REPORT DIGEST

 

STATE UNIVERSITIES RETIREMENT SYSTEM

 

 

 

 

FINANCIAL AUDIT

For the Year Ended:

June 30, 2008

 

Release Date:

February 5, 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 Full Report are also available on

the worldwide web at

http://www.auditor.illinois.gov

 

INTRODUCTION

 

††††† This digest covers our financial audit of the System for the year ended June 30, 2008.A compliance examination report covering the year ending June 30, 2008 will be issued separately.

†††††

UNDERFUNDING OF THE SYSTEM

 

††††† The actuarial accrued liability was valued at $24,917.7 million at June 30, 2008.The actuarial value of assets (at market) totaled approximately $14,586.3 million at June 30, 2008.The difference between the liability and the assets of $10,331.4 million reflects the unfunded liability of the System at June 30, 2008.The State Universities Retirement System had a funded ratio of 58.5% at June 30, 2008.

 

 

SYNOPSIS

(of Financial Statement Finding)

 

  • The System should enhance its accounting and financial reporting process for determining and reviewing the fair value measurements and disclosures for alternative investments.Further, the System should enhance documentation of valuation methods and significant supporting assumptions used for its alternative investments on a timely basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STATE UNIVERSITIES RETIREMENT SYSTEM

FINANCIAL AUDIT

Year Ended June 30, 2008

 

FINANCIAL OPERATIONS

FY 2008

FY 2007

Additions

††††† Contributions

††††††††††† Participants..............................................

††††††††††† Employer.................................................

††††††††††††††††† Total Contributions.............................

††††† Investment Income

††††††††††† Net appreciation (depreciation) in fair ...... ††††††††††† market value............................................

††††††††††† Interest....................................................

††††††††††† Dividends.................................................

††††††††††† Securities lending......................................

††††††††††† Less:Investment expense........................

††††††††††††††††† Net Investment Income (Loss)............

††††††††††††††††††††††† Total Additions............................

Deductions

††††† Benefits..........................................................

††††† Refunds of contributions.................................

††††† Administrative expense...................................

††††††††††††††††††††††† Total Deductions..........................

Net Increase (Decrease)......................................

 

 

††††††† $310,101,265

††††††††† 383,899,304

††††††† $694,000,569

 

†††††††††††††††††††††††††††††

†††††† ($938,306,823)

††††††††††† 60,706,695

††††††††† 187,602,637

††††††††††† 14,161,232

†††††††††† (39,012,867)

†††††† ($714,849,126)

†††††††† ($20,848,557)

 

†††† $1,279,172,742

††††††††††† 54,939,592

††††††††††† 12,079,244

†††† $1,346,191,578

††† ($1,367,040,135)

 

 

 

††††††† $303,992,601

††††††††† 294,451,464

††††††† $598,444,065

 

†††††††††††††††††††††††††††††

†††† $2,249,927,509

††††††††† 225,548,765

††††††††† 155,508,304

††††††††††††† 4,958,036

†††††††††† (38,111,626)

†††† $2,597,830,988

†††† $3,196,275,053

 

†††† $1,180,574,674

††††††††††† 53,407,456

††††††††††† 11,704,567

†††† $1,245,686,697

†††† $1,950,588,356

 

INVESTMENT PORTFOLIO ANALYSIS
(Fair Value)

JUNE 30, 2008

JUNE 30, 2007

Equities††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††

Fixed income.......................................................

Real estate...........................................................

Mutual funds and variable annuities.......................

††††† Total .............................................................

†††† $8,731,804,485

†††††† 4,813,443,832

††††††††† 352,275,186

††††††††† 562,118,120

†† $14,459,641,623

†† $10,242,225,544

†††††† 5,180,583,996

††††††††† 328,033,841

††††††††† 533,000,506

†† $16,283,843,887

FUNDING PROGRESS (millions)

June 30, 2008

June 30, 2007

Actuarial Accrued Liability...................................

Actuarial Value of Assets.....................................

Unfunded Actuarial Accrued Liability....................

Funded Ratio.......................................................

†††††††††††††††† $24,917.7

†††††††††††††††††† 14,586.3

†††††††††††††††† $10,331.4

†††††††††††††††††††††††† 58.5%

†††††††††††††††† $23,362.1

†††††††††††††††††† 15,985.7

†††††††††††††††††† $7,376.4

†††††††††††††††††††††††† 68.4%

SUPPLEMENTARY INFORMATION

June 30, 2008

June 30, 2007

Benefit recipients..................................................

Active members...................................................

Inactive members.................................................

††††† Total..............................................................

45,408

83,074

76,721

205,203

43,443

81,691

75,261

200,395

EXECUTIVE DIRECTOR

 

 

During Audit Period:Dan M. Slack

Currently:Ms. Judith Parker Ė Interim Executive Director (1-1-09 to present)


 

 

 


 

 

 

 

 


Improvements needed in accounting and reporting the fair value of alternative investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The System did not perform a review to determine whether there was a material difference

 

 

 

 

 

 

 

 


Alternative investments comprise approximately 10% of the Systemís total investments

 

 

 

 


Reliance on external investment managers and advisors

 

 

 

 

 

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

 

VALUATION OF ALTERNATIVE INVESTMENTS

 

††††† The State Universities Retirement System (System) should enhance its accounting and reporting process for determining and reviewing the fair value measurements and disclosures, enhance documentation of valuation methods and significant supporting assumptions used for its alternative investments on a timely basis.

 

††††† In conjunction with the audit for the year ended June 30, 2008, an analysis was performed on the Systemís alternative investments.As part of this process, it was discovered that the financial activity reported for certain alternative investments was not current as June 30, 2008.The amounts that were reported represented the values provided by their Investment Management Firms as of March 31st with cash activity through June 30th,but did not include the change in the underlying investments for the period from April 1st through June 30th.As a result, the Systemís beginning Plan Net Assets and Net Increase in Plan Net Assets were understated by approximately $85 million.

 

††††† Generally accepted accounting principles require the System to report their investments at fair value as of the Statement of Plan Net Assets date.Management has been unable to obtain more current financial data in time to prepare the June 30 financial statements.Errors occurred because management had historically used a March 31 cutoff date in the Systemís financial statements and they have not performed any retrospective look backs to determine that the values reported at March 31st were not materially different than the June 30th actual balances.

 

††††† Alternative investments are defined as investments for which a readily determinable fair value does not exist.These are investments not listed on national exchanges or over-the-counter markets, or for which quoted market prices are not available from sources such as financial publications, the exchanges, or the National Association of Securities Dealers Automated Quotations System (NASDAQ).Alternative investments comprise approximately 10% of the Systemís total investments and include real estate and private equity as of June 30, 2008.

 

††††† Based on the organizational structure and limited staff of the System, they have traditionally relied on the due diligence and valuation procedures performed by external investment managers and the investment advisors.System management may look to the external managers and advisors for guidance, but management must have sufficient information to evaluate and independently challenge the information provided by the external managers and advisors.

 

††††† We recommended the System review its current process for determining the fair value measures and disclosures for alternative investments and develop written procedures related to the determination of fair value measurements, selecting appropriate valuation methods, identifying and adequately supporting assumptions used, and assignment of responsibilities.The System should also evaluate current staffing to determine whether appropriate resources exist and work with their external investment managers to obtain the necessary financial information on a timely basis. (Finding 1, Pages 32-34)

 

††††† System management concurred with the finding and stated that they will adjust the reporting and accounting schedules to allow the use of June valuation amounts for the alternative investments class.In addition, they stated that they will improve the documentation and review of valuation methods as well as the ongoing monitoring process of its investment managers.

 

AUDITORS' OPINION

 

††††† Our auditors state the June 30, 2008 financial statements of the System are fairly presented in all material respects.

 

 

_____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:TLK:pp

 

SPECIAL ASSISTANT AUDITORS

 

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