TEACHERS' RETIREMENT SYSTEM
WILLIAM G. HOLLAND
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TEACHERS' RETIREMENT SYSTEM OF ILLINOIS
INFORMATION FROM FINANCIAL AND COMPLIANCE AUDITS
YEAR ENDED JUNE 30, 1998
|OPERATING STATEMENT ANALYSIS||
|Revenues: Contributions - Members
Contributions - State of Illinois
Contributions - School Districts
Investment Income - Appreciation in Fair Value
Investment Income - Income From Investments
Total Investment Income
Expenses: Total Benefits
Revenues in Excess of Expenses
|INVESTMENT PORTFOLIO ANALYSIS - Fair Value||
JUNE 30, 1998
JUNE 30, 1997
|Total Government Obligations
Total Corporate Obligations
Preferred Stock (U.S. & International Combined)
Common Stock - U.S.
Common Stock - International
Short Term Investments
Real Estate Investments
Total Investment Portfolio
Machine Repair and Rental
Other Contractual Services
Provision for Depreciation
Gain on Disposal of Equipment
Total Administrative Expenses
|SELECTED ACCOUNT BALANCES||
JUNE 30, 1998
JUNE 30, 1997
Accrued Investment Income Receivable
Collateral from Securities Lending
Property and Equipment
Net Assets Held in Trust for Pension Benefits
Actuarial Accrued Liability
Unfunded Actuarial Accrued Liability
26,951,585,000 $ (9,558,477,085)
|Total investment manager fees
Total time weighted return on investments
Average Number of System Employees
Number of Retirement Annuitants
Total Brokerage Commissions Paid
|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
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:
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.
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.
SPECIAL ASSISTANT AUDITORS
KPMG Peat Marwick, LLP were our special assistant auditors for this audit.