State of Illinois State Universities Retirement System Compliance Examination Year Ended June 30, 2008 Performed as Special Assistant Auditors for the Auditor General, State of Illinois McGladrey & Pullen, LLP is a member firm of RSM International – an affiliation of separate and independent legal entities. State of Illinois State Universities Retirement System Compliance Examination Year Ended June 30, 2008 Table of Contents Page System Officials 1 Management Assertion Letter 2 Compliance Report Summary 3 Independent Accountants’ Report on State Compliance, on Internal Control Over Compliance, and on Supplementary Information for State Compliance Purposes 4 Schedule of Findings – Current Findings 7 Financial Statement Report The System’s financial statement report for the year ended June 30, 2008, which includes the report of independent auditors, management discussion and analysis, required supplementary information other than management discussion and analysis, basic financial statements and notes, supplementary information, and the independent auditor’s report on internal control over financial reporting and on compliance and other matters based on an audit of basic financial statements performed in accordance with Government Auditing Standards has been issued separately. Supplementary Information for State Compliance Purposes Summary 10 Fiscal Schedules and Analysis Summary Schedule of Appropriations and Expenditures 12 Comparative Schedules of Revenues and Expenses 13 Analysis of Revenue and Expenses 14 Schedule of Administrative Expenses 15 Analysis of Administrative Expenses 17 Schedule of Changes in Property and Equipment 18 Schedule of Investment Portfolio 19 Schedule of Investment Expenses 21 Schedule of Investment Commissions 23 Selected Account Balances 24 Schedule of Accounts Receivable 25 *Schedule of Changes in Reserves (Unaudited) 26 *Description of Reserves (Unaudited) 27 State of Illinois State Universities Retirement System Compliance Examination Year Ended June 30, 2008 Table of Contents Supplementary Information for State Compliance Purposes (continued) Page Analysis of Operations System’s Functions and Planning Program 28 Locally Held Fund 30 System Funding Progress 30 *Rate of Return (Unaudited) 30 Revenues and Expenses 30 Employer Contributions 31 Retirement Benefits 31 Survivors’ Benefits 31 Disability Benefits 31 Investment Income 31 Benefit Costs 32 Member Contributions 33 *Average Number of Employees (Unaudited) 33 Derivative Securities 34 Securities Lending 36 Self-Managed Plan Investments 36 Proceeds from General Obligation Bonds, Pension Funding Series June 2003 37 Future Funding and Benefit Calculations 38 Schedule of Contributions/Deductions and Effect on Investments 39 *Selected Activity Measures and Service Efforts and Accomplishments (Unaudited) 40 Investment Listing 41 *Unaudited information is presented for informational purposes only and is not intended to be presented in conformity with accounting principles generally accepted in the United States of America. State of Illinois State Universities Retirement System Compliance Examination Year Ended June 30, 2008 System Officials Associate Executive Director Ms. Judith A. Parker (Beginning January 1, 2009) Executive Director Mr. Dan Slack (Through December 31, 2008) Chief Financial Officer Ms. Shelley Porter Legal Counsel Mr. Kelly Jenkins Internal Auditor Mr. Steven Hayward President Mr. Mitchell Vogel Vice President Ms. Alice Palmer Treasurer Mr. Robert Hilgenbrink Board of Trustees Ms. Christine Boardman Mr. Mark Donovan Mr. Michael Mackey Mr. Michael Pizzuto Mr. Antonio Vasquez Ms. Marva Williams State Universities Retirement System’s office is located at: 1901 Fox Drive Champaign, IL 61820 1 State of Illinois State Universities Retirement System Compliance Examination Year Ended June 30, 2008 Summary The compliance testing performed during this examination was conducted in accordance with Government Auditing Standards and in accordance with the Illinois State Auditing Act. Accountants’ Report The Independent Accountants’ Report on State Compliance, on Internal Control Over Compliance, and on Supplementary Information for State Compliance Purposes does not contain scope limitations, disclaimers, or other significant non-standard language. Summary of Findings Prior Compliance Financial Compliance Number of Report Report Report Findings 1 1 None Repeated findings None None None Prior recommendations implementation or not repeated None None None Details of findings are presented in the separately tabbed report section of this report. Schedule of Findings Finding Item No. Page Description Type CURRENT FINDINGS (GOVERNMENT AUDITING STANDARDS AND STATE COMPLIANCE) 08-1 7 Valuation of Alternative Investments Material Weakness Exit Conference The findings are recommendations appearing in this report were discussed with System personnel at an exit conference on January 16, 2009. The responses to the recommendations were provided by Steven L. Hayward in a letter dated January 21, 2009. 3 Independent Accountants' Report on State Compliance, on Internal Control Over Compliance, and on Supplementary Information for State Compliance Purposes Honorable William G. Holland Auditor General, State of Illinois Springfield, Illinois Board of Trustees State Universities Retirement System of Illinois Champaign, Illinois Compliance As Special Assistant Auditors for the Auditor General, we have examined the State of Illinois, State Universities Retirement System’s (System) compliance with the requirements listed below, as more fully described in the Audit Guide for Financial Audits and Compliance Attestation Engagements of Illinois State Agencies (Audit Guide) as adopted by the Auditor General, during the year ended June 30, 2008. The management of the System is responsible for compliance with these requirements. Our responsibility is to express an opinion on the System’s compliance based on our examination. A. The System has obligated, expended, received, and used public funds of the State in accordance with the purpose for which such funds have been appropriated or otherwise authorized by law. B. The System has obligated, expended, received, and used public funds of the State in accordance with any limitations, restrictions, conditions or mandatory directions imposed by law upon such obligation, expenditure, receipt or use. C. The System has complied, in all material respects, with applicable laws and regulations, including the State uniform accounting system, in its financial and fiscal operations. D. The State revenues and receipts collected by the System are in accordance with applicable laws and regulations and the accounting and recordkeeping of such revenues and receipts is fair, accurate and in accordance with law. E. Money or negotiable securities or similar assets handled by the System on behalf of the State or held in trust by the System have been properly and legally administered and the accounting and recordkeeping relating thereto is proper, accurate, and in accordance with law. We conducted our examination in accordance with attestation standards established by the American Institute of Certified Public Accountants; the standards applicable to attestation engagements contained in Government Auditing Standards issued by the Comptroller General of the United States; the Illinois State Auditing Act (Act); and the Audit Guide as adopted by the Auditor General pursuant to the Act and, accordingly, included examining, on a test basis, evidence about the System’s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Our examination does not provide a legal determination on the System’s compliance with specified requirements. 4 McGladrey & Pullen, LLP is a member firm of RSM International – an affiliation of separate and independent legal entities. In our opinion, the System complied, in all material respects, with the requirements listed in the first paragraph of this report during the year ended June 30, 2008. However, the results of our procedures disclosed instances of noncompliance, which are required to be reported in accordance with criteria established by the Audit Guide, issued by the Illinois Office of the Auditor General and which are described in the accompanying schedule of findings as Finding 08-1. As required by the Audit Guide, immaterial findings relating to instances of noncompliance excluded from this report have been reported in a separate letter to your office. Internal Control The management of the System is responsible for establishing and maintaining effective internal control over compliance with the requirements listed in the first paragraph of this report. In planning and performing our examination, we considered the System’s internal control over compliance with the requirements listed in the first paragraph of this report in order to determine our examination procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with the Audit Guide, issued by the Illinois Office of the Auditor General, but not for the purpose of expressing an opinion on the effectiveness of the System’s internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the System’s internal control over compliance. Our consideration of internal control over compliance with the requirements