REPORT DIGEST

TEACHERS’ RETIREMENT SYSTEM OF THE

STATE OF ILLINOIS

COMPLIANCE EXAMINATION

For the Year Ended:

June 30, 2005

Summary of Findings:

Total findings this report 1

Total findings last report 0

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

u The Teachers’ Retirement System identified in their June 30, 2005 financial statements that they did not have a formal policy addressing custodial credit risk.

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

TEACHERS' RETIREMENT SYSTEM OF ILLINOIS

INFORMATION FROM FINANCIAL AUDIT AND COMPLIANCE EXAMINATION

YEAR ENDED JUNE 30, 2005

OPERATING STATEMENT ANALYSIS	FY 2005	FY 2004
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: Benefits................................................................................... Refunds................................................................................ Administrative Expenses.................................................... Total Expenses.................................................................. Revenue over Expenses....................................................	$ 761,790,009 906,749,310 148,813,036 $1,817,352,355 2,569,878,360 953,893,405 $3,523,771,765 193,732,607 $5,147,391,513 $2,533,102,848 59,395,758 14,403,715 $2,606,902,321 $2,540,489,192	$ 768,661,300 5,361,851,773 127,573,465 $ 6,258,086,538 3,873,564,792 740,823,119 $ 4,614,387,911 128,658,566 $10,743,815,883 $ 2,262,329,479 48,019,644 13,560,546 $ 2,323,909,669 $ 8,419,906,214
INVESTMENT PORTFOLIO ANALYSIS - Fair Value	JUNE 30, 2005	JUNE 30, 2004
Total Government Obligations................................................................... Total Corporate Obligations....................................................................... International Notes and Bonds.................................................................. 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................................................................	$ 6,019,627,007 3,646,412,522 659,701,554 168,998,798 12,499,580,367 6,118,615,710 1,413,132,556 3,525,456,881 1,068,633,225 28,166,730 $35,148,325,350	$ 5,699,920,106 3,047,586,076 341,939,109 170,070,366 13,185,157,414 5,249,363,442 1,036,863,444 2,680,788,703 840,390,782 24,999,284 $32,277,078,726
ADMINISTRATIVE EXPENSES	FY 2005	FY 2004
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........................................................	$10,787,362 981,768 452,629 462,559 765,214 506,844 172,652 277,617 (2,930) $14,403,715	$ 9,855,223 981,402 436,283 503,353 792,565 435,978 182,991 372,751 0 $13,560,546
Contributions Available to Invest (iNVESTMENTS USED FOR Benefits and Expenses)	FY 2005	FY 2004
CONTRIBUTIONS: Member/Participants................................................ Employers.............................................................. State of Illinois Appropriations ........................ Total Contributions (1)................................. DEDUCTIONS: Benefits........................................................................ Refunds..................................................................... Administration......................................................... Total Deductions (2)....................................... Contributions Available to Invest (Investments used to Pay Benefits and Expenses) (1)-(2)..............................................................	$ 761,790,009 148,813,036 906,749,310 $1,817,352,355 $2,533,102,848 59,395,758 14,403,715 $2,606,902,321 $(789,549,966)	$ 768,661,300 127,573,465 5,361,851,773 $6,258,086,538 $2,262,329,479 48,019,644 13,560,546 $2,323,909,669 $3,934,176,869
SUPPLEMENTARY INFORMATION	FY 2005	FY 2004
Total investment manager fees.................................................................. Total time weighted return on investments............................................. Average Number of System Employees................................................... Number of Retirement Annuitants............................................................ Total Brokerage Commissions Paid..........................................................	$104,221,360 10.8% 168 73,464 $16,360,838	$94,175,293 16.5% 165 67,950 $20,031,798
EXECUTIVE DIRECTOR
During Engagement Period: Jon Bauman Currently: Jon Bauman

System did not have a formal policy addressing custodial credit risk

A change in an accounting standard now requires disclosures regarding various risks for deposits and investments

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

INTRODUCTION

This digest covers our compliance examination of the Teachers’ Retirement System (System) for the year ended June 30, 2005. A financial audit covering the year ending June 30, 2005 was issued separately.

FINDING, CONCLUSION, AND RECOMMENDATION

NO FORMAL POLICY ADDRESSING CUSTODIAL CREDIT RISK

The Teachers’ Retirement System (System) identified in their June 30, 2005 financial statements that they did not have a formal policy addressing custodial credit risk. At June 30, 2005, the System identified $165,262,023 of investments that were noted as being uninsured and unregistered, with the securities held by a counterparty, but not in the System’s name (exposed to custodial credit risk).

The Systems’ financial statements are prepared in accordance with generally accepted accounting standards (standards). The standards require the System 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 System would not be able to recover the value of the investments in the possession of an outside party.

System management noted they did not have a formal policy addressing custodial credit risk because such a policy is not required by law or GASB 40.

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

System management noted there is no statute or accounting standard setting authority that requires a formal written policy to address custodial credit risk. However, the System agrees to implement a formal written policy to address custodial credit risk and will continue to work with its custodian and investment managers to monitor custodial credit risk exposure.

Ms. Jana Bergschneider, Director of Administration provided the System’s response to the finding.

CHANGE IN FUNDING LEGISLATION

In June 2005, Public Act 94-0004 became law. This legislation further modified the funding plan of the System by reducing the amount of required employer contributions for fiscal year 2006 and 2007 that would have otherwise been required under the previous funding legislation. The required State contributions for fiscal years 2008 through 2010 will then be increased incrementally as a percentage of the participant payroll so that by fiscal year 2011 the State is contributing at the required level contribution rate to achieve the financing objective of a 90% funded status by the end of fiscal year 2045.

AUDITORS’ OPINION

We conducted a compliance attestation examination of the System 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

BKD LLP were our special assistant auditors for this engagement.

REPORT DIGEST

YEAR ENDED JUNE 30, 2005

Contributions Available to Invest (iNVESTMENTS USED FOR Benefits and Expenses)

SUPPLEMENTARY INFORMATION

FY 2005

FY 2004

CHANGE IN FUNDING LEGISLATION

SPECIAL ASSISTANT AUDITORS