Board of Investments, Department of Commerce, financial-compliance audit for the fiscal year ended June 30 .. PDF
Preview Board of Investments, Department of Commerce, financial-compliance audit for the fiscal year ended June 30 ..
s 354.88 L72BI 1998 Legislative Audit Division StateofMontana Reportto theLegislature December 1998 Financial-CoiTipliance Audit For the Fiscal Year Ended June 30, 1998 Board of Investments DepartmentofCommerce Weperformedafinancial-complianceauditoftheBoardofInvestments, DepartmentofCommerce,forthefiscalyearendedJune30, 1998. This reportcontainstheauditedfinancialstatementsandaccompanyingnotesfor fiscalyear 1997-98. Weissuedunqualifiedopinionsonthefinancial statementsoftheBoardofInvestment'sRetirementFundsBondPool,Trust FundsBondPool,ShortTermInvestmentPool,MontanaStockPool,Montana InternationalEquityPool,AllOtherFunds,andEnterpriseFund. Thisreportcontainsnorecommendations. collects' :^•n cnnnwiEUTS MONTANA STATE LlBRAi;> HELE1N5A1.5MEO.N6TtAhNAAVE5.9^J. Directcomments/inquiriesto: LegislativeAuditDivision Room135,StateCapitol POBox201705 98-3 HelenaMT59620-1705 Helpeliminatefraud,waste,andabuseinstategovernment. CalltheFraudHotlineat1-800-222-4446 statewideor444-4446inHelena. MONTANASTATEUBRARY ./Jill|r{lllllll|l|ll|lllllliil|iiIiiI'IIlIliI 3 0864 0014 3443 3 FINANCIAL-COMPLIANCEAUDITS Financial-complianceauditsareconductedbytheLegislativeAuditDivisiontodetermineifan agency'sfinancialoperationsareproperlyconducted,thefinancialreportsarepresentedfairly,and theagencyhascomphedwithapphcablelawsandregulations. Inperformingtheauditwork,the auditstaffusesstandardssetforthbytheAmericanInstituteofCertifiedPublicAccountantsandthe UnitedStatesGeneralAccountingOffice. Financial-complianceauditstaffmembersholddegrees withanemphasisinaccounting. MoststaffmembersholdCertifiedPublicAccountant(CPA)cer- tificates. GovernmentAuditingStandards,theSingleAuditActAmendmentsof1996and0MBCircularA- 133requiretheauditortoissuecertainfmancial,internalcontrol,andcompliancereports. This individualagencyauditreportisnotintendedtocomplywiththesereportingrequirementsandis thereforenotintendedfordistributiontofederalgrantoragencies. TheLegislativeAuditDivision issuesastatewidebiennialSingleAuditReportwhichcomplieswiththeabovereporting requu-ements. TheSingleAuditReportforthetwofiscalyearsendedJune30, 1999,willbeissued byMarch31,2000. CopiesoftheSingleAuditReport,whenavailable,canbeobtainedby contacting: SingleAuditCoordinator LegislativeAuditDivision OfficeofBudgetandProgramPlanning Room 135,StateCapitol StateCapitol POBox201705 HelenaMT59620 HelenaMT59620-1705 Phone(406)444-3616 MEMBERS OFTHELEGISLATIVEAUDITCOMMITIEE . LEGISLATIVE AUDIT DIVISION Scott A. Seacat, Legislative Auditor Deputy Legislative Auditors: John W. Northey, Legal Counsel Jim Pellegrini, Performance Audit Tori Hunthausen. IT& Operations Manager JamesGillett. Financial-Compliance Audit December 1998 TheLegislativeAuditCommittee oftheMontanaStateLegislature: Thisisourfinancial-complianceauditreportontheBoardofInvestments,DepartmentofCommerce,forthe fiscalyearendingJune30, 1998. WeperformedthisannualauditoftheBoardofInvestmentsincompliance withArticleVIQ,section 13oftheMontanaConstitution,andsection 17-6-321.MCA. Theobjectivesofthe auditweretodeterminetheboard'scompliancewithapplicablelawsandregulations,makenecessary recommendationsforimprovementsinmanagementandinternalcontrols,anddeterrruneiftheboard's fmancialstatementspresentfau-lyitsfmancialpositionandresultsofoperationsoftheboardforthefiscal yearendedJune30, 1998. Thisreportcontainsnorecommendations. TheBoardofInvestments,originallycreatedm 1971,isattachedtotheDepartmentofCommercefor administrativepurposes. Theboardemploysanexecutivedirectorandanmvestmentofficerwhointurnhire andmanageboardstaff Thestaffmembersadvisetheboard,implementitsdecisions,andperformdaily investment,economicdevelopment,andrecordkeepmgfimctions. IncludedmthisreportisahstofthemembersoftheBoardofInvestmentsandAdministrativeOfficialsof theBoardofInvestmentsaswellasanunqualifiedIndependentAuditor'sReportforeachofthefollowing sevensetsoffinancialstatementsoftheBoardofInvestments;RetirementFundsBondPool,TrustFunds BondPool,ShortTermInvestmentPool,MontanaStockPool,MontanaInternationalEquityPool,AllOther Funds,andEnterpriseFund. Theboard'sresponsetothisreportisonpageH-1 Thepriorfinancialauditreport,issuedforfiscalyear 1995-96,didnotincludeanyrecommendationstothe BoardofInvestments. WethanktheBoardofInvestmentsandtheirstafffortheircooperationandassistanceduringtheaudit. Respectfullysubmitted. /0^^, ScottA. Seacat LegislativeAuditor Room 135, StateCapitolBuilding,POBox201705 HelenaMT59620-1705 Phone(406)444-3122 FAX(406)444-9784 [email protected] O^O, ^ Digitized by the Internet Archive in 2010 with funding from IVIontana State Library http://www.archive.org/details/boardofinvestmen1998mont Appointed and Administrative Officials MontanaBoardof InvestmentsMembers TroyMcGee,St.,Chairman LEGISLATIVE AUDIT DIVISION Scott A. Seacat, Legislative Auditor /&^^^^^ Deputy Legislative Auditors: John W. Noithey, Legal Counsel i^^^^^^P •"'" Pellegrini, Performance Audit Tori Hunthausen, IT& Operations Manager \^^^^^^^ JamesGillett. Financial-Compliance Audit INDEPENDENTAUDITOR'SREPORT TheLegislativeAuditCommittee oftheMontanaStateLegislature: WehaveauditedtheaccompanyingStatementofNetAssetValueforthestateofMontanaBoardof Investments, RetirementFundsBondPool, asofJune30, 1998and 1997, andtherelatedStatementof ChangesinNetAssetValueandStatementofInvestmentIncomeandDistributionforthetwo fiscal yearsthenended. Thesefinancial statementsaretheresponsibilityoftheBoardofInvestments' management. Ourresponsibility istoexpressanopiniononthesefinancial statementsbasedonour audit. Weconductedouraudit inaccordancewithgenerallyacceptedauditing standards. Thosestandards requirethat weplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancial statementsarefreeofmaterial misstatement. Anaudit includesexamining, onatestbasis, evidence supportingtheamountsand disclosures inthefinancial statements. Anauditalso includesassessingthe accountingprinciplesusedand significantestimatesmadeby management, aswell asevaluatingthe overall financial statementpresentation. Webelievethatourauditprovidesareasonablebasisforour opinion. Inouropinion, thefinancial statementsreferredtoabovepresentfairly, inall material respects, thenet asset valueofthestateofMontanaBoardofInvestments, RetirementFundsBondPool, asofJune30, 1998and 1997, anditschangesinnetassetvalueandinvestment incomeanddistributionforthefiscal yearsthenendedinconformitywithgenerallyacceptedaccountingprinciples. Respectfullysubmitted, JamesGillett, CPA DeputyLegislative Auditor October 14, 1998 PageA-1 Room 135,StateCapitolBuilding.POBox201705 HelenaMT59620-1705 Phone(406)444-3122 FAX(406)444-9784 [email protected] PageA-2 ) ) STATEOFMONTANABOARDOFINVESTMENTS RETIREMENTFUNDSBONDPOOLFINANCIALSTATEMENTS STATEMENTOFNETASSETVALUEJUNE30,1998AND1997 122fi 1997 Assets Cash $ $ Securitylendingcashcollateral(Notes3and4 254,045,485 298,166,077 Interestreceivable 33,424,845 34,837,871 Investmentsmanagedatfairvalue(amortized costof$1,816,584,113in1998and$1,776,782,613in 1997)(Notes2and4) 1.935.515.857 1.814.478.871 Totalassets $ 2.222.986.187 $ 2.147.482.819 Liabilities Incomedueparticipants(Note2) $ 12,053,400 $ 11,858,910 Securitylendingobligations(Notes3and4) 254,045,485 298,166,077 Securitylendingexpensepayable 1,073^73 1,376,578 Brokerpayableforsecuritiespurchasedbutnotsettled(Note2) 3,650,000 Duetootherfunds Q 18.199 Totalliabilities 267,172,258 315,069,764 Netassetvalue $ 1.955.813.929 $ 1.832.413.055 UnitsOutstanding 18,206^45 17,807,131 UnitValue $107.42 $102.90 STATEMENTOFCHANGESINNETASSETVALUE FORTHEFISCALYEARSENDEDJUNE30,1998AND1997 Netassetvalue,beginningofyear $ 1,832,413,055 $ 1,743,372,346 Valueofunitspurchasedbyparticipants 42,429,404 71,041,724 Valueofunitssoldbyparticipants (257,386) Changesinfairvalueofinvestmentsmanaged 81.228.856 17.998.985 Netassetvalue,endofyear $ 1.955.813.929 $ 1.832.413.055 STATEMENTOFINVESTMENTINCOMEANDDISTRIBUTION FORTHEFISCALYEARSENDEDJUNE30,1998AND1997 Investmentincome(Note2 $ 144,602,880 $ 138,006,611 Securitylendingincome 14,432,115 19,507,512 Administrativeexpenses (183,126) (218^88) Securitylendingexpense (14,097,841) (18,617,225) Incomedueparticipants,beginningofyear 11.858.910 11.320.128 Incomeavailablefordistribution 156,612,938 149,998,638 Distribution 144.559.538 138.139.728 Incomedueparticipants,endofyear(Note2) $ 12.053.400 $ 11.858.910 Theaccompanyingnotesareanintegralpartofthesefinancialstatements. PageA-3 STATEOFMONTANABOARDOFINVESTMENTS RETIREMENTFUNDSBONDPOOL NOTESTOFINANCIALSTATEMENTS JUNE30,1998AND1997 HISTORYANDORGANIZATION 1. TheBoardwascreatedbyanactoftheLegislaturetoinvestandmanagetheStateofMontana'sinvestmentfunds onacentralizedbasis.TheRetirementFundsBondPool(RFBP)wascreatedbytheBoardtoallowqualifying funds,perSection17-6-201,MCA,toparticipateinadiversifiedpool.TheRFBPwascreatedonApril1,1995, bythetransferofallfixedincomeandvariable-ratesecuritiesownedbythePublicEmployees',MunicipalPolice Officers',GameWardens',Sheriffs',Judges',HighwayPatrolOfficers',Teachers',VolunteerFirefighters'and Firefighters'Unifiedretirementfunds. 2. SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES Investments RFBPinvestmentsarepurchasedinaccordancewiththestatutorilymandated"PrudentExpertPrinciple."The RFBP portfolio includes corporate asset-backed, other corporate, U.S. government mortgage-backed, U.S. governmentandyankeesecurities.Corporateasset-backedsecuritiesrepresentdebtsecuritiescollateralizedby a pool of assets. U.S. government mortgage-backed securities reflect participation in a pool of residential mortgages.U.S.governmentsecuritiesincludedirectandindirectobligationsoftheU.S.Treasury.Yankeebonds areU.S.dollardenominatedbondsissuedbyforeigncorporationsandgovernmentsandU.S.companiesissuing debtinforeignmarkets. The RFBP portfolio includes structured financial instruments known as REMICs (Real Estate Mortgage InvestmentConduits).REMICsarepass-throughvehiclesformulticlassmortgage-backedsecurities.SomeRFBP REMICsareprincipal-onlystrips(POs)andinterest-onlystrips(lOs).Stripinvestmentsrepresenttheseparate purchaseoftheprincipalandinterestcashflowsofamortgagesecurity.POsreceivecashflowfromtheprincipal paymentcomponentwhilelOsreceivecashflowfromtheinterestpaymentcomponentonunderlyingmortgage loans.Thesesecurities,purchasedforportfoliodiversificationandacompetitiverateofreturn,areidentifiedand reportedasgovernmentmortgage-backedsecuritiesintheinvestmentriskandportfoliodisclosures.(SeeNote 4onInvestmentRiskCategoriesandNote5fortheYearEndPortfolio.) RFBPfixedincomesecuritiespayafixedrateofinterestuntilmaturitywhilethevariable-rate(floating-rate) securitiespaya variableinterestrateuntilmaturity.Thevariable-ratesecuritiesfloatwithLIBOR(London InterbankOfferedRate)ortheweightedaverageofthenetmortgageinterestratesforthemortgageloangroup. Thefourvariable-ratesecurities,withanamortizedcostof$2,250,125and$3,952,445respectivelyasofJune30, 1998and 1997,andareidentifiedand reportedascorporateasset-backedandgovernmentmortgage-backed securitiesintheinvestmentriskandportfoliodisclosures.(SeeNote4onInvestmentRiskCategoriesandNote 5fortheYearEndPortfolio.) TheRFBP,asaninternalinvestmentpool,investsitsexcesscash,bylaw,intheBoard'sShortTermInvestment Pool(STIP),anexternalinvestmentpool. Bymeetingcertainconditions,STIP,asa2a7-likepool,isallowedto useamortizedcostratherthanfairvaluetoreportnetassetstocomputeunitvalues. InvestmentsarepresentedintheStatementofNetAssetValueatfairvalue.Fairvaluesaredeterminedprimarily byreferencetomarketpricessuppliedtotheBoardbytheBoard'scustodialbank.StateStreetBank.Amortized cost, parenthetically disclosed, representstheoriginalcost,adjustedforpremiumanddiscountamortization whereapplicable.Premiumsanddiscountsareamortized/accretedusingthestraight-lineorinterestmethodto thecall,averagelifeormaturitydateofthesecurities. Amortizedcostmayalsobereferredtoasbookvalue. ParticipantUnits ThePublicEmployees',MunicipalPoliceOfficers',GameWardens',Sheriffs',Judges',HighwayPatrolOfficers', Teachers',VolunteerFirefighters'andFirefighters'Unifiedretirementfundstransferredallfixedincomeand variable-ratesecurities,atamortizedcost,intotheRFBPatthestart-updateandwereissuedunitsaccording tothemarketvalueofeachparticipant'sportfolio.TheinitialunitvalueasofApril1,1995,was$100.00.Unit valuesthereafterarecalculatedweekly,basedonportfoliopricing,toallowforparticipanttransactionstooccur asdeterminedbytheinvestmentstaff. PageA-4
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