FY11-SERS-Fin-Full

              State Employees' Retirement System
of the State of Illinois
Auditors' Report and Financial Audit
For the Year Ended June 30, 2011
Performed as Special Assistant Auditors for
the Auditor General, State of Illinois
BKD~,
CPAs &Advisors State Employees' Retirement System
of the State of IIIinois
Financial Audit
For the Year Ended June 30, 2011
Table of Contents
System Officials
...................................................................................................................
1
Financial Statement Report
Summary
............................................................................................................................................
2
Independent Auditors' Report
.............................................................................................................
3
Management's Discussion and Analysis
............................................................................................
5
Financial Statements
Statements ofPlan Net Assets
.......................................................................................................
7
Statements of Changes in Plan Net Assets
....................................................................................
8
Notes to Financial Statements
.......................................................................................................
9
Required Supplementary Information
Schedule of Funding Progress
..........................................................................................................
26
Schedule ofEmployer Contributions
................................................................................................
26
Notes to Required Supplementary Information
................................................................................
26
Supplementary Financial Information
Summary ofRevenues by Source
.....................................................................................................
27
Summary Schedule ofCash Receipts & Disbursements
................................................. : ................
27
Schedule ofPayments to Consultants & Advisors
............................................................................
27
Independent Auditors' Report on Internal Control over Financial
Reporting and on Compliance and Other Matters Based on an Audit
of the Financial Statements Performed in Accordance with Government
Auditing Standards
.........................................................................................................
28
Schedule of Findings
.........................................................................................................
30
State Employees' Retirement System
of the State of Illinois
June 30, 2011
System Officials
Executive Secretary
Timothy B. Blair
Accounting Division Manager
Nicholas C. Merrill, Jr., CPA
Internal Auditor
Larry L. Stone
Office Locations
210 1 South Veterans Parkway
P.O. Box 19255 Springfield, Illinois 62794-9255
State of Illinois Building 160 North LaSalle Street, Suite N725 Chicago, Illinois 60601
Page 1 State Errlployees' Retirement System
of the State of Illinois
Financial Statement Report Summary
For the Year Ended June 30, 2011
Summary
The audit ofthe accompanying financial statements of the State Employees' Retirement System of the State of Illinois was performed by BKD, LLP.
Based on their audit, the auditors expressed an unqualified opinion on the State Employees'
Retirement System ofthe State of Illinois' financial statements.
Summary of Findings
The auditors identified a matter involving the System's internal control over financial reporting that they considered to be a significant deficiency. The significant deficiency is described in the accompanying Schedule of Findings listed in the table of contents as finding 11-1 (Journal Entry Review).
Exit Conference
System management waived a formal exit conference in correspondence dated January 9, 2012.
Page 2 225 N. Water Street, Suite 400
P.O. Box 1580
8KD.,
Decatur, IL 62525-1580 CPAs & Advisors 217.429.2411 Fax 217.429.6109 www.bkd.com
Independent Auditors' Report
The Honorable William G. Holland Auditor General State of Illinois and Board of Trustees State Employees' Retirement System of the State of Illinois
As Special Assistant Auditors for the Auditor General, we have audited the accompanying statement of plan net assets ofthe State Employees' Retirement System of the State of Illinois (System), as ofJune 30, 2011 and 2010, and the related statement of changes in plan net assets for the years then ended. These financial statements are the responsibility of the System's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 2011 and 2010 financial statements ofthe Illinois State Board of Investment, an internal investment pool ofthe State of Illinois, which statements represent 99 percent, 99 percent, and 58 percent, respectively in 2011, and 99 percent, 99 percent, and 37 percent, respectively, in 2010 oftotal assets, net assets held in trust for pension benefits, and total additions ofthe System. Those financial statements were audited by other auditors whose report thereon has been furnished to us, and our opinion, insofar as it relates to the amounts included for the Illinois State Board of Investment is based on the report of the other auditors.
We conducted our audits in accordance with aUditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the financial statements referred to
above present fairly, in all material respects, the plan net assets ofthe System as of June 30,2011 and 2010, and the changes in its plan net assets for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Page 3
••• A
Praxitx·:
MEMBER ••
GLOBAL ALLIANCE OF
INDEPENDENT FIRMS
experienceBKD In accordance with Government Auditing Standards, we have also issued our report dated January 27, 2012 on our consideration of the System's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit perfonned in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.
The accompanying management's discussion and analysis and schedules of funding progress and employer contributions and accompanying notes to required supplementary infonnation as listed in the table of contents are not a required part of the basic financial statements but are supplementary infonnation required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries ofmanagement regarding the methods of measurement and presentation of the required supplementary infonnation. However, we did not audit the information and express no opinion on it.
Our audits were conducted for the purpose offorming an opinion on the System's basic financial
statements. The supplementary financial infonnation as noted in the table of contents is presented for purposes of additional analysis and is not a required part ofthe basic financial statements. The supplementary financial infonnation has been subjected to the auditing procedures applied by us and other auditors in the audits of the basic financial statements and, in our opinion, based on our audits and the report of other auditors, is fairly stated, in all material respects, in relation to the basic financial statements as of and for the years ended June 30, 2011 and 2010, taken as a whole.
January 27, 2012
Page 4 MANAGEMENT'S DISCUSSION AND ANAL YSIS
This financial This section presents management's discussion and analysis of the financial position and performance of
report is
the State Employees' Retirement Systems of Illinois
designed to
(System) for the years ended June 30, 2011 and 2010. provide a It is presented as a narrative overview and analysis. general overview .. ..
The System IS a defmed benefit, smgle-employer
ofthe State public employee retirement system. It provides Employees' services to over 66,000 active state employees and Retirement over 59,000 benefit recipients. Throughout this
,. discussion and analysis units of measure (i.e. billions, System s fmances millions, thousands) are approximate, being rounded for all those with up or down to the nearest tenth of the respective
an interest in the System's finances.
unit value.
OVERVIEW OF THE FINAI\JCIAL STATEMENTS
This discussion and analysis is intended to serve as an introduction to the System's financial reporting which is comprised of the following components:
1. Basic Financial Statements. For the fiscal years ended June 30, 2011 and 2010, basic financial state­ments are presented for the System. This information presents the net assets held in trust for pension ben­efits for the System as ofJune 30, 2011 and 2010. This financial information also summarizes the changes in net assets held in trust for pension benefits for the years then ended.
PLAN NET ASSETS
2.
Notes to the Financial Statements. The notes to the Financial Statements provide additional informa­tion that is essential to achieve a full understanding of the data provided in the basic financial statements.
3.
Required Supplementary Information. The re­quired supplementary information consists of two schedules and related notes concerning actuarial information, funded status and required contributions for the System.
4.
Other Supplementary Schedules. Other schedules include more detailed information pertaining to the System, including schedules of revenues by source, cash receipts and disbursements, and payments to consultants.
FINANCIAL HIGHLIGHTS
The Systems' net assets increased by $1,768.9 million and by $723.9 million during fiscal years 2011 and 2010, respectively. The changes were primarily due to an increase of $1,761.9 million (excluding securities lending collateral), and $919.8 million in the System's investments, at fair value, for fiscal years 2011 and 2010, respectively.
The System was actuarially funded at 35.6% as of June 30,2011, compared to 37.4% as ofJune 30,2010. For fiscal years 2011 and 2010, the actuarial value of assets equals the fair value of assets adjusted for any actuarial gains or losses from investment return in­curred in the fiscal year recognized in equal amounts over the five year period following that fiscal year.
The overall rate of return for the
Illinois State Board of Investment (IS81)
Commingled Fund was 21.7% for fiscal The condensed Statements of Plan Net Assets reflect the resources available to pay
year 2011 compared to 9.1% for fiscal year
benefits to members, including retirees and beneficiaries, at the end of the years
2010.
reported. A summary of the System's Plan Net Assets is presented below.
Condensed Statements of Plan Net Assets (in millions)
As ofJune 30
2011
2010
2009
Cash $ 54.9 Receivables 41.1 Investments, at fair value * 10,908.9 Property & equipment, net
$ 49.9 39.3 9,143.2 2.8
$
232.7 57.4 8,200.8
ADDITIONS TO PLAN I\JET ASSETS
Increasel(Decrease) from
Additions to Plan Net Assets include em­2010
to 2009 to
ployer and participant contributions and
2011 2010
net income from investment activities. Participant contributions were approxi­$
5.0 $ (182.8)
mately $254.2 million and $246.2 million
1.8 (18.1 )
for the years ended June 30, 2011 and 2010,
1,765.7 942.4
respectively. Participant contribution rates
(.1 J
are set by statute as a percentage of gross
Total assets 11,007.6 9,235.2 8.493.5 741.7
salary. Employer contributions increased
Liabilities * 36.9
to approximately $1,127.9 million in 2011
Total plan net assets $ 10,970.7 $ 9,201.8
from approximately $1,095.5 million in 2010. This increase was the result of the
* Including securities lending collateral State's funding plan.
State Employees' Retirement System ofIllinois................................................................................... .............................. 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
DEDUCTIONS FROM PLAN NET ASSETS INVESTMENTS
Investments of the System are combined in a com­Deductions
from Plan Net Assets are primarily benefit mingled investment pool with the Judges' Retirement
payments. During 2011 and 2010, the System paid out System and the General Assembly Retirement System.
approximately $1 ,529.6 million and $1,405.9 million, Each system owns an equity position in the pool respectively, in benefits and refunds, an increase of and receives proportionate investment income from approximately 8.8%. These higher payments were
the pool in accordance with respective ownership mainly due to a scheduled 3% increase in retirement
percentage. Investment gains or losses are reported and other benefit payments, and a 2% increase in
in the Statement of Changes in Net Assets of each beneficiaries. The administrative costs of the System retirement system. represented approximately 1 % of total deductions in The net investment gain for the System totaled ap­both
2011 and 2010. proximately $1,930.2 million during fiscal year 2011,
versus a net investment gain of $799.9 million during
FUNDED RATIO
fiscal year 2010, resulting in returns of 21.7% and The funded ratio of the plan measures the ratio of
9.1%, respectively. For the three, five, and ten year the actuarial value of assets against actuarially de­period ended June 30, 2011, the ISBI Commingled termined liabilities and is one indicator of the fiscal Fund earned a compounded rate of return of 2.0%, strength of a pension fund's ability to meet obliga­3.1 %, and 4.5%, respectively. tions to its members. An annual actuarial valuation The ISBI is exposed to general market riSk. This
is required by statute. The most recent available general market risk is reflected in asset valuationsvaluation showed the funded status of the System fluctuating with market volatility. Any impact from on June 30,2011 decreased to 35.6% from 37.4% at . market volatility on the ISBI's investment portfolio June 30, 2010. The major reason for the decline was
depends in large measure on how deep the market the lingering effect of prior investment performance
downturn is, how long it lasts, and how it fits within on the smoothed-market value of assets. The amount fiscal year reporting periods. The resulting market by which actuarially determined liabilities exceeded risk and associated realized and unrealized gains and the actuarial value of assets was $20.2 billion at June losses could significantly impact the ISBI's financial 30, 2011 compared to $18.3 billion at June 30, 2010. condition.
CHANGES 11\1 PLAN NET ASSETS
The condensed Statements of Changes in Plan Net Assets reflect the changes in the resources available to pay benefits to members, including retirees and beneficiaries.
Condensed Statements of Changes in Plan Net Assets (In millions) Increase!(Decrease) from
For the Year Ended June 30,
2010 to
2009 to
2011
2010
2009
2011
2010
Additions
Participant contributions
$ 254.2
$ 246.2
$ 242.2
$ 8.0
$ 4.0
Employer contributions
1,127.9
1,095.5
774.9
32.4
320.6
Investment income!(loss)
1,930.2
799.9
(2,208.9)
1,130.3
3,008,8
Total additions!(deductions)
3,312.3
2,141.6
(1,191.8)
1,170,7
3,333.4
Deductions
Benefits
1,492,1
1,390.7
1,300.2
101.4
90.5
Refunds
37.6
15.3
14.8
22.3
0,5
Administrative expenses
11.7
1,0
Total deductions
1,543.4
1.417.7
1,325.7
125.7
92.0
Net increase/( decrease)
in plan net assets
$ 1,768.9
$ 723.9
$(2,517.5) $ 1,045.0
$ 3,241.4
Questions concerning any ofthe informa­tion provided in this report or requests for additional financial infor­mation should be addressed to the State Em­ployees'Retire­ment System of Illinois, Accounting Divi­sion, 2101 S.
Veterans Park­way,P. a.Box 19255, Spring­field, lJIinois
62794
State Employees'Retirement System ofIllinois .............................................. ................................................................... 6
FINANCIAL STATEMENTS
STATE EMPLOYEES' RETIREMENT SYSTEM
OF ILLINOIS
Statements of Plan Net Assets June 30, 2011 and 2010
2011 Assets
Cash $ 54,940,085
Receivables:
Contributions: Participants 15,561,242 Employing state agencies 18,858,218 Other accounts 6,748,407 Total Receivables 41
Investments -held in the Illinois State Board of Investment Commingled Fund at fair value 10,882,4841 004 Securities lending collateral with State Treasurer 26,4141000
Property and equipment net of accumulated depreciation 2,676,348 Total Assets 11,007,682,304
Liabilities
Benefits payable 5,055,752 Refunds payable 684,323 Administrative expenses payable 1,375,236 Participants' deferred service credit accounts 156,993 Due to the State of Illinois 3,243,314 Securities lending collateral 26,414,000 Total Liabilities 36,929,618
Net assets held in trust for pension benefits $ 10,970,752,686
See accompanying notes to financial statements.
2010
$ 49,912,665
15,308,885
17,119,073
6,905,516
39,333,474
9,120,601,694
22,587,000
2,808,489
9,235,243,322
5,260,823 640,022 1,326,567 215,859 3,382,396 22,587,000
33,412,667
$ 9,201,830,655
State Employees' Retirement System of Illinois. .................................. ................................................ ............................. .. 7
FINANCIAL STATEMENTS
STATE EMPLOYEES' RETIREMENT SYSTEM
OF ILLINOIS
Statements of Changes in Plan Net Assets
Years Ended June 30, 2011 and 2010
Additions:
Contributions: Participants Employing State agencies and appropriations
Total Contributions
Investment income:
Net investment income
Interest earned on cash balances
Net appreciation
in fair value of investments
Total investment income Total Additions
Deductions:
Benefits:
Retirement annuities
Survivors' annuities
Disability benefits
Lump sum benefits
Total Benefits Refu nds (including transfers to reciprocating systems) Administrative
Total Deductions
Net Increase
Net assets held in trust for pension benefits: Beginning of year
End of year
See accompanying notes to financial statements.
2011
$ 254,201,379 1,127,886,796 1,382,088,175
221,489,114 448,284
1,708,270,995 1,930,208,393 3,312,296,568
1,329,155,991 95,118,041 53,056,325 14,733,290
1,492,063,647 37,575,929 13,734,961
1,543,374,537
1,768,922,031
9,201,830,655
$10,970,752,686
2010
$ 246,172,971 1,095,545,856 1,341
200,200,994 795,373
598,899,494
799,895,861 2,141,614,688
1,237,118,008 89,516,980 48,312,629 15,693,575
1,390,641,192 15,274,174 11,720,755
1,417,636,121
723,978,567
8,477,852,088 $ 9,201,830,655
State Employees' Retirement System of Illinois .................................................................................................................. 8
FINANCIAL STATEMENTS
STATE EMPLOYEES' RETIRENIENT SYSTEM OF ILLINOIS
Notes to Financial Statements June 3D, 2011 and 2010
1. Reporting Entity
Generally accepted accounting principles require that terms of the initial appointees under the amendatory the financial reporting entity include: 1) the primary Act of the 96th General Assembly shall be as follows: government; 2) organizations for which the primary 3 for a term of 3 years and 3 for a term of 5 years; c. government is financially accountable; and 3) other four active participants of the System having at least organizations for which the nature and significance 8 years of creditable service, to be elected from the of their relationship with the primary government are contributing members ofthe System by the contribu­such that exclusion would cause the reporting entity's tion members; and d. two annuitants of the System financial statement to be misleading or incomplete. who have been annuitants for at least one full year. to
be elected from and by the annuitants of the System. The State Employees' Retirement System of Illinois (System) is administered by a Board of Trustees Based on the criteria of the Governmental Account­consisting of thirteen persons, which includes: a. ing Standards Board Statement No. 14. there are the Comptroller, who shall be the Chairperson; b. six no other state agencies. boards or commissions, or persons appointed by the Governor with the advice other organizations required to be combined with and consent of the Senate who may not be members the System. However. the System is considered to be of the system or hold an elective State office and part of the State of Illinois financial reporting entity, who shall serve for a term of 5 years, except that the and is to be combined and included in the State of
Illinois' comprehensive annual At June 30. 2011 and 2010. the number of participating state financial report.
agencies. boards and commissions totaled:
2011
2010
Pursuant to federal tax laws and
State agencies
38
regulations governing the ad­State
boards and commissions
43
43
ministration of public employee
TOTAL
82
pension plans, the System has
established a separate fund for
At June 30.2011 and 2010, SERS membership consisted of:
the sole purpose of disbursing
benefits in accordance with Sec­Retirees
and beneficiaries currently receiving benefits:
tion 415 of the Internal Revenue
Retirement annuities Survivors' annuities Disability benefits TOTAL Inactive employees entitled to benefits, but not yet receiving them TOTAL
47,002 10,428 2,356 59,786 4,489 64,275
45.659 10.325 2,408 58,392 4,646 63,038
Code. For fiscal years 2011 and 2010, receipts were approximately $23,800 and $60,500, respec­tively. For fiscal years 2011 and 2010. disbursements were ap­proximately $53.100 and $4',200, respectively.
Current Employees: Vested: Coordinated with Social Security Noncoordinated Nonvested: Coordinated with Social Security Noncoordinated
45,839 1,854 17,969 701
46,717 2,020 14,723 683
Due to the immaterial nature of the separate fund, these receipts and disbursements have been in­cluded in the financial statements
TOTAL
66.363
64,143
of the System,
Operation of the System and the direction of its policies are the responsibility of the Board of Trustees of the System.
State Employees' Retirement System ofI/Iinois ..... , ......... , .......... ,"',.... ' ............ ,................................................................. 9
FINANCIAL STATEMENTS
2. Plan Description
The System is the administrator of a single-employer, defined benefit public employee retirement system (PERS) established and administered by the State of Illinois to provide pension benefits for its employees. The plan is comprised of two tiers of contribution requirements and benefit levels. The provisions below apply to both Tier 1 & 2 employees, except where noted. A summary of the plan provisions pertaining to eligibility and membership, contributions, and benefits are displayed in the table below:
a. Eligibility and Membership
Generally, anyone entering state service, except those in positions subject to membership in certain other state sponsored retirement systems, persons employed after June 30, 1979 as public service employment program participants under the Federal CETA program, and other exceptions as indicated in state law, become members of the System immediately.
Employees appointed by the Governor and requiring confirmation by the State of Illinois Senate may elect to become members of the System.
b. Employee Contributions
Participating members contribute specified percentages of their salaries for retirement annuities and sur­vivors' annuities in accordance with Chapter 40, Section 5/14-133 ofthe Illinois Compiled Statutes (ILCS).
Contributions are excluded from gross income for Federal and State income tax purposes. The total contribution rate is 4% if the member is covered by Social Security and 8% if the member is not covered. Certain employment categories which are eligible for benefits under alternative formulas contribute at the rate of 81/2% or 12 1/2 % depending upon whether or not the employee is covered by Social Security. Participants' contributions are fully refundable, without interest, upon withdrawal from state employment.
Tier 1
Tier 2
No annual compensation limit on contributions.
Beginning on or after January 1, 2011, annual com·
pensation on which contributions are taken cannot
exceed $106.800. This amount increases annually
by 3% or one-half of the Consumer Price Index,
whichever is less.
c. Employer Contributions
The State of Illinois is obligated to make payment for the required departmental employer contributions. all allowances. annuities, any benefits granted under Chapter 40. Article 5/14 of the ILCS and all admin­istrative expenses of the System to the extent specified in the ILCS. State law provides that the employer contribution rate be determined based upon the results of each annual actuarial valuation.
d. Retirement Annuity Benefits The System is governed by Chapter 40. Article 5/14 of the ILCS. Vesting and benefit provisions of the System are defined in the ILCS. The retirement annuity is based on the member's final average compensa­tion and the number of years of service credit that have been established. The retirement benefit formula available to general state employees is 1.67% for each year of covered service and 2.2% for each year of noncovered service. Alternative formula employees have a formula of 2.5% for covered service and 3.0% for noncovered service.
The maximum retirement annuity payable is 75% of final average compensation for regUlar employees and 80% for alternative formula employees. The minimum retirement annuity payable is $15.00 for each year of covered employment and $25.00 for each year of noncovered employment.
State Employees' Retirement System ofIllinois .............. ....................................................................................................10
FINANCIAL STATEMENTS
Regular Formula Tier 1
A member must have a minimum of eight years of service credit and may retire at:
•
Age 60, with 8 years of service credit.
•
Any age, when the member's age (years & whole months) plus years of service credit (years & whole months) equal 85 years (1,020 months) (Rule of 85) with eight years of credited service.
•
Between ages 55-60 with 25-30 years of service credit (reduced 1/2 of 1% for each month under age 60).
The retirement benefit is based on final average com­pensation and credited service. Final average compen­sation is the 48 highest consecutive months of service
within the last 120 months of service.
Under the Rule of 85, a member is eligible for the first 3% increase on January 1 following the first full year of retirement. even if the member is not age 60. If the member retires at age 60 or older, he/she will receive a 3% pension increase every year on January 1, following the first full year of retirement.
If the member retires before age 60 with a reduced retirement benefit, he/she will receive a 3% pension increase every January 1 after the member turns age 60 and has been retired at least one full year. These pension increases are not limited by the 75% maximum.
Alternative Formula Tier 1
Members eligible for the alternative formula may retire
at age 50 with 25 years of service credit, or at age 55
with 20 years of service credit.
Final average compensation is figured one of three ways:
•
The average of the highest 48 consecutive months over .the last 120 months of service (for members in service prior to January 1, 1998).
•
Average of last 48 months of service.
. Final rate of pay: cannot exceed the average of the last 24 months of pay by 115%.
Alternative formula retirees receive their first 3% pen­sion increase on January 1 following the first full year of retirement after age 55. These increases are not limited by the 80% maximum.
Regular Formula Tier 2
A member must have a minimum of 10 years of cred­ited service and may retire at:
•
Age 67, with 10 years of cred ited ser vice.
•
Between ages 62-67 with 10 years of credited service (reduced 1/2 of 1 % for each month under age 67).
The retirement benefit is based on final average com­pensation and credited service. For regular formula employees, final average compensation is the average of the 96 highest consecutive months of service within the last 120 months of service. The retirement benefit is calculated on a maximum salary of $106,800. This amount increases annually by 3% or one-half of the Consumer Price Index, whichever is less.
If the member retires at age 67 or older, he/she will receive a pension increase of 3% or one-half of the Consumer Price Index for the preceding calendar year, whichever is less, every year on January 1, following
the first full year of retirement.
If the member retires before age 67 with a reduced
retirement benefit, he/she will receive a pension in­crease
of 3% or one-half of the Consumer Price Index
for the preceding calendar year, whichever is less,
every January 1 after the member turns age 67 and
has been retired at least one full year. These pension
increases are not limited by the 75% maximum.
Alternative Formula Tier 2
Members eligible for the alternative formula may retire at age 60 with 20 years of service.
Final average compensation is the average monthly sal­ary during the 96 highest consecutive months of service within the last 120 months. The retirement benefit is cal­culated on a maximum salary of$106,800. This amount increases annually by 3% or one-half of the Consumer Price Index, whichever is less.
Alternative formula retirees receive their first pension increase of 3% or one-half of the Consumer Price In­dex for the preceding calendar year, whichever is less, following the first full year of retirement after age 60. These increases are not limited by the 80% maximum.
State Employees' Retirement System of Illinois ..................................................................................................................11
FINANCIAL STATEMENTS
e. Disability & Death Benefits
Occupational and nonoccupational (including temporary) disability benefits are available through the System.
To be eligible for nonoccupational (including temporary) disability benefits, an employee must have at least
eighteen months of credited service with the System.
The nonoccupational (including temporary) disability benefit is equal to 50% of the monthly rate of compen­sation of the employee on the date of removal from the payrOll. Occupational disability benefits are provided when the member becomes disabled as a direct result of injuries or diseases arising out of and in the course of state employment. The monthly benefit is equal to 75% of the monthly rate of compensation on the date of removal from the payroll. This benefit amount is reduced by Workers' Compensation or payments under the Occupational Diseases Act.
Occupational and nonoccupational death benefits are also available through the System. Certain nonoccupa­tional death benefits vest after eighteen months of credited service. Occupational death benefits are provided
from the date of employment.
Tier 1 For disability benefits, final average compensation is the rate of pay on the date of the disability. or the 48 highest consecutive months of service within the last 10 years, whichever is greater.
3. Summary of Significant Accounting Policies & Plan Asset Matters
a. Basis of Accounting The financial transactions of the System are main­tained and these financial statements have been prepared using the accrual basis of accounting in conformity with generally accepted accounting principles. Employee and employer contributions are recognized as revenues when due pursuant to statutory requirements.
Benefits and refunds are recognized as expenses when due and payable in accordance with the terms of the plan.
b. Cash The System retains all of its available cash in a com­mingled investment pool managed by the Treasurer of the State of Illinois (Treasurer). All deposits are fully collateralized by the Treasurer.
"Available cash" is determined to be that amount which is required for the current operating expendi­tures of the System. The excess of available cash is transferred to the Illinois State Board of Investment (lSBI) for purposes of long-term investment for the System.
c. Implementation of New Accounting Standard GASB Statement No.59, Financial Instruments Omni­bus, was established to update and improve existing standards regarding financial reporting and disclo-
Tier 2 For disability benefits, final average compensation is the rate of pay on the date of the disability, or the 96 highest consecutive months of service within the last 10 years. whichever is greater. The disability benefit is calculated on a maximum salary of $106.800.
sure requirements of certain financial instruments and external investment pools for which significant issues have been identified in practice. The IS81 implement­ed this Statement for the year ending June 30, 2011.
d. Methods Used to Value Investments Investments are managed by the ISBI pursuant to Chapter 40. Article 5/22A of the Illinois Compiled Statutes (lLCS) and are maintained in the ISBI Com­mingled Fund.
Investments owned are reported at fair value as follows: (1) U.S. Government and Agency, Foreign Government and Corporate Obligations. Convertible Bonds -prices quoted by a major dealer in such securities; (2) Common Stock and Equity Funds. Preferred StOCk, Foreign Equity Securities, Forward Foreign Currency Contracts and Options: (a) Listed­closing prices as reported on the composite summary of national securities exchanges; (b) Over-the-counter -bid prices; (3) Money Market Instruments -average cost which approximates fair values; (4) Real Estate Investments -fair values as determined by the ISBI and its investment managers; (5) Alternative Investments (Private Equity. Hedge Funds, and Infrastructure Funds) fair values as determined by the ISBI and its investment managers; and (6) Commingled Funds-fair values as determined by the ISBI and its investment managers.
Units of the ISBI Commingled Fund are issued to the member systems on the last day of the month based on the unit net asset value calculated as of that date.
State Employees' Retirement System ofIllinois ..................................................................................................................12
FINANCIAL STATEMENTS
Net investment income of the ISBI Commingled Fund i. Use of Estimates is allocated to each of the member systems on the In preparing financial statements in conformity with last day of the month on the basis of percentage of U.S. generally accepted accounting principles, the accumulated units owned by the respective systems. System makes estimates and assumptions that af­Management expenses are deducted monthly from fect the reported amounts of assets and liabilities income before distribution. and disclosures of contingent assets and liabilities at
the date of the financial statements, as well as the The investment authority of the ISBI is provided
reported amounts of revenue and expenses duringin Chapter 40, Section 5/22A·112 of the ILCS. Such
the reporting period. Actual results could differ from investment authority requires that all opportunities
those estimates and assumptions. be undertaken with care, skill, prudence and dili­gence given prevailing circumstances that a prudent j. Reclassifications person acting in like capacity and experience would Certain fiscal year 2010 amounts have been reclassi­undertake. fied to conform to the fiscal year 2011 presentation. These reclassifications have not changed the fiscal
e. Actuarial Experience Review
year 2010 results. In accordance with Illinois Compiled Statutes, an
actuarial experience review is to be performed at least
4. Investments
once every five years to determine the adequacy of actuarial assump­Summary of the 1581 Fund's investments at fair value by type tions regarding the mortality, re­June 30, 2011 June 30, 2010 tirement. disability, employment,
u.s. govt. and agency obligations $ 1,367,098,751 $ 810,739,312
turnover, interest and earnable Foreign obligations 37,951,769 44,409,906
compensation of the members and Corporate obligations 762,833,382 925,668,388
beneficiaries of the System. An ex­Domestic common stock & eqUity funds 3,380,198,858 2,857,144,559
perience review was last performed Preferred stock 517,676
as of June 30, 2010 resulting in the Foreign equity securities 2,195,201,185 1,733,177,670
adoption of new assumptions as of Foreign preferred stock 40,032 179,924
June 30, 2011. Commingled funds 256,817,374 270,510,642
f. Administrative Expenses Hedge funds 1,075,584,754 917,854,201 Expenses related to the adminis­Real estate funds 819,053,366 750,210,957 tration of the System are financed Private equity 629,256,286 542,441,291 through investment earnings and Money market instruments 303,501,465 270,231,935 employer retirement contributions. Infrastructure funds 417,267,415 320,293,041 These expenses are budgeted and Bank loans 253.447,070 222,623,999
approved by the System's Board of Forward foreign currency contracts (266,410) Trustees. Total investments $11,498,251,354 $ 9,665,737,091
g. Risk Management Custodial Credit Risk for Investments The System, as part of the primary government of The custodial credit risk for investments is the risk the State, provides for risks of loss associated with that, in the event of the failure of the counterparty workers' compensation and general liability through to a transaction, the ISBI will not be able to recover the State's self-insurance program. The System ob­the value of investments or collateral securities that tains commercial insurance for fidelity, surety, and are in the posseSSion of a counterparty. As of June 30, property. There have been no commercial insurance 2011 and 2010, there were no investments that were claims in the past four fiscal years. uninsured and unregistered, securities held by the
counterparty or by its trust department or agent but
h. General Litigation not in the ISBl's name.
The System is subject to claims and lawsuits that arise primarily in the ordinary course of business. It
Deposits
is the opinion of management that the disposition or Custodial credit risk for deposits is the risk that, in
ultimate resolution of such claims and lawsuits will the event of a financial institution failure, the Sys­not
have a material adverse effect on the plan net tem's and ISBI's deposits may not be returned, All
assets or the changes in plan net assets ofthe System.
non-investment related bank balances at year-end are insured or collateralized with securities held by the Illinois State Treasurer or agents in the name of
State Employees' Retirement System of illinois ........................................... .................................................................. , ... 13
FINANCIAL STATEMENTS
the State Treasurer. As of June 30, 2011 and 2010, the ISSI had non-investment related bank balances of $119,804 and $34,557, respectively. During fiscal year 2007, a Credit Risk Policy was implemented by the ISSI staff and formally adopted by the ISSI Soard in July of 2007. The policy outlines the control proce­dures used to monitor custodial credit risk. These assets are under the custody of State Street Sank and Trust Company. State Street Bank and Trust Company has an AA-Long-term Deposit/Debt rating
by Standard & Poor's and an Aa2 rating by Moody.
Certain investments of the ISBI with maturities of 90 days or less would be considered cash equivalents; these consist of short-term investment funds and U.S. Treasury bills with maturities of 90 days or less, which are not subject to the custodial credit risk. For finan­cial statement presentation and investment purposes, the ISSI reports these types of cash equivalents as
Money Market Instruments within their investments. As of June 30, 2011 and 2010, the ISSl had investment related bank balances of $12,234,333 and $3,630,043, respectively. These balances include USD and foreign cash balances. The USD cash balances had no expo­sure to custodial credit risk as a result of the passage of the Dodd Frank Wa II Street Reform and Consumer Protection Act ("Dodd Frank Act") in July, 2010. The
FDIC must provide unlimited deposit insurance cover­age
for balances held in US dollar non-interest bear­ing transaction accounts (DDAs) for a period of two years, beginning on December 31, 2010 and ending on December 31, 2012. At any given point and time, the foreign cash balances may be exposed to custo­dial
credit risk.
Securities Lending The ISBI participates in a securities lending program with Credit Suisse AG, New York Sranch who acts as securities lending agent. Securities are loaned to brokers and, in return, the ISBI receives cash and non­cash collateral. All ofthe securities are eligible for the securities lending program. Collateral consists solely of cash and U.S. government securities having a fair value equal to or exceeding 102% of the value of the loaned securities (105% for non-U.S. securities). In the event of borrower default, Credit Suisse AG, New York Branch provides the ISBI with counterparty default indemnification. Investments in the cash collateral ac­count represent securities that were distributed to the ISSI in connection with the in-kind redemption of the ISBI's ownership in the State Street Sank and Trust Company Quality Funds for Short-Term Investment ("Quality DN). Credit Suisse is not responsible for any losses with regards to these legacy investments. This arrangement SUbjects the ISBI to credit risk as the credit quality of these investments may decline
over time. The credit risk on the legacy investments is the risk of a possible loss arising from the inability of a counterparty to meet its obligations. These losses could include the loss of principal, interest and/or de­creased expected cash flows in any of the investments held in the ISBI's cash collateral account: In the event a counterparty defaults on its obligations, the ISSI would need to credit the cash collateral account with the amount of the default to make the account whole so that once loaned securities are returned, the cash pledged by borrowers is returned to them. As of June 30, 2011 and 2010, respectively, the collateral received exceeded the fair value of the securities loaned. As of June 30, 2011 and 2010, there were outstanding loaned investment securities having fair values of $221.448,333 and $1,055.476,733, respectively; against which collateral was received with a fair value of $230,083.146 and $1,091,589,381, respectively. Col­lateral received at June 30, 2011 and 2010 consisted of $216,717,213 and $1,010,115,059, respectively, in cash and $13,987,903 and $81.474,322, respectively, in securities for which the ISBI does not have the ability to pledge or sell.
The cash collateral received is invested in a short term investment pool having a fair value of $211,162,204 and $997,638,887 as of June 30, 2011 and 2010, re­spectively. This investment pool had an average dura­tion of 31.18 days and 12.45 days as of June 30, 2011 and 2010, respectively. Any decrease in the fair value of invested cash collateral is recorded by the IS81 as unrealized. losses and reported as a component of the investment income/loss on the ISBl's Statement of Changes in Net Assets.
Cash and cash equivalents included in the System's Statement of Plan Net Assets consist of deposits held in the State Treasury. The Illinois Office of the Trea­surer invests the deposits held and allocates invest­ment income on a monthly basis.
Under the authority of the Treasurer's published investment policy that was developed in accordance with State statute, the State Treasurer lends securities to broker-dealers and other entities for collateral that will be returned for the same securities in the future. The State Treasurer has, through a Securities Lending Agreement, authorized Deutsche Bank Group to lend the State Treasurer's securities to broker-dealers and banks pursuant to a form of loan agreement.
During fiscal year 2011, Deutsche Sank Group lent
U.S. agency securities and received as collateral U.s.
dollar denominated cash. Borrowers were required
to deliver collateral for each loan equal to at least
100% of the aggregate market value of the loaned
State Employees I Retirement System of Illinois .............. ....................................................................................................14
FINANCIAL STATEMENTS
securities. Loans are marked to market daily. If the market value of collateral falls below 100%, the bor­rower must provide additional collateral to raise the market value to 100%.
The State Treasurer did not impose any restrictions during the fiscal year on the amount of the loans of available, eligible securities. In the event of borrower default, Deutsche Bank Group provides the State Trea­surer with counterparty default indemnification. In addition, Deutsche Bank Group is obligated to indem­nify the State Treasurer if Deutsche Bank Group loses any securities, collateral or investments of the State Treasurer in Deutsche Bank Group's custody. More­over, there were no losses during the fiscal year result­ing
from a default of the borrowers or Deutsche Bank Group.
During the fiscal year, the State Treasurer and bor­rowers maintained the right to termi­nate all securities lending transac­tions on demand. The cash collateral received on each loan was invested in repurchase agreements with approved counter­parties collateral­ized with securi­ties approved by Deutsche Bank Group and marked to mar­ket daily at no less than 102%. Because the loans are terminable at will, their duration
U.S. Government and Agency obligations
Foreign govt. obligations
Total foreign govt. obligations Corporate obligations
Total corporate obligations
did not generally match the duration of the invest­ment made with cash collateral. The State Treasurer had no credit risk as a result of its securities lending program as the collateral held exceeded the fair value of the securities lent. For the portion related to the System, securities lending collateral was invested in repurchase agreements and the value of securities on loan for the State Treasurer as of June 30, 2011 and 2010 were $26.414,000 and $22,587,000, respectively. Securities on loan are reported at market value with the exception of U.S. Treasury Bills and U.S. Agency Discount notes which are reported at amortized cost.
Concentration of Cred it Risk and Cred it Risk for Investments The ISBI's portfolio of investments is managed by professional investment management firms. These in­vestment management firms are required to maintain diversified portfolios. Each investment manager must comply with risk management guidelines individually assigned to them as part of their investment manage­ment agreement. The ISBI did not have any single
issuer investment that exceeded 5% of the total net assets of the fund as of June 30, 2011 and 2010. The table below presents the quality ratings of debt securi­ties held by the ISBI as of June 30, 2011 and 2010.
Moody's Quality Rating AAA $ A Not Rated
Total U.S. govt. and agency obligations $
AA $
A
BAA
BA
B
Not rated
2011 1,355,098,991
11,999,760 1,367,098,751
2,972,737 9,187,174
7,107,320 17,263,610 1,420,928
AAA
$ 17,786.171
AA
87,458,769
A
193,686,773
BAA
99,755,613
BA
84,923,049
B
243,240,592
CAA
11,141,685
Not rated
24,840,730
$ 762,833,382
Derivative Securities
2010 $ 785,753,044 11,999,760
12.986.508
$ 810,739,312
$ 1,601,595 13,951,076 10,708,205 11,475,920 5,659,170 1,013,940 $ 44,409,906
$ 43,798,021 78,359,254 272,476,793 201,122,004 85,333,142 188,825,884 38,250,212 17,503,078 $ 925,668,388
In fiscal year 2010, the ISBI implemented GASB State­ment No. 53 Accounting and Financial Reporting for Derivative Instruments with respect to investments held in derivative securities. A derivative security is an investment whose payoff depends upon the value of other assets such as commodity prices, bond and stock prices, or a market index. The ISBI invests in derivative instruments including forward foreign currency con­tracts, futures, rights and warrants. The IS81's deriva­tives are considered investment derivatives.
State Employees' Retirement System oflfIinois ..................................................................................................................15
FINANCIAL STATEMENTS
Foreign currency forward contracts (FX forwards) are used to protect against the currency risk in the ISBl's foreign equity portfolio. A foreign currency forward contract is an agreement to buy or sell a specific amount of a foreign currency at a specified delivery or maturity date for an agreed-upon price. Fluctua­tions in the market value of foreign currency forward contracts are marked to market on a daily basis. These investments are reported at fair value in the invest­ment section of the ISBI's Statement of Net Assets. The gain or loss arising from the difference between the original contracts and the closing of such con­tracts is recognized in the net increase/decrease in the fair value of investments in the ISBl's Statement of Changes in Net Assets.
In May 2011, the ISBI removed language from the
investment management agreements allowing man­agers to hedge foreign currencies and/or to hedge equity positions.
The ISBI's investment managers use financial futures to replicate an underlying security they wish to hold (sell) in the portfolio. In certain instances, it may be beneficial to own a futures contract rather than the underlying security (arbitrage). A financial futures contract is an agreement to buy or sell a specific amount at a specified delivery or maturity date for an agreed-upon price. As the fair values of the futures contract vary from the original contract price, a gain or loss is recognized and paid to or received from the clearinghouse. The gain or loss is recognized in the net increase/decrease in the fair value of investments in the ISBI's Statement of Changes in Net Assets. Fi­nancial futures represent an off-balance sheet obliga­tion, as there are no balance sheet assets or liabilities associated with those contracts other than the fair values. The cash or securities to meet these obliga­tions are held in the ISBI's investment portfolio.
Rights and warrants allow the ISBI's investment man­agers to replicate an underlying security they wish to hold (sell) in the portfolio. Rights and warrants pro­vide the holder with the right, but not the obligation, to buy or sell a company's stock at a predetermined price. Rights usually expire after a few weeks and warrants can expire from one to several years. Under certain circumstances, a type of warrant called Par­ticipatory Notes (P-Notes) are used in the portfolio by the 1581's investment managers that are not registered to trade in domestic Indian Capital Markets. P-Notes are issued by Indian-based brokerage firms against an
underlying Indian security permitting holders to get
a share in the income from the security. These invest­ments
are reported at fair value in the investment
section of the ISBI's Statement of Net Assets within the
common stock and foreign equity classifications. The
gain or loss associated with rights and warrants is rec­ognized
in the net increase/decrease in the fair value
of investments in the 15BI's Statement of Changes in
Net Assets.
The fair values of the forward contracts are estimated
based on the present value of their estimated future
cash flows. Futures contracts are exchange traded
instruments where the fair value is determined by
the equilibrium between the forces of supply and
demand. The fair value of a right or warrant closely
tracks the intrinsic value of the underlying stock and
can be determined either by formulaic methodol­ogy
(most commonly Black-Scholes) or intrinsic value
methodology.
Derivative transactions involve, to varying degrees,
credit risk and market risk. Credit risk is the possibility
that a loss may occur because a party to a transaction
fails to perform according to terms. Derivatives which
are exchange traded are not SUbject to credit risk.
Market risk is the possibility that a change in interest
(interest rate risk) or currency rates (foreign currency
risk) will cause the value of a financial instrument to
decrease or become more costly to settle. The market
risk associated with derivatives, the prices of which are
constantly fluctuating, is regulated by imposing strict
limits as to the types, amounts and degree of risk that
investment managers may undertake. These limits are
approved by the Board of Trustees and management
of the 1581 and the risk positions of the investment
managers are reviewed on a periodic basis to monitor
compliance with the limits. As of June 30, 2011 and
June 30, 2010, the ISBI held no derivatives subject to
interest rate risk. The IS81 has not adopted a formal
policy specific to master netting arrangements.
The table below presents the investment derivative instruments aggregated by type that were held by the ISBI as of June 30, 2011 and 2010:
Changes in Fair Value Fair Value at Year End Notional Amount
2011
FX Forwards Futures Rights Warrants
$(15.460,385) n/a 840,746 16,898.459 $ 2,278,820
$ $
2010
2011
2010
(number ofshares) 2011 2010
4,751,552 n/a 1,184,339 12,100,555 18,036,446
$ (353) n/a 162,133 66,421,545 $ 66,583,325
$ $
(266,410) n/a 227,807 65,373,110 65,334,507
n/a 65,250 901,548 5,272,322 6,239,120
n/a 51,300 905,044 3,391.468 4,347,812
State Employees'Retirement System ofIllinois ..... """.................................................................... " .................... " ........... 16
FINANCIAL STATEMENTS
The ISBI's derivative investments in foreign currency forward contracts are held with counterparties.
The credit ratings and net exposure as of June 30, 2011 and 2010 for the counterparties are as follows:
2011
2010
Moody's Rating
Fair Value
Net Exposure
Percentage of Net Exposure
Fair Value
Net Exposure
Pecentage of Net Exposure
Aa3 A3 A AA
$ 188 2,736,018 $2,736,206
$ 188 2,736,018
0.01% 99.99% 100.00%
$ 2,478,451 69,204 $ 2,547,655
$ 2.478.451 69,204 $2,547,655
97.28% 2.72% 100.00%
The following are the amounts of foreign investments by the currency in which they are denominated as of June 30, 2011 and 2010:
2011 2010
Currency FX Forwards Rights Warrants FX Forwards Rights Warrants
Australian Dollar $ $ $ $ 367,196 $ $
Brazilian Real (510,309)
Canadian Dollar (81.756)
English Pound Sterling (603,992)
Euro (391 ) 153,078 293,614 191.452 722
Hong Kong Dollar 9,055 31,000 18,357
Indian Ruppe 625,478
Japanese Yen 38 (2,226)
Norwegian Krone 5,355
Singapore Dollar (991 )
South Korean Won 841
Swedish Krona (768)
Swiss Franc (353.497)
Investments denominated in U.S. dollars $ (353) $ 162,133
=========
Investment liquidity
The ISBI holds investments in hedge funds, real estate 2011
Futures positions held by the ISBI as of June 30, 2011 and 2010
funds, private equity funds and infrastructure funds Number of Contract
that are considered illiquid by the very nature of the
Contracts Principal*
investment. Market risk exists with respect to these
Equity futures
investments as the ISBI may not be able to exit from
purchased 1,305 $85,836,375
the investments during periods of significant market 2010 value declines. Number of Contract Investment Commitments
Contracts Principal' The ISBI's real estate and private equity investment
EqUity futures
purchased 1,026 $52,664,580
portfolios consist of passive interests in limited part­nerships.
The ISBI had outstanding commitments to
• Contract principal amounts shown represent the market value of the un­these
limited partnerships of approximately $344 mil­derlying
assets the contracts control. These are shown to present the volume
lion and $463 million, as of June 30, 2011 and 2010,
of the transactions but do not reflect the extent to which pOSitions may off­respectively.
Also, at the end of fiscal year 2011 and
set one another. These amounts do not represent the much smaller amounts
2010, the ISBI had outstanding commitments of $321
potentially subject to risk. Contract principal values also do not represent actual recorded values reported in the ISBI's Statement of Net Assets. million and $154 million, respectively, to separate real estate accounts. Also at the end of fiscal year 2011 and 2010, the ISBI had outstanding amounts of $102 million and $147 million, respectively, committed to
State Employees' Retirement System of Illinois ..... ..................................................................................... , ....................... 17
FINANCIAL STA TEMENTS
infrastructure funds. The ISBI would fund outstand­ing commitments by utilizing available cash and then selling liquid securities in the portfolio as necessary.
Foreign Currency Risk The ISBl's international portfoliO is constructed on the principles of diversification, quality growth, and value. Risk of loss arises from changes in currency exchange rates. International managers may also engage in transactions to hedge currency at their discretion. Certain investments held in infrastructure funds trade in a reported currency of Euro-based dol­lars valued at $50,878,191 and $34,896,279 as of June 30, 2011 and 2010, respectively. The following table
presents the foreign currency risk by type of invest­ment as of June 30, 2011 and 2010: The ISBI's investments in Private Equity and Real Es­tate funds represent investment vehicles used for mak­ing investments in various equity and debt securities according to the investment strategies as determined by the fund managers at the commencement of the fund.
Investment strategies of Private Equity funds include, but are not limited to, leveraged buyouts, venture capital, growth capital and mezzanine capital.
Investment strategies of Real Estate investments include, but are not limited to, the purchase, develop­ment, ownership, management, rental and/or sale of real estate for profit. In May, 2011, RLJ Lodging Fund
II. a limited partnership investment, was exchanged
2011
Foreign Equity and
Currency
Foreign Preferred Securities
Australian Dollar
$ 109,809,451
Brazilian Real
62,981.703
Canadian Dollar
144,335,493
Danish Krone
25,279,264
Egyptian Pound
1,549,693
English Pound Sterling
388,163,730
Euro
550,189,912
Hong Kong Dollar
83,691,016
Hungarian Forint
1.711,349
indonesian Rupian
1.735,957
Israeli Shekel
4,293,903
Japanese Yen
249,633,309
Mexican Peso
10,577,337
New Zealand Dollar
4,812,384
Norwegian Krone
25,479,679
Singapore Dollar
51,977,284
South African Rand
11,571,713
South Korean Won
62,696,222
Swedish Krona
35,264,901
Swiss Franc
154,181,296
Thailand Baht
Foreign investments
denominated in U.S. Dollars
215,305,621
Total
$ 2,195,241,217
Alternative Investments
The ISBI's investments in hedge funds are structured to achieve a diversified hedged equity fund-of-funds portfolio. Capital is allocated to a select group of hedge fund managers that invest predominately in equity securities, both long and short. The invest­ments shall be managed with the intent of preserving capital in a declining market and in a rising market they will generate a smaller return than the overall equity market.
2010
Foreign Govt.
Foreign Equity and
Foreign Govt.
Obligations
Foreign Preferred Securities
Obligations
$
$ 80,124,165
$
52,217,836
97,585,461
29,767,544
2,121,276
333,465,799
401,821,017
60,278,477
266,743
992,274
222,916,572
5,584,047
3,181,046
15,111,055
35,452,297
8,691 ,759
39,303,338
21,927,042
121,970,148
1,081,519
37,951,769
199,498,179
44,409,906
$ 37,951,769
$ l,733,357,594
$ 44,409,906
by the ISBI for 1,035,092 shares of restricted common stock as a result of an initial public offering (IPO) transaction conducted by RU Lodging Trust. Due to the fact that this holding is currently restricted for sale as a result of a lock-up agreement in place that specifies that during the period that commences 180 days from the date of the initial IPO the holders of the shares will not, without prior written consent of the underwriting group, directly or indirectly offer,
State Employees' Retirement System of lJIinois ..................................................................................................................18
FINANCIAL STA TEMENTS
Investment Type pledge, sell, contract to sell, sell any option or con­tract to purchase, purchase any option or contract to sell, grant any option, right or warrant for sale of, or otherwise dispose or transfer such shares. As of June 30, 2011, this holding is an illiquid asset as a result of this restriction. The fair value of these shares at June 30, 2011 is $17,959,548. As a result of the current il­liquidity of this investment, the ISBI has determined that it is appropriate to continue to classify the asset as a real estate investment. When the restrictions imposed by the lock-up agreement lapse the ISBI will reclassify the investment as common stock.
The ISBI's investments in infrastructure funds repre­sent pooled investment vehicles used to seek capital appreciation and current income by acquiring, hold­ing, financing, refinancing and disposing of infra­structure investments and related assets. Infrastruc­ture assets include various public works (e.g. bridges, tunnels, toll roads, airports, public transportation and other public works) that are made typically as a part of a privatization initiative on the part of a govern­ment entity.
A Commingled fund is a kind of mutual fund or
common trust fund which consists of multiple kinds
of assets from several accounts combined together.
'Commingling' these separate assets mitigates risk for the trader through investment diversification and
2011
Effective Weighted Fair Value Duration Years
reduces the cost of managing each account separately. Commingled funds are also called "pooled funds" and "master trusts".
Interest Rate Risk The ISBI manages its exposure to fair value losses arising from interest rate risk by diversifying the debt securities portfolio and maintaining the debt securities portfolio to an effective weighted duration between 80% and 120% of the benchmark index.
Duration is the measure of a debt investment's ex­posure to fair value changes arising from changing interest rates. It uses the present value of cash flows, weighted for those cash flows as a percentage of the investment's fair value. The effective duration mea­sures the sensitivity of market price to parallel shifts in the yield curve. As of June 30, 2011 and 2010, the ISBl benchmarked its debt security portfolio to Barclay's Capital Intermediate U.S. Government/Credit Bond Index. At June 30, 2011 and 2010, the effective dura­tion of the Barclay's Capital Intermediate U.S. Govern­ment/Credit Bond Index was 3.9 years. At the same point in time, the effective duration of the ISBI debt security portfolio at June 30, 2011 and 2010 was 4.6 and 3.8 years, respectively. Below is the detail of the duration by investment type as of June 30, 2011 and
2010.
Other Informa­2010
tion
Effective
The System
owns
Weighted
approximately
Fair Value
Duration
94% of the net in-
Years
vestment assets of
the ISBI Commin-
U.S. Govt. and Agency Obligations
U.S. Government
$ 479,422,631
6.9
Agency
887,676,120
3.6
Foreign Govt. Obligations
37,951,769
4.3
Corporate Obligations
Bank & Finance
204,608,577
4.2
Collateralized Mortgage
Obligations
13,492,526
2.1
Industrials
425,847,041
4.4
Other
118,885,238
4.2
Total
$ 2,167,883,902
gled Fund as of $ 155,303,411 4.8 June 30, 2011 and 655.435,901 2.3
2010. A schedule of investment ex­44.409,906 4.9
penses is included in the ISBI's annual
246,087,134 4.8
report.
For additional in­39,240,826 3.0
formation on IS­496,856,383 4.8
BI's investments,
143.484,045 5.0
please refer to
$1,780,817,606 their Annual Re­port as of June 30, 2011. A copy of
the report can be obtained from the ISBI at 180 North LaSalle Street, Suite 2015, Chicago, Illinois 60601.
State Employees' Retirement System of f/Iinois ..................................................................................................................19
FINANCIAL STATEMENTS
5. Funding -Statutory Contributions Required & Contributions Made
On an annual basis, a valuation of the liabilities and reserves of the System is performed by the System's actuarial consultants in order to determine the amount of contributions statutorily required from the State of Illinois. For fiscal years 2011 and 2010 the actuary used the projected unit credit actuarial method for determining the proper employer con­tribution rate and amount.
For fiscal year 2011 and 2010 the required employer contributions was computed in accordance with the State's funding plan. This funding legislation provides for a systematic 50 year funding plan with an ultimate goal to fund the cost of maintaining and administer­ing the System at an actuarial funded ratio of 90%.
In addition, the funding plan provided for a 15 year phase-in period to allow the state to adapt to the increased financial commitment. Since the 15 year phase-in period ended June 30, 2010, the state's contribution will remain at a level percentage of payroll for the next 35 years until the 90% funded level is achieved.
The funded status of the System as of June 30, 2011, the most recent actuarial valuation date, is in the table below:
The schedule of funding progress, presented as re­quired supplementary information (RSI) following the notes to the financial statements, present multi­year trend information about whether the actuarial values of plan assets are increasing or decreasing over time relative to the AALs for benefits.
Actuarial
Actuarial Accrued
Value of
Liability (AAL):
Assets
Projected Unit
(a)
Credit (b)
Additional information as of the latest actuarial valu­ation follows:
Valuation date: June 30, 2011
Actuarial cost method: Projected Unit Credit
Amortization method:
a.
For GASB Statement No. 25 reporting purposes: Level percent of payroll
b.
Per state statute: 15-year phase-in to a level percent of payroll until a 90% funding level is achieved
Remaining amortization period:
a.
For GASB Statement No. 25 reporting purposes: 30 years, open
b.
Per state statute: 34 years, closed
Asset valuation method: Fair value, adjusted for any actuarial gains or losses from investment return incurred in the fiscal year recognized in equal amounts over the five year period following that fiscal year.
Actuarial assumptions: Investment rate of return: 7.75 percent Projected salary increases: 1.0 to 5.35 percent, based upon member's age Assumed inflation rate: 3.0 percent Group size growth rate: 0.0 percent Post-retirement increase: Tier 1 -3.0 percent per year,
compounded annually Tier 2 -3.0 percent per year or one-half ofthe annual increase in the Consumer Price Index, whichever is less, on the original benefit
Mortality table: 1994 Group Annuity Mortality Table for males and females. Five percent of deaths amongst active employees are assumed to be in the performance of
their duty.
Unfunded AAL (UAAL) (b-a)
Funded Ratio (alb)
Covered Payroll (c)
UAAL as a Percentage Covered Payroll ([b-ajlc)
$ 11,159,836,617 $ 31,395,007,782 $ 20,235,171,165 35.6% $4,211,186,269 480.5%
State Employees' Retirement System of Illinois ................................................................................................................. 20
FINANCIAL STA TEMENTS
6. Accrued Compensated Absences
Employees of the System are entitled to receive com­pensation for all accrued but unused vacation time and one-half of all unused sick leave earned on and after January 1, 1984 and before January 1, 1998 upon ter­mination of employment. These accrued compensated absences as of June 30. 2011 and 2010 totaled $976,988 and $880,127, respectively are included in Administra­tive Expenses Payable.
7. Property & Equipment
Capital assets over $100 are capitalized at their cost at the time of acquisition, Depreciation is computed using the straight-line method over the estimated use­ful life of the asset. The estimated useful lives are as follows: (1) office furniture -10 years. (2) equipment -6 years, (3) automobiles and certain electronic data processing equipment -3 years, and (4) building -30 years. Land is carried at its original cost. including applicable legal fees. surveying costs, etc.
This is a summary of changes in property and equipment assets for 2011 and 2010: 2011
Beginning
Ending
Assets
Balance
Additions
Deletions
Balance
Land
$ 655,241
$
$
$ 655,241
Land improvements
298.979
298,979
Building
3,380.093
104,171
3,484,264
Equipment
2.311.750
155.124
(188.583)
2.278.291
TOTAL
6.646,063
259.295
(188.583)
6.716.775
Accumulated depreciation
Land Improvements
(649)
(1,282)
(1.931 )
Building
(2,178.893)
(116.384 )
(2,295,277)
Equipment
(1,658,032)
{252.561 )
167,374
(1.143.219)
TOTAL
(3.837.574)
(370,227)
167,374
( 4.040,427)
Net property and eqUipment
$2,808.489
$
{110,932}
$
(21.209)
$2.676,348
2010
Beginning
Ending
Assets
Balance
Additions
Deletions
Balance
Land
$ 655,241
$
$
$ 655.241
Land improvements
250.316
48,663
298,979
Building
3,352.428
27,665
3,380.093
Equipment
1,945,131
429,910
(63,291)
2,311,750
TOTAL
6,203,116
506,238
(63.291)
6,646,063
Accumulated depreciation
Land Improvements
(577)
(72)
(649)
Building
(2,065,512)
(113,381 )
(2.178,893)
Equipment
(1,562,268)
(158,876)
63,112
(1,658,032)
TOTAL
(3,628,357)
(272,329)
63,112
(3,837,574)
Net property and equipment
$2,574,759
$
233,909
$
(179)
$2,808.489
State Employees' Retirement System of Illinois .................................................. , .............................................................. 21
FINANCIAL STATEMENTS
8. Collection and Remittance of Bond
and Interest Payments
On April 7, 2003 House Bill 2660 was signed into law as Public Act 93-0002. This legislation authorized the State to issue $10 billion in general obligation bonds for the purpose of making required contributions to the five state-funded retirement systems, including the State Employees' Retirement System. On July 1, 2003, the net bond proceeds were allocated and distributed to each of the five state-funded retirement systems based on each system's relative percentage of the total unfunded liability at June 30, 2002. The State Employees' Retirement System received an allocation of bond proceeds totaling $1,385,895,278 and deposited all of the proceeds into the Illinois State Board of Investment Commingled Fund on July 2, 2003.
As of June 30, 2ml and 2mO the following amounts are included in the System's Statement of Plan Net Assets regarding the collection of bond principal and interest payments:
Cash -payments collected but not yet
Public Act 93-0839, effective July 30. 2004, requires that employer contributions to the System shall include an additional amount to be paid over to the General Obligation Bond Retirement and Interest Fund to pay principal of and interest on those general obligation bonds due that fiscal year. This debt service payment is to be made on the first day of each month, or as soon thereafter as practical.
The total debt service payments received for all fis­cal year 2011 and 2mO payrOllS, amounted to $25.7 million for each year. The total amount remitted to the State of Illinois as of June 30, 2011 and 2010 was $22.5 million and $22.3 million, respectively.
9. Administrative Expenses
& Other Post-Employment
Benefits
Expenses related to the administration of the Sys­tem are financed through investment earnings and employer retirement contributions. These expenses are budgeted and approved by the System's Board of Trustees.
The System pays employer retirement contributions based upon an actuarially determined percentage of its payrolls. For fiscal years 2011, 2mO, and 2009 the employer contribution rates were 27.988%,28.377%, and 21.049%, respectively. The System's contributions to SERS for fiscal years 2011, 2010, and 2009 were $1,254,741, $1,206,740, and $852,808 respectively, for the general staff. The System's contributions for the electronic data processing staff for fiscal years 2011, 2010, and 2009 were $338,798, $270,504, and $179.993, respectively. These amounts were equal to the required contributions for each fiscal year.
2011 2010
remitted to the State of Illinois
$
2,527,808
$ 2.426.434
Accounts receivable -for June payrOllS received in July and August
$ 955,962
Due to the State of Illinois
$
(3,243,314)
$ (3,382,396)
The State provides health, dental, vision, and life insurance benefits for retirees and their dependents in a program admin­istered by the Depart­ment of Healthcare and Family Services along with the De­partment of Central Management Ser­vices. Substantially
all State employees become eligible for post-employ­ment benefits if they eventually become annuitants of one of the State sponsored pension plans. Health, dental, and vision benefits include basic benefits for annuitants and dependents under the State's self­insurance plan and insurance contracts currently in force. Annuitants may be required to contribute towards health, dental, and vision benefits with the amount based on factors such as date of retirement. years of credited service with the State, whether the annuitant is covered by Medicare, and whether the annuitant has chosen a managed health care plan. Annuitants who retired prior to January 1, 1998, and who are vested in the State Employee's Retirement System do not contribute towards health, dental, and vision benefits. For annuitants who retired on or after January 1. 1998, the annuitant's contribution amount is reduced five percent for each year of cred­ited service with the State allowing those annuitants with twenty or more years of credited service to not
State Employees' Retirement System ofIllinois ................................................................................................................. 22
FINANCIAL STATEMENTS
contribute towards health, dental, and vision benefits. Annuitants also receive life insurance cover­age equal to the annual salary of the last day of employment until age 60, at which time the benefit becomes $5,000.
The State pays the System's portion of employer costs for the benefits provided. The total cost of the State's portion of health, dental, vision, and life insurance benefits of all members, including post­employment health, dental, vision, and life insurance benefits, is rec­ognized as an expenditure by the State in the Illinois Comprehensive Annual Financial Report. The State finances the costs on a pay-as-you­go basis. The total costs incurred for health, dental, vision, and life insur­ance benefits are not separated by
department or component unit for annuitants and their dependents nor active employees and their dependents.
A summary of post-employment benefit provisions, changes in benefit provisions, employee eligibility requirements including eligibility for vesting, and the authority under which benefit provisions are estab­lished are included as an integral part of the financial statements of the Department of Healthcare and Fam­ily Services. A copy of the financial statements of the Department of Healthcare and Family Services may be obtained by writing to the Department of Healthcare and Family Services, 201 South Grand Ave., Springfield, Illinois, 62763-3838.
A summary of the administrative expenses of the System for fiscal years 2011 and 2010 are as follows:
Personal Services Employee Retirement Pickup Retirement Contributions Social Security Contributions Group Insurance Contractual Services Travel Commodities Printing Electronic data processing Telecommunications
Automotive Depreciation Other (net) Total
2011 2010
$ 4,464,468 $ 4,248,014 31,159 42,062 1,254,741 1,206,740 331,002 314,861 1,071,977 947,163 2,370,364 1,777,453 24,080 39,497 28,453 27,108 50,517 42,225 3,523,259 2,665,507 76,199 67,333 14,301 13,801 370,227 272,329 56,662 $ 11,720,755
The state's responsibilities include extending Social Security coverage by agreement to any of the state's retirement systems or units of local government re­questing social security or medicare only coverage for their members or employees.
In addition, the Social Security Division was respon­sible for collecting wage information and contribution payments from covered retirement systems and units of local government on wages paid prior to January 1, 1987. Administrative expenses for the Social Secu­rity Division are appropriated annually by the State Legislature.
Administrative expenses for the Social Security Division
10. Social Security Division are appropriated annually by the State Legislature
-Administrative Expenses
The Social Security Division of the State Employees' Retirement Personal services System was created by 40 ILCS Retirement contributions 5/21, to administer the state's re­Social
Security contributions sponsibilities under Title II Section
Contractual services
218 of the Federal Social Security Travel
Act and the master federal-state agreement. Commodities Electronic Data Processing Telecommunications Total
$
2011 45,049 3,309 25,500 105
2010 $ 41,465 3,329 3,122 25,000 1,161 243
$
415 74,378
403 $ 74,723
State Employees' Retirement System of Illinois ........., ....................................................................................................... 23
FINANCIAL STA TEMENTS
11. Analysis of Changes in Reserve Balances
b.
Interest accumulations: Accounts for interest The System maintains three reserve accounts. credited to each participant's account The reserves are defined as follows:
c. Other future benefits: Accounts for all assets not
a.
Participants' contributions: Accounts for assets otherwise specifically provided for in items (a) contributed by each participant and (b) above.
State Employees' Retirement System Statements of Changes in Reserve Balances Years Ended June 30, 2011 and 2010
Other
Total
Participants'
Interest
Future
Reserve
Contributions
Accumulations
Benefits
Balances
Balance at June 30, 2009 $ 2,188.602,984 $ 1,537,128,750 $ 4,752,120,354 $8,477,852,088
Add (deduct): Excess revenue over expenses 218,288,124 505,690,443 723,978,567 Reserve transfers:
Accumulated contributions of
members who retired during the
year, less contributions of
annuitants returning to active status (19,811,506) 19,811,506
Interest credited to members' accounts (109,187,475)
Balance at June 30, 2010 $ 2,387,079,602 $ 1,646,316,225 $ 5,168,434,828 $9,201.830,655
Add (deduct): Excess revenue over expenses 223,751,499 1,545,170,532 1,768,922,031 Reserve transfers:
Accumulated contributions of
members who retired during the
year, less contributions of
annuitants returning to active status (24,546,691 ) 24,546,691
Interest credited to members' accounts 87,145,150 (87,145,150)
Balance at June 30, 2011 $ 2,586,284,410 $ 1,733,461 ,375 $ 6,651,006,901 $ 10,970,752,686
State Employees' Retirement System ofIlIinois ................................................................................................................. .24
FINANCIAL STA TEMENTS
12. New Accounting Pronouncements
GASB Statement No. 62, "Codification of Accounting and Financial Reporting Guidance contained in pre­November 1989 FASB and AICPA Pronouncements", was established to incorporate into the GASB's au­thoritative literature certain accounting and financial reporting guidance that is included in certain FASB and AICPA pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements. The System is required to implement this Statement for the year ending June 30, 2013.
GASB Statement No. 63, "Financial Reporting of De­ferred Outflows of Resources, Deferred Inflows of Re­sources and Net Position", was established to provide a framework that specifies where deferred outflows of resources and deferred inflows of resources, assets, liabilities and net position should be displayed on the financial statements. The System is required to implement this Statement for the year ending June 30, 2013.
GASB Statement No. 64. "Derivative Instruments: Ap­plication of Hedge Accounting Termination Provisions -An Amendment to GASB Statement No. 53", was
June 30, 2011
U. S. Equities
$ 3,380,198,858
Commingled Funds**
256,817,374
Foreign EqUity Securities
2,195,201,185
Foreign Preferred Stock
40,032
Fixed Income
2,167,883,902
Real Estate * *
819.053,366
Private Equity* *
629.256,286
Hedge Funds**
1,075,584,754
Infrastructure Funds* *
417,267,415
Money Market Instruments
303,501 ,465
Bank Loans*"
253,447,070
Foreign Currency Forward Contracts
(353)
Total Investments
$11
established to enhance comparability and improve financial reporting by clarifying the circumstances in which hedge accounting should continue when a swap counterparty, or a swap counterparty's credit support provider, is replaced. The ISBI is required to implement this Statement for the year ending June
30,2012.
The System's and ISBl's management has not yet completed their assessment of these Statements; how­ever, they are not expected to have a material effect on the overall financial statement presentation.
13. Subsequent Events (Unaudited)
Subsequent to the June 30 fiscal year end, the overall financial markets experienced a decline in value. The decline in the ISBI's investments as of October 31, 2011 is depicted in the strategic asset allocation chart below. The chart represents assets assigned to invest­ment managers within each asset allocation class, not by security type, Therefore, amounts noted below will differ from those as presented in the ISBI's Statement of Plan Net Assets, The chart represents the most cur­rent information available for both public and private market investments as compared to June 30, 2011.
Percentage
Increase/
Increase/
October 31, 2011 "
(Decrease)
(Decrease)
$3,241,223,055
$(138,975,803)
(4.11)%
208,080,726
(48,736,648)
(18.98)
2,002,588,947
(192,612,238)
(8.77)
206,197
166,165
415.08
1,887,365,453
(280,518.449)
(12.94)
809,618,861
(9,434.505)
(1.15)
633,685,952
4,429.666
0.70
997,862,476
(77,722,278)
(7.23)
479,237,585
61,970,170
14.85
216,097,627
(87,403,838)
(28.80)
307,092,370
53,645,300
21.17
(36,366)
(36,013)
(10,201.98)
$10,183,022,883
$(715,228,471 )
* October 31, 2011 information is based upon best available data on December 1. 2011 as recorded by the ISBI's custodian and is preliminary and unaudited .
• " Mark to market adjustments as of September 30, 2011 have been incorporated into the IS81's custodian data and represents the most recent investment manager mark to market information to date.
State Employees' Retirement System of Illinois ................................................................................................................. 25
REQUIRED SUPPLEMENTARY INFORMA TION
SCHEDULE OF FUNDING PROGRESS
Actuarial Actuarial Accrued Unfunded UAAL as a Actuarial Value of Liability (AAL) AAL Funded Covered Percentage Valuation Assets Projected Unit (UAAL) Ratio Payroll Covered Payroll
Date (a) Credit (b) (b-a) (alb) (c) ([b-al/c)
6/30106 $10,899,853,065 $ 20,874,541,910 $ 9,974,688,845 52.2% $ 3,572,541,000 279.2%
6/30107 12,078,908,954 22,280,916,665 10,202,007,711 54.2 3,762,777,000 271.1
6/30108 10,995,366,485 23,841,280,102 12,845,913,617 46.1 3,967,704,000 323.8
6/30/09 10,999,953,527 25,298,346,092 14,298,392,565 43.5 4,027,263,000 355.0
6/30/10 10,961,540,164 29,309,464,296 18,347,924,132 37.4 4,119,360,842 445.4
6/30/11 11,159,836,617 31,395,007,782 20,235,171,165 35.6 4,211,186,269 480.5
* For fiscal years prior to 2009, the actuarial value ofassets was equal to the fair value of assets, Beginning in fiscal year 2009, the actuarial value ofassets was equal to the fair value of assets acfjusted for any actuarial gains or losses from investment return incurred in the fiscal year recognized in equal amounts over the five year period following that fiscal year.
SCHEDULE OF EMPLOYER CONTRIBUTIONS
Annual Annual
Required Required
Year Contribution Payroll Contribution
Ended per GASB Percentage per State Percentage
June 30 Statement No. 25 (1) Contributed Statute(2) Contributed
2006 $ 672,555,569 31.3 $ 207,814,710 100
2007 823,802.760 43.6 361,113,709 99
2008 986,410,891 59.6 576,626,422 102
2009 1,003,432,849 77.2 769,851,595 101
2010 1,177,313,343 93.1 1,093,072,413 100
2011 1,289,002,005 87.5 1,102,783,348 102
(1) This amount includes both payroll and non-payroll employer required contributions.
(2) Employer required contribution determined in accordance with P.A. 88-0593, and P.A. 94-0004
(for Fiscal Years 2006 and 2007 only). These amounts reflect only payroll required contributions.
Notes to Required Supplementary Information Group size growth rate -0.0 percent Post-retirement increase -Tier 1 -3.0 percent perValuation date: June 30, 2011
year, compounded annually Actuarial cost method: Projected Unit Credit
Tier 2 -3.0 percent per year or one-half of the Amortization method:
annual increase in the Consumer Price Index, a, For GASB Statement No. 25 reporting pur­whichever
is less, on the original benefit poses -Level percent of payroll
b. Per state statute -15-year phase-in to a Mortality: FV2011: Post-Retirement Mortality -RP2000 level percent of payroll until a 90% funding level is Combined Health mortality table, sex distinct, with achieved rates projected to 2015 with scale aa. No adjustment
Remaining amortization period: is made for post-disabled mortality. The table used is
a. For GASB Statement No. 25 reporting pur­a
static table with the provision for future mortality poses -30 years, open
improvement in the projection to 2015, which is in syncb. Per state statute -34 years, closed with the next scheduled experience study.
Asset valuation method -Fair value, adjusted for any actuarial gains or losses from investment return in­Pre-Retirement Mortality -based on 85% for males curred in the fiscal year recognized in equal amounts and 70% for females of post-retirement mortality. Five
over the five year period following that fiscal year. percent of deaths amongst active employees is assumed Actuarial assumptions: to be in the performance of their duty. Investment rate of return -7.75 percent
FV2010: 1994 Group Annuity Mortality Table for males Projected salary increases -1.0 to 5.35 percent, and females, Five percent of death amongst active em­based
upon member's age ployees is assumed to be in the performance of duty.
Assumed inflation rate -3.0 percent
State Employees'Retirement System of iJlinois ....................................................... , ............................. , , .......................... 26
SUPPLEMENTARY FINANCIAL INFORMA TION
SUMMARY OF REVENUES BY SOURCE
2011 2010
Contributions: Participants $ 246,221,470 $ 238,860,138 Repayments of contributions refunded 991,532 911,169 Interest received from participants 6,988,377 6,401,664 Total participants contributions 254,201,379 246,172,971
Employing state agencies and appropriations 438,764,595 372.408,603 Pension Contribution Fund 689,122,201 123,]31,253 Total employer contributions 1,127,886;796 1,095,545,856
Investments: Net investments income 221,489,114 200,200,994 Interest earned on cash balances 448,284 795,373 Net appreciation in fair value of investments 1,708,270,995 598,899,494 Total investment loss 1,930,208,393 799,895,861
TOTAL REVENUE $ 3,312,296,568 $ 2,141,614,688
SUMMARY SCHEDULE OF CASH RECEIPTS & DISBURSEMENTS
2011 2010 Cash balance, beginning of year $ 49,912,665 $ 232,679,069 Receipts: Participant contributions 243,861,823 235,574,760 Employer contributions (net of bond principal and interest transfers) 414,626,625 386,572,210 Pension Contribution Fund 689,122,201 720,745,289 Transfers from Illinois State Board of Investment 857,000,000 600,000,000 Interest income on cash balance 466,694 911,074 Claims receivable payments 6,490,495 6,874,476 Installment payments 4,526,432 4,020,445 Other 3Q4693 :101 455 Total cash receipts 2,216,398,963 1,954,805,709 Disbursements: Annuity payments: Retirement annuities 1,329,698.219 1,237,349,115 Widow's and Survivor's annuities 95,322,411 89.582,037 Disability benefits SO.000.581 47,201 ,278 Lump Sum benefits 15,002,758 15,355,322 Refunds (including transfers to reciprocal systems) 18.514,104 15,257,661 Administrative expenses 13,711,269 12,032,748 Transfer to Illinois State Board of Investment 689,122,201 720,793,952 Total cash disbursements 2,2JJ ,31] ,543 2.331.512,lJ3 Cash balance, end of year $ 5:t9~Q,Q85 $ 49,912,665
SCHEDULE OF PAYMENTS TO CONSULTANTS & ADVISORS
2011 2010 Legal Services $ 43,641 $ 39,499 Actuarial Costs 177,677 125,190 AUdit Expense 89,132 96,722 Physicians and Disability Inspections 277,791 336,682 Financial Planning 56,787 63,131 Management Consultants 1,160,200 658,058 TOTAL $ 1,805,228 $ 1,319,282
State Employees' Retirement System of I/Iinois ....... , ................... ,",.,"'... " ................ ,",.... , ................ ,.,',., .................... , ... 27
225 N, Water Street, Suite 400 P.O, Box 1580
BKD~
Decatur, IL 62525-1580 CPAs & Advisors 217.429,2411 Fax 217.429.6109 www.bkd,com
Independent Auditors' Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of the Financial Statements Performed in Accordance With Government Auditing Standards
The Honorable William G. Holland Auditor General State of Illinois and The Board ofTrustees State Employees' Retirement System ofthe State ofIllinois
As Special Assistant Auditors for the Auditor General, we have audited the financial statements ofthe State Employees' Retirement System ofthe State ofIllinois (System), as of and for the year ended June 30, 2011 and have issued our report thereon dated January 27, 2012, which contained a reference to the report of other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States ofAmerica and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General ofthe United States. Other auditors audited the financial statements ofthe Illinois State Board ofInvestment, as described in our Independent Auditor's Report on the System's financial statements. This report does not include the results ofthe other auditors' testing of internal control over financial reporting or compliance and other matters that are reported on separately by those auditors.
Internal Control Over Financial Reporting
Management ofthe System is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered the System's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the fmancial statements, but not for the purpose of expressing an opinion on the effectiveness ofthe System's internal control oyer fmandal reporting. Accordingly, we do not express an opinion on the effectiveness ofthe System's internal control over financial reporting.
A deficiency in control exists when the design or operation of a control does not allow management or
employees, in the normal course ofperforming their assigned functions, to prevent, detect and correct
misstatement on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in
internal control, such that there is a reasonable possibility that a material misstatement of the System's
financial statements will not be prevented, or detected and corrected on a timely basis.
Page 28
Praxiix";
MEMBER ••
GLOBAL ALLIANCE OF
experienceBKD
INDEPENDENT FIRMS Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting ofthe System that we consider to be material weaknesses, as defined above. However, we identified a certain deficiency in internal control over financial reporting, described in the accompanying schedule of findings and responses as item 11-1, that we consider to be a significant deficiency in internal control over financial reporting. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the System's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results ofour tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.
The System's response to the finding identified in our audit is described in the accompanying schedule of findings. We did not audit the System's response and, accordingly, we express no opinion on it.
This report is intended solely for the information and use of the Auditor General, the General Assembly, the Legislative Audit Commission, the Governor, the Board of Trustees ofthe System and System
management and is not intended to be and should not be used by anyone other than these specified
parties.
January 27, 2012
Page 29 State Employees' Retirement System
of the State of Illinois
Current Finding -Government Auditing Standards
June 30, 2011
11-1. Finding -Journal Entry Review
The State Employees' Retirement System (System) does not have a policy or procedure for the review of financial journal entries by a person independent of the person that initiates them.
During our audit testing, we noted the same individual prepares and records the financial journal entries without an independent review by another individual.
The Fiscal Control and Internal Auditing Act (Act) (30 ILCS 10/3001) notes agencies shall establish and maintain a system of internal and fiscal and administrative controls, which shall provide assurance that revenue, expenditures, and transfers of assets, resources, or funds applicable to operations are properly recorded and accounted for to permit the preparation of accounts and reliable financial and statistical reports to maintain accountability over the State's resources.
System officials indicated the management staff preparing the journal entries are not involved in the preparation and/or processing ofthe underlying transactions. Due to the relatively small size of the Accounting Division, however, there has been a lack of appropriate personnel to perform a meaningful review of financial journal entries. However, there is a subsequent, independent review ofthe System's financial statements on a quarterly basis for potential irregularities.
The lack of an independent review of financial journal entries leaves the System open to risks of error and material misstatement of financial information. (Finding Code No. 11-1)
Recommendation:
We recommend the System develop a policy and procedure for someone independent of the individual preparing and recording financial journal entries to document their review of the financial journal entries and related supporting documentation.
System Response:
The System will reallocate the review function of financial journal entries to other management staff which are independent ofthe person that initiates them. The System recently hired another management staff member who will provide assistance in the financial journal entry review process. The new process will be incorporated into the System's policy and procedures in fiscal year 2012.
Page 30