Michael W. Frerichs ___ ILLINOIS STATE TREASURER - i...,.__ __ OFFICE OF THE ILLINOIS STATE TREASURER • ANNUAL REPORT 2016 LETTER FROM ILLINOIS STATE TREASURER MICHAEL W. FRERICHS Dear Illinois Residents, The Treasurer is the state’s chief investment officer and chief banking officer. Our office is dedicated to protecting the state’s investment portfolio, ensuring the liquidity of all investments, and consistently producing earnings at or above industry standards. Despite the state’s current fiscal climate, our investments still make money. However, our office generates millions more in investment income when a full, balanced budget is in place. The lack of a budget in Fiscal Year 2016 has forced my office to make shorter-term investments to prioritize cash availability rather than longer-term, higher yielding investment opportunities. However, the budget impact is far worse for Illinois residents, forcing families and businesses to make difficult life decisions. It is important that we always put people first. It is my hope that Governor Bruce Rauner and the Illinois General Assembly will come together to LETTER FROM ILLINOIS STATE TREASURER MICHAEL W. FRERICHS • 2016 ensure a full budget is passed on time, each year, to help businesses, social services agencies, and other providers stabilize and plan for the future. 02 Having a sound fiscal plan also helps state offices such as ours to continue the important services and programs that families rely upon to ensure their success. Our office also invests in people. Among our most effective tools: College Savings: The Treasurer’s Office is the conduit for families to save for college and trade school. This year, our Bright Directions program was named one of the best in the country. Still, we must do more to help families save money to send their children to college. A skilled workforce attracts employers. A diploma or trade school certificate shows employers an individual can be trained and adapt to changing market conditions. Saving for Retirement: Retirement insecurity puts a strain on families and stresses public assistance programs. The Secure Choice Savings Program will provide retirement savings options for workers throughout our state. Illinois is a national leader in this effort. Helping our Children: Illinois leads a 13-state consortium that allows parents of children with blindness or a disability to save for their future. Our Achieving a Better Life Experience Program (ABLE) is the national standard. A program manager was chosen in 2016 and the first accounts will open soon. Investing in the Illinois Economy: Illinois is the Midwest’s tech hub. On January 26, 2016, I announced the formation of the Illinois Growth and Innovation Fund (ILGIF). ILGIF aims to invest more than $222 million in venture capital and growth equity funds focused on spurring economic activity in Illinois. During the next three years, the program is expected to create an estimated 3,600 new jobs, thousands more in indirect jobs, and generate a return for the investment portfolio. Making Sound Investments: The Illinois Funds is a Local Government Investment Pool operated by the Illinois State Treasurer’s Office. Over 2,200 local and state agencies have voluntarily participated in the pool since it was created in 1975 to provide public agencies with a safe, liquid, and competitive investment option. The Illinois Funds has earned Standard & Poor’s highest rating (AAAm). Fighting for Families: Our unclaimed property unit safeguards more than $2 billion in cash and valuables. Examples include bank safe deposit box contents or an undelivered paycheck or refund. Life insurance policies also are included, which is why I championed legislation (HB 4633) to require life insurers to use the federal Death Master File to identify deceased policy holders whose life insurance proceeds have not been paid. I will keep fighting to make sure beneficiaries get what is owed to them. This fiscal year was a unique one with no budget in place, but our office still achieved some major wins. We made changes to our Ag Invest program to provide better access to capital for farmers. Radioshack surrendered $140,000 to Illinois residents after our auditors determined their failure to report unclaimed rebate checks. We were recognized by Rainbow Push for our efforts to increase business opportunities for Minority, Women, Veteran and Disabled (MWVD) firms. In 2017, we will continue to demand inclusion, fight for consumers, and work to identify business opportunities that create jobs and boost the economy. Sincerely, Michael W. Frerichs LETTER FROM ILLINOIS STATE TREASURER MICHAEL W. FRERICHS • 2016 This annual report is intended to fulfill the requirements of Section 15 of the State Treasurer Act, Section 3(a) of the State Finance Act and Article V, Section 19 of the Illinois Constitution. 03 MISSION STATEMENT The Illinois State Treasurer’s Office is dedicated to protecting the state’s investment portfolio, ensuring the liquidity of all investments, and consistently producing earnings at or above industry standards. Our investment decisions will promote education, access, and opportunity for individuals and governmental bodies across our state to give families the tools to achieve the American Dream. The Treasurer’s Office is committed to fulfilling this mission in a highly professional and ethical manner, while striving for transparency, efficiency, and preservation of public trust. MISSION STATEMENT • 2016 04 TABLE OF CONTENTS 06 INVESTMENTS 08 INVEST IN ILLINOIS 10 ILLINOIS GROWTH AND INNOVATION FUND 12 FOCUS ON DIVERSITY 14 UNCLAIMED PROPERTY 18 COLLEGE SAVINGS PROGRAMS 20 INVESTMENT POLICIES 21 STATE PORTFOLIO INVESTMENT POLICY 30 THE ILLINOIS FUNDS/MARKET FUND POLICY 38 BRIGHT START COLLEGE SAVINGS PROGRAM INVESTMENT POLICY STATEMENT 47 BRIGHT DIRECTIONS COLLEGE SAVINGS PROGRAM INVESTMENT POLICY STATEMENT 52 ILGIF INVESTMENT POLICY STATEMENT 64 FINANCIALS 73 CONTACT US TABLE OF CONTENTS • 2016 05 Investments) Banking) and Finance State Portfolio & Banking The Treasurer’s Office is responsible for receiving and safekeeping all public monies of the state, ensuring liquidity is available to meet the state’s obligations, and investing all remaining funds in authorized instruments. Pursuant to this authority, the Banking section maintains numerous accounts with financial institutions to process deposits for check clearing, lockbox services, ACH transactions, depository and custodial services, and electronic payment transactions on the State’s behalf. State legislators budget public monies that are collected, but that money is not spent all at once. The Treasurer’s Office is responsible for safekeeping of public monies and managing the State Investment Portfolio, ensuring liquidity to meet the state’s obligations and investing all remaining funds in authorized investments. The State Investment Portfolio, with total assets over $12 billion, is an internally managed investment program that aims to ensure the following principles: safety of principal, liquidity, diversification, return on investment, and support community development efforts. The Illinois Funds Created in 1975, The Illinois Funds was the first local government investment pool established in the nation, thereby enabling communities across the state to invest their money together in a secure money market fund to earn greater returns. The fund is comprised of over 1,600 participating entities, holding more than 3,500 accounts with net assets of over $5 billion. INVESTMENTS, BANKING, AND FINANCE • 2016 The Illinois Funds is a safe, secure, highly liquid, diversified money market fund that holds Standards 06 & Poor’s AAAm rating, the highest fund rating possible. INVESTMENTS E-Pay E-Pay is a full-service electronic payment services program specifically designed for Illinois government agencies so they can quickly and securely receive monies through convenient, customized payment channels. Over 800 local and state government agencies have adopted E-Pay since it was created in 2002 to provide public agencies and state universities with a safe, timely, and competitively priced electronic payment solution. The Treasurer’s Office conducts and oversees program management, including customer service, storage, transfer, and data processing. Accounting/Budget/Warrants The Accounting/Budget/Warrants Division successfully performs daily, monthly, quarterly, and annual general accounting activities, including balancing the general ledger, processing accounts payable, reconciling bank accounts, and compiling budget estimates for the appropriation process. The Division is also responsible for processing forgery claims and depositing unclaimed property, circuit clerk, estate tax, and other miscellaneous receipts. The Accounting Division continues to work towards its overall objective to provide accurate and timely general and budgetary accounting services to internal and external constituents. Credit Risk Analysis The Credit Risk Analysis Unit is responsible for modeling, analyzing, and reporting on the Office’s investment portfolio to anticipate, identify, and mitigate credit risk exposure. As such, this team assesses prospective and existing counterparties for credit worthiness, examines the eligibility and suitability of broker/dealers, develops quantitative and qualitative analytic models to measure risk, utilizes best practices of data analysis to ensure results are accurate, and presents formal analyses that guide the investment decisions of the Treasurer’s Office. Investment