A RepoRt to the MontAnA Legi sL Atu Re LegisLAtive Audit division 08-04B Fi n A n c i A L Au d i t nov e M b e R 20 09 Boardof Investments For the Two Fiscal Years Ended June 30, 2009 This is trial version www.adultpdf.com Financial Audits Financial audits are conducted by the Legislative Audit Division to determine if the financial statements included in this report are presented fairly and the agency has complied with laws and regulations having a direct and material effect on the financial statements. In performing the audit work, the audit staff uses standards set forth by the American Institute of Certified Public Accountants and the United States Government Accountability Office. Financial audit staff members hold degrees with an emphasis in accounting. Most staff members hold Certified Public Accountant (CPA) certificates. Government Auditing Standards, the Single Audit Act Amendments of 1996 and OMB Circular A-133 require the auditor to issue certain financial, internal control, and compliance reports. is individual agency audit report is not intended to comply with these requirements and is therefore not intended for distribution to federal grantor agencies. e Legislative Audit Division issues a statewide biennial Single Audit Report which complies with the above reporting requirements. e Single Audit Report for the two fiscal years ended June 30, 2007, was issued January 23, 2008. e Single Audit Report for the two fiscal years ended June 30, 2009, will be issued by March 31, 2010. Copies of the Single Audit Report can be obtained by contacting: Single Audit Coordinator Legislative Audit Division Office of Budget and Program Planning Room , State Capitol Room , State Capitol P.O. Box P.O. Box Helena, MT - Helena, MT - L A C Representatives D B, V C B H S M C P-L W S B W Senators M T, C G B J B T B M C C L A S Financial-Compliance A C J F B K F H H , , . C F H : (S) --- ( H) - Direct comments or inquiries to: Legislative Audit Division Room , State Capitol P.O. Box Helena, MT - () - Reports can be found in electronic format at: http://leg.mt.gov/audit This is trial version www.adultpdf.com Room 160 • State Capitol Building • P.O. Box 201705 • Helena, MT • 59620-1705 Phone (406) 444-3122 • FAX (406) 444-9784 • E-Mail lad@mt.gov LEGISLATIVE AUDIT DIVISION Tori Hunthausen, Legislative Auditor Deputy Legislative Auditors Monica Huyg, Legal Counsel James Gillett Angie Grove November 2009 e Legislative Audit Committee of the Montana State Legislature: is is our nancial audit report on the Boardof Investments (Board) for the two scal years ended June 30, 2009. We performed this audit of the Board in compliance with Article VIII, Section 13 of the Montana Constitution, and §17-6-321, MCA. e objectives of our nancial audit included determining whether the Board’s nancial statements presented fairly its nancial position and results of operations at and for the periods ended June 30, 2009, and 2008 and the Board’s compliance with laws and regulations that have a direct and material impact on the nancial statements. e Board, created in 1971, is attached to the Department of Commerce for administrative purposes. e Board employs an executive director and chief investment ocer who in turn hire and manage sta. e sta members advise the Board, implement its decisions, and perform daily investment, economic development, and record keeping functions. Included in this report is a list of the members of the Boardof Investments and its Administrative Ocials (page i). is report contains unqualied Independent Auditor’s Reports for the Board’s Consolidated Unied Investment Program and Enterprise Fund. e Independent Auditor’s Reports cover two scal years because the Board presents two scal years in the nancial statements for comparative purposes. e Board’s response to this report is on page B-1. is report does not contain any recommendations to the Board. e prior nancial-compliance audit report, issued for the two scal years ended June 30, 2008, contained two recommendations to the Board. e Board implemented one recommendation and partially implemented the other. e recommendation partially implemented is related to the Board’s involvement in the construction of the Montana State Fund Building. e Board is still involved in the construction of the building and plans to remain involved until construction is complete. As a result, we will follow up on this again during our next audit. We make no further recommendation at this time. We thank the members of the Boardof Investments and their sta for their cooperation and assistance during the audit. Respectfully submitted, /s/ Tori Hunthausen Tori Hunthausen, CPA Legislative Auditor This is trial version www.adultpdf.com This is trial version www.adultpdf.com Appointed and Administrative Officials Term Expires Montana Boardof Investments Terry Moore, Chairman Billings 1/2011 Elouise Cobell Browning 1/2013 Teresa Cohea Helena 1/2013 Karl Englund Missoula 1/2011 Maureen Fleming Missoula 1/2011 Patrick McKittrick Great Falls 1/2013 Jack Prothero Great Falls 1/2013 Jon Satre Helena 1/2011 Jim Turcotte Helena 1/2013 Greg Barkus Senate Liaison Brady Wiseman House of Representatives Liaison Administrative Ocials Carroll South, Executive Director Geri Burton, Deputy Director Cli Sheets, Chief Investment Ocer Gayle L. Moon, Accounting Fiscal Manager For additional information concerning the Montana Boardof Investments, contact: Carroll South, Executive Director P.O. Box 200126 Helena, MT 59620-0126 (406) 444-0001 e-mail: csouth@mt.gov 08-04B i This is trial version www.adultpdf.com Financial Statements Index INDEPENDENT AUDITOR’S REPORTS AND BOARDOF INVESTMENTS FINANCIAL STATEMENTS Consolidated Unified Investment Program Independent Auditor’s Report and Financial Statements A-1 Enterprise Fund Independent Auditor’s Report and Financial Statements A-59 Montana Legislative Audit Division ii This is trial version www.adultpdf.com I A’ R e Legislative Audit Committee of the Montana State Legislature: We have audited the accompanying Statement of Net Asset Value/Investments Managed of the Montana Boardof Investments, Consolidated Unied Investment Program as of June 30, 2009, and 2008, and the related Statement of Changes in Net Asset Value/Investments Managed, and Statement of Investment Income and Distribution, for each of the scal years then ended. e information contained in these nancial statements is the responsibility of the Board’s management. Our responsibility is to express an opinion on these nancial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. ose standards require that we plan and perform the audit to obtain reasonable assurance about whether the nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the nancial statements. An audit also includes assessing the accounting principles used and signicant estimates made by management, as well as evaluating the overall nancial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the nancial statements referred to above present fairly, in all material respects, the net asset value of the Montana Boardof Investments, Consolidated Unied Investment Program as of June 30, 2009, and 2008, and its changes in net asset value/investments managed and investment income and distribution for each of the scal years then ended, in conformity with accounting principles generally accepted in the United States of America. Respectfully submitted, /s/ James Gillet James Gillett, CPA Deputy Legislative Auditor October 27, 2009 Room 160 • State Capitol Building • P.O. Box 201705 • Helena, MT • 59620-1705 Phone (406) 444-3122 • FAX (406) 444-9784 • E-Mail lad@mt.gov LEGISLATIVE AUDIT DIVISION Tori Hunthausen, Legislative Auditor Deputy Legislative Auditors Monica Huyg, Legal Counsel James Gillett Angie Grove A-1 This is trial version www.adultpdf.com A-2 This is trial version www.adultpdf.com STATE OF MONTANA BOARDOF INVESTMENTS CONSOLIDATED UNIFIED INVESTMENT PROGRAM FINANICAL STATEMENT 2009 2008 Assets Cash $ 9,230,879 $ 17,266,879 Securit y lendin g cash collateral ( Note 5 ) 1,200,731,501 836,203,843 Broker receivable for securities sold but not settled ( Note 2A ) 69,143,177 33,967,399 Dividend and interest receivable ( Note 2E ) 54,603,280 68,543,146 STIP investment p ortfolio at amortized cost ( Note 2B ) 2,301,281,468 2,322,008,128 Investment p ortfolios at fair value ( Note 2B ) 8,823,470,364 10,473,336,072 Total assets ( Note 2B ) $ 12,458,460,669 $ 13,751,325,467 Liabilities Income due p artici p ants ( Notes 2E ) $ 23,811,192 $ 31,121,618 Broker p a y able for securities p urchased but not settled ( Note 2A ) 43,878,167 99,374,745 Securit y lendin g obli g ations ( Note 5 ) 1,200,731,501 836,203,843 Securit y lendin g ex p ense p a y able 404,942 1,587,852 Unrealized forei g n exchan g e market g ain ( loss ) 133,099 249,585 Other payables 2,799,578 206,737 Administrative fee p a y able 2,716,909 4,238,184 STIP reserve ( Note 7 ) 1,427,621 4,352,667 Total liabilities ( Note 2B ) 1,275,903,009 977,335,231 Net asset value/investments managed (Note 2B, 2C) $ 11,182,557,660 $ 12,773,990,236 Pool Units Outstandin g ( Note 2B, 2C ) 2,374,560,621 2,390,312,896 N et asset value/investments, be g innin g of y ear $ 12,773,990,236 $ 13,469,961,763 Value of p ool units/investments p urchased ( Note 2D ) 13,196,815,945 13,874,166,338 Value of p ool units/investments sold/matured ( Note 2D ) ( 13,034,950,059 ) ( 13,979,187,863 ) Increase ( decrease ) in AOF interest receivable ( 2,066,822 ) ( 531,143 ) Increase ( decrease ) in AOF broker receivable 70,376 ( 78,728 ) ( Increase ) decrease in AOF accounts p a y able ( 6,097 ) 33,207 ( Increase ) decrease in AOF securit y lendin g ex p ense p a y able 317,686 741,098 Chan g es in current value of investments mana g ed ( Note 2D ) ( 1,751,613,605 ) (591,114,436) Net asset value/investments managed, end of year $ 11,182,557,660 $ 12,773,990,236 N et realized g ain ( loss ) ( Note 2E ) $ ( 16,324,497 ) $ 26,598,055 Dividend/interest income ( Note 2E ) 332,619,985 380,536,951 Amortization/accretion ( Note 2E ) 30,860,796 73,207,790 Securit y lendin g income ( Note 5 ) 23,851,652 42,135,165 Securit y lendin g ex p ense ( Note 5 ) ( 9,949,320 ) ( 34,612,280 ) Administrative ex p enses ( Note 2F ) ( 37,373,150 ) ( 41,612,233 ) Other ex p enses ( 204,871 ) ( 841,495 ) STIP reserve ex p ense ( Note 7 ) ( 9,242,500 ) ( 4,346,500 ) Income due p artici p ants, be g innin g of y ear 31,121,618 34,290,689 Income available for distribution ( Note 2E ) 345,359,713 475,356,142 Distribution ( Note 2E ) 321,548,521 444,234,524 Income due participants, end of year (Note 2E) $ 23,811,192 $ 31,121,618 STATEMENT OF NET ASSET VALUE/INVESTMENTS MANAGED JUNE 30, 2009 AND 2008 The accompanying notes are an integral part of these financial statements. STATEMENT OF CHANGES IN NET ASSET VALUE/INVESTMENTS MANAGED STATEMENT OF INVESTMENT INCOME and DISTRIBUTION FOR FISCAL YEARS ENDED JUNE 30, 2009 AND 2008 FOR FISCAL YEARS ENDING JUNE 30, 2009 AND 2008 A-3 This is trial version www.adultpdf.com STATE OF MONTANA BOARDOF INVESTMENTS CONSOLIDATED UNIFIED INVESTMENT PROGRAM FINANICAL STATEMENT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2009 AND 2008 1. HISTORY AND ORGANIZATION The Board was created by the Legislature to manage the Unified Investment Program established by the state Constitution. The Investment Program is comprised of all state funds, including pensions, trusts, insurance, and cash. Local government entities may only invest in the Short Term Investment Pool portion of the Program. The Board manages the Investment Program pursuant to the “Prudent Expert Principle” mandated by state law, which requires an investment manager to: (a) discharge the duties with the care, skill, prudence, and diligence, under the circumstances then prevailing, that a prudent person acting in a like capacity with the same resources and familiar with like matters exercises in the conduct of an enterprise of a like character with like aims; (b) diversify the holdings of each fund within the unified investment program to minimize the risk of loss and to maximize the rate of return unless, under the circumstances, it is clearly prudent not to do so; and (c) discharge the duties solely in the interest of and for the benefit of the funds forming the unified investment program. Currently, only the nine retirement funds and the Montana State Fund (Workers’ Compensation) may invest in stock. All other state funds must be invested in fixed-income type investments. Neither state law nor the state Constitution place restrictions on retirement fund investments. The funds are invested solely at the discretion of the Board pursuant to the “Prudent Expert Principle.” To facilitate management of the Investment Program, the Board created seven investment pools (Pools) that operate similar to mutual funds. All state agencies and many local government entities participate in one or more Pools. By investing in large Pools with other participants the smaller participants are provided broad diversification not otherwise possible. Some Pools are dedicated solely to the state’s nine retirement funds, while others are open to other state and local government funds. State agencies, ineligible to participate in a long term investment pool, have direct fixed income, equity, real estate, loan and mortgage investments. These investments are combined and reported as All Other Funds (AOF) Investments Managed. The Pools, AOF Investments Managed, Pool creation date and eligible participants are shown below. Pool/Investments Managed Name Creation Date Eligible Participants Retirement Funds Bond Pool (RFBP) 04/01/95 Trust Funds Bond Pool (TFBP) 10/01/95 Montana Domestic Equity Pool (MDEP) 07/01/80 Montana International Equity Pool (MTIP) 06/01/96 Montana Private Equity Pool (MPEP) 05/01/02 Montana Real Estate Pool (MTRP) 06/01/06 Short Term Investment Pool (STIP) 07/01/74 All Other Funds (AOF) Investments Managed NA Nine Retirement Funds Only Nine Retirement Funds Only Non-Pool State Agency Investments Nine Retirement Funds Only All State Funds and Local Governments Nine Retirement Funds/Small Trusts Nine Retirement Funds Only Various State Trust Funds 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Valuation and Timing – The value of stocks and bonds are recorded at both “book” and “fair” value. The book or carrying value of a stock is the average cost of the shares held. If the same stock has been purchased several times, the average of the purchase prices is the book value. The book value of bonds is the “amortized” cost, which represents the original cost, adjusted for premium and discount amortization where applicable. If bonds are purchased at more than the par value, the difference is called a premium. If they are purchased for less than par value, the difference is called discount. Premiums and discounts are amortized/accreted using the straight-line or scientific method to the call, average life, or maturity date of the securities. The fair value of publicly traded stocks and bonds is determined by reference to market prices supplied by State Street Bank (the custodial bank). Because a public market does not exist for private equity and real estate investments, the fair value of these investments is the value reported in the most recent external managers’ valuation reports. The book or carrying value of these private investments is the capital invested less capital returned. Except for STIP, all investment portfolios presented in the Statement of Net Asset Value are at “fair” value. A-4 This is trial version www.adultpdf.com . Committee of the Montana State Legislature: We have audited the accompanying Statement of Net Asset Value/Investments Managed of the Montana Board of Investments, Consolidated Unied Investment. asset value of the Montana Board of Investments, Consolidated Unied Investment Program as of June 30, 2009, and 2008, and its changes in net asset value/investments managed and investment income. Committee of the Montana State Legislature: is is our nancial audit report on the Board of Investments (Board) for the two scal years ended June 30, 2009. We performed this audit of the Board