REPORT DIGEST

 

 

STATE UNIVERSITIES RETIREMENT SYSTEM

 

 

 

 

FINANCIAL AUDIT

For the Year Ended:

June 30, 2009

 

Release Date:

February 16, 2010

 

 

 

 

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, 2009.A compliance examination report covering the year ending June 30, 2009 will be issued separately.

†††††

UNDERFUNDING OF THE SYSTEM

 

††††† The actuarial accrued liability was valued at $26.3 billion at June 30, 2009.The actuarial value of assets (at smoothed value) totaled approximately $14.3 billion at June 30, 2009.The method for determining the actuarial value of assets was changed beginning with the June 30, 2009 valuation.The method was changed from the market value to a smoothed value where the actuarial gains or losses for each year are recognized in equal amounts over the ensuing five-year period.

 

††††† The difference between the actuarial accrued liability and the actuarial value of assets of $12 billion reflects the unfunded liability of the System at June 30, 2009.The System had a funded ratio (at smoothed value) of 54.3% at June 30, 2009.When using the market value (valuation method used June 30, 2008) the System would have had a funded ratio of 41.9% at June 30, 2009.

 

 

SYNOPSIS

(of Financial Audit Findings)

 

  • The System does not have adequate internal control over the accuracy and completeness of individual memberís earnings and contributions.

 

  • The System did not have adequate internal control over financial reporting for its securities lending transactions.

 

 

 

 

 


STATE UNIVERSITIES RETIREMENT SYSTEM

FINANCIAL AUDIT

Year Ended June 30, 2009

 

FINANCIAL OPERATIONS

FY 2009

FY 2008

Additions

††††† Contributions

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

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

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

†††††

††††† Investment Income

††††† ††††† Net depreciation in fair market value.........

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

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

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

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

††††††††††††††††† Net Investment Loss..........................

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

Deductions

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

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

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

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

Net Decrease.......................................................

 

 

††††††† $322,117,492

††††††††† 489,881,392

††††††† $811,998,884

 

†††††††††††††††††††††††††††††

††† ($3,290,131,425)

††††††††† 183,668,534

††††††††† 153,789,636

††††††††††† 18,313,879

†††††††††† (32,760,517)

††† ($2,967,119,893)

††† ($2,155,121,009)

 

†††† $1,376,726,389

††††††††††† 51,372,312

††††††††††† 12,922,070

†††† $1,441,020,771

††† ($3,596,141,780)

 

 

 

††††††† $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)

 

INVESTMENT PORTFOLIO ANALYSIS(Fair Value)

JUNE 30, 2009

JUNE 30, 2008

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

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

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

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

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

†††† $6,967,844,154

†††††† 3,565,341,020

††††††††† 228,750,215

††††††††† 530,092,101

†† $11,292,027,490

†††† $8,731,804,485

†††††† 4,813,443,832

††††††††† 352,275,186

††††††††† 562,118,120

†† $14,459,641,623

FUNDING PROGRESS (millions)

June 30, 2009

June 30, 2008

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

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

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

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

†††††††††††††††† $26,316.2

†††††††††††††††††† 14,282.0

†††††††††††††††† $12,034.2

†††††††††††††††††††††††† 54.3%

†††††††††††††††† $24,917.7

†††††††††††††††††† 14,586.3

†††††††††††††††† $10,331.4

†††††††††††††††††††††††† 58.5%

SUPPLEMENTARY INFORMATION

June 30, 2009

June 30, 2008

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

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

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

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

46,920

83,545

77,780

208,245

45,408

83,074

76,721

205,203

ASSOCIATE EXECUTIVE DIRECTOR

 

 

During Audit Period and Current:Judith A. Parker


 

 


 

 

 

 

 

 

 

 

 

 


The System assumes that the employer is remitting the statutorily required percentage of earnings

 

 

 

 

 

 

 

 

 

 


The System does not have a control in place to verify the completeness and accuracy of member contributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Management used historical par value instead of market value

 

 

 

Proposed adjustment of $6,870,000 was not recorded in the financial statements

 

 

 

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

 

IMPROVEMENTS NEEDED FOR CONTROLS OVER MEMBER EARNINGS AND CONTRIBUTIONS †††

 

††††† The State Universities Retirement System (System) does not have adequate internal control over the accuracy and completeness of individual memberís earnings and contributions.

 

††††† During the testing of contributions, it was noted that each participating employer of the System submits a payroll detail report at the end of each payroll period.This report details individual member contributions into the System as part of payroll deductions by the employer.The employer does not remit earnings on the payroll detail report in total or on an individual basis.Only the contribution amount by employee is listed.Since no earnings data is reported, the System assumes that the employer is remitting the statutorily required percentage of earnings.

 

††††† In the Systemís Member Subsidiary Ledger, the computer system calculates the earnings based on the contribution.This information is used for tracking and is submitted to the actuary on an annual basis for the preparation of the actuarial valuation.

 

††††† The System is relying upon the participating employers to remit accurate and complete contributions to them on a regular basis. As a result, the System does not have a control in place to verify the completeness or accuracy of an individual memberís contribution for a given payroll period or in total at the end of the fiscal year.

 

††††† We recommended the System implement sufficient internal controls over contributions remitted by the participating employers.A process should be put in place to review the amounts remitted in order to identify any errors in a timely manner and to ensure the completeness and accuracy of the contribution amounts.This process should also be done on a regular basis and reviewed by an appropriate official of the System. (Finding 1, Pages 32-33)

 

††††† System management concurred with the finding and stated that they will add earnings control totals to employer payroll reporting requirements and use this number to check the accuracy of contributions submitted. In addition, they stated that they will consider adding certification language with which the employers need to agree prior to submitting individual payrolls to the System.

 

IMPROVEMENTS NEEDED FOR CONTROLS OVER THE VALUATION OF SECURITIES LENDING COLLATERAL

 

††††† The State Universities Retirement System (System) did not have adequate internal control over the financial reporting for its securities lending transactions.

 

††††† It was noted that the System did not record the fair market value of the investment of cash collateral received for securities lending transactions.The fair market value of the investment at June 30, 2009 was $1,316,000,000 with related obligations of $1,323,000,000.The collateral was invested in various securities that had declined in value during the fiscal year.Management accounted for the investment at its historical par value and did not take into consideration market fluctuations.The resulting unrealized loss of $6,870,000 was a proposed auditor adjustment and has not been recorded in the financial statements for the fiscal year ending June 30, 2009.

 

††††† Generally Accepted Accounting Principles in the United States of America require that the System properly record the collateral assets, liabilities, and gains or losses related to securities lending transactions.Investments of cash collateral received from borrowers should be recorded at fair value.

 

††††† We recommended that System management improve its controls to review all relevant investment information necessary to properly record and disclose all security lending transactions including changes in the market value of the underlying collateral, in the Systemís financial statements.The change in market value should flow through the Systemís general ledger as opposed to being a report entry. (Finding 2, pages 34-35)

††††† System management concurred with the finding and stated that they will change the financial reporting process to properly record the securities lending collateral and obligation amounts as part of year end accounting.

†††††

 

AUDITORS' OPINION

 

††††† Our auditors state the June 30, 2009 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.