100,000. The Board also noted they did not have a formal policy to address custodial credit risk.

The Board’s financial statements are prepared in accordance with generally accepted accounting standards (standards). The standards require the Board to disclose information regarding deposits and investments that are subject to various risks, with custodial credit risk being one of those risks. Custodial credit risk is the risk that in the event of a financial institution failure, the Board would not be able to recover the value of the deposits or investments in the possession of an outside party.

The State Officers and Employees Money Disposition Act (30 ILCS 230/2c) provides that whenever funds deposited with a bank or savings and loan association exceed the amount of federal deposit insurance coverage, a bond, pledged securities, or other eligible collateral shall be obtained. Board management indicated they have researched the State Officers and Employees Money Disposition Act and believe it is not applicable to the Board or any State pension funds.

We recommended the Board develop a formal policy to address custodial credit risk as it relates to deposits. (Finding 1 page 9-10)

The Board responded to the recommendation noting they will consider whether adopting a policy regarding custodial credit risk is necessary. The Board also responded their counsel is of the opinion the Board is not subject to the State Officers and Employees Money Disposition Act and they are requesting an Attorney General opinion regarding the applicability of the State Officers and Employees Money Disposition Act to the Board.

The auditors included a comment to the Board’s response noting the Board is a part of the Executive branch of the State Government and is subject to the provisions of the State Officers and Employees Money Disposition Act. We further recommend if the Board continues to disagree with the applicability of the State Officers and Employees Money Disposition Act they seek a formal written Attorney General opinion on this matter.

CHANGE IN PENSION

FUNDING LEGISLATION

In June 2005, Public Act 94-0004 became law. This legislation further modified the funding plan of the State Employees’ Retirement System, Judges’ Retirement System and General Assembly Retirement System by reducing the amount of required employer (State) contributions for fiscal year 2006 and 2007 that would have otherwise been required under the previous funding legislation. This reduction in funding will result in an increase in the member systems’ withdrawals from the Board in fiscal year 2006 and 2007 to meet their respective funding requirements for benefit obligations.

AUDITORS’ OPINION

We conducted a compliance attestation examination of the Board for the year ended June 30, 2005 as required by the Illinois State Auditing Act. A financial audit covering the year ending June 30, 2005 was issued separately.

____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:RPU:pp

SPECIAL ASSISTANT AUDITORS

KPMG, LLP were our special assistant auditors for this engagement.