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2011 2010
Defined Benefit Plan
Equities 60.0% 65.0%
Opportunity Fund 2.0 3.0
Fixed income 18.0 18.0
Private Equity 6.0 0.0
TIPS* 4.0 4.0
Real Estate Investment Trusts 4.0 4.0
Real Estate 6.0 6.0
Total 100.0% 100.0%
Self-Managed Plan
Equities 70.0% 65.0%
Fixed income 29.0 34.0
Real Estate 1.0 1.0
Total 100.0% 100.0%
*TIPS denotes Treasury Inflation Protected Securities
Proper implementation of the investment policy requires that a periodic adjustment, or rebalancing, of assets be
made to ensure conformance with policy target levels. Such rebalancing is necessary to reflect sizable cash flows
and performance imbalances among investment managers who are hired to manage assets with a specified strategy.
SURS’ rebalancing policy calls for rebalancing, as soon as practical, if a strategy exceeds or falls below its target
allocation by 3%. Ongoing rebalancing of the investment portfolio occurred as needed during the year with the assis-tance
of System cash flows. The allocation of assets within the self-managed plan is totally determined by the indi-vidual
participants, and also reflects gains or losses over the past year.
Liabilities decreased by $0.7 billion or 27.0%. This was primarily due to a decrease in the obligation for securities
lending collateral and payables to brokers-unsettled trades.

Changes in Plan Net Assets
The summary of changes in plan net assets for the System is presented below:
Condensed Statement of Changes in Plan Net Assets
Reporting Entity (in millions) 2011 2010 Change
Amount %
Employer contributions $ 818.5 $ 739.7 $ 78.8 10.7
Participant contributions 309.9 323.6 (13.7) (4.2)
Net investment income/(loss) 2,973.6 1,725.3 1,248.3 72.4
Total additions 4,102.0 2,788.6 1,313.4 47.1
Benefits 1,622.5 1,483.7 138.8 9.4
Refunds 73.9 57.5 16.4 28.5
Administrative expense 12.6 12.5 0.1 0.8
Total deductions $ 1,709.0 $ 1,553.7 155.3 10.0
Net increase/(decrease) in plan net assets $ 2,393.0 $ 1,234.9 $ 1,158.1 93.8
SURS 2011 | 5 A COMPONENT UNIT
OF THE STATE OF ILLINOIS
Management’s Discussion and Analysis
Additions
Additions to plan net assets are in the form of employer and participant contributions and investment income or loss-es.
For fiscal year 2011, employer contributions increased by $78.8 million due to higher employer contributions from the
State of Illinois as required by Public Act 88-0593. Participant contributions remained decreased from the prior year
due to an increase in refund of participant contributions that exceed the 80% maximum benefit.
The investment net income for fiscal year 2011 was $3.0 billion for the System, representing a $1.2 billion increase from
the prior year. For the defined benefit plan, the overall rate of return was 23.8% (net of all investment management fees).
Given the long-term orientation of the SURS defined benefit investment program, it is important to track
investment returns over several time periods to correctly assess performance, especially given recent market volatil-ity.
The defined benefit plan returns are as follows:
Time Period 1-year 3-year 5-year 10-year 20-year
Annualized Return 23.80% 4.6% 5.3% 6.1% 8.5%
The 20-year return corresponds to the average active service term of the System member. At 8.5%, it can be com-pared
to the actuarial rate of return assumption, recently changed from 8.5% to 7.75% and effective as of the June 30,
2010 actuarial valuation. While this assumed rate is normally determined every five years as part of the experience
study performed by the System actuaries, the rate can be changed outside of this timetable by the System Board of
Trustees, should changes in market conditions or plan demographics call for such an adjustment.
Deductions
The expenses of the Retirement System relate to the provision of retirement annuities and other benefits, refunds to ter-minated
employees, and the cost of administering the System. These expenses for fiscal year 2011 were $1.71
billion, an increase of $155.3 million or 10.0% over expenses for 2010. This increase is primarily due to the $138.8 million
increase in defined benefit plan retirement and survivor annuity payments, and a $16.4 million increase in portable lump
sum distributions and refunds. Administration expenses increased by $0.1 million or 0.8% from fiscal year 2010 to 2011.
Future Outlook
Participant contributions are expected to grow in the future, at least at the pace of wage inflation experienced by the
employers. The employer contribution for fiscal year 2012, mainly provided by the State of Illinois, will increase by
approximately $201 million or 25%. The employer contributions for fiscal years 2012 and beyond should remain at a level
percent of pay of approximately 34% as required by the funding plan set out by Public Act 88-0593. Under this plan, con-tributions
will be at levels sufficient to fund the employer normal cost while amortizing the unfunded accrued actuarial
liability for the period of 2012 to 2045, allowing the System to reach a funding ratio of 90%.

Benefit payments are projected to continue to grow at a rate of approximately 7 - 8 % annually as a result of increasing
numbers of retirees, the 3% annual increase, and the impact of salary increases at the participating agencies. This results
in expenditure levels greater than combined participant and employer contributions such that the System will continue to
liquidate investments by approximately $500 to $700 million annually in order to pay current benefits. SURS will continue
to structure its portfolio with the objective of maximizing returns over the long term, taking advantage of investment
income to help offset the shortages in employer contributions.
FINANCIAL 6 | Creating Value
Financial Statements
Statement of Plan Net Assets as of June 30, 2011
With Comparative Reporting Entity Totals as of June 30, 2010
2011 2010
Defined Benefit Self-Managed
Plan Plan Total Total
Assets
Cash and short-term investments $ 505,492,014 $ - $ 505,492,014 $ 758,435,840
Receivables

Participants 9,936,358 2,262,025 12,198,383 15,208,630
Federal, trust funds, and other 3,317,220 1,309,800 4,627,020 3,768,845
Pending investment sales 597,196,141 - 597,196,141 729,180,673
Interest and dividends 40,462,379 - 40,462,379 37,970,185
Total receivables 650,912,098 3,571,825 654,483,923 786,128,333

Prepaid expenses 22,777 - 22,777 22,480

Investments, at fair value

Equity investments 10,086,790,110 44,823,063 10,131,613,173 7,634,359,192
Fixed income investments 3,189,219,461 20,800,782 3,210,020,243 3,596,346,644
Real estate investments 374,925,811 663,939 375,589,750 266,184,186
Mutual fund and variable annuities - 890,678,243 890,678,243 667,015,195
Total investments 13,650,935,382 956,966,027 14,607,901,409 12,163,905,217

Securities lending collateral 1,516,154,400 - 1,516,154,400 1,940,729,837
Capital assets, at cost,
net of accumulated depreciation
$17,977,466 and $17,729,535
respectively 6,003,179 - 6,003,179 6,408,913
Total assets 16,329,519,850 960,537,852 17,290,057,702 15,655,630,620

Liabilities

Benefits payable 7,159,269 - 7,159,269 6,577,950
Refunds payable 3,416,995 - 3,416,995 3,863,392
Securities lending collateral 1,515,998,213 - 1,515,998,213 1,935,311,903
Payable to brokers for unsettled trades 511,135,516 - 511,135,516 851,863,268
Administrative expenses payable 17,806,560 - 17,806,560 16,491,806

Total liabilities 2,055,516,553 - 2,055,516,553 2,814,108,319

Net assets held in trust
for pension benefits $ 14,274,003,297 $ 960,537,852 $ 15,234,541,149 $ 12,841,522,301
SURS 2011 | 7 A COMPONENT UNIT
OF THE STATE OF ILLINOIS
Financial Statements
Statement of Changes in Plan Net Assets For the Year Ended June 30, 2011
With Comparative Reporting Entity Totals For the Year Ended June 30, 2010

2011 2010
Defined Benefit Self-Managed

Plan Plan Total Total
Additions
Contributions

Employer $ 773,594,666 $ 44,841,140 $ 818,435,806 $ 739,711,843
Participant 260,177,436 49,756,972 309,934,408 323,570,314
Total Contributions 1,033,772,102 94,598,112 1,128,370,214 1,063,282,157
Investment Income

Net appreciation

in fair value of investments 2,474,258,890 172,505,597 2,646,764,487 1,294,472,087
Interest 192,587,174 - 192,587,174 324,588,475
Dividends 181,007,663 - 181,007,663 153,916,871
Securities lending 5,347,769 - 5,347,769 6,534,929
2,853,201,496 172,505,597 3,025,707,093 1,779,512,362
Less investment expense

Asset management expense 51,574,569 - 51,574,569 53,524,481
Securities lending expense 518,100 - 518,100 652,536
Net investment income 2,801,108,827 172,505,597 2,973,614,424 1,725,335,345
Total additions 3,834,880,929 267,103,709 4,101,984,638 2,788,617,502

Deductions

Benefits 1,611,228,356 11,224,239 1,622,452,595 1,483,740,506
Refunds of contributions 58,917,601 14,977,550 73,895,151 57,467,779
Administrative expense 12,273,786 344,258 12,618,044 12,455,584
Total deductions 1,682,419,743 26,546,047 1,708,965,790 1,553,663,869
Net increase 2,152,461,186 240,557,662 2,393,018,848 1,234,953,633
Net assets held in trust
for pension benefits

Beginning of year 12,121,542,111 719,980,190 12,841,522,301 11,606,568,668
End of Year $ 14,274,003,297 $ 960,537,852 $ 15,234,541,149 $ 12,841,522,301
FINANCIAL 8 | Creating Value
Notes to the Financial Statements
I. Summary of Significant Accounting Policies
A. Reporting Entity
The System is a component unit of the State of Illinois. As defined by accounting principles generally accepted
in the United States of America established by the Governmental Accounting Standards Board (GASB), the
financial reporting entity consists of a primary government, as well as its component units, which are legally
separate organizations for which the elected officials of the primary government are financially accountable, or
for which the nature and significance to the primary government are such that exclusion would cause the report-ing
entity’s financial statements to be misleading or otherwise incomplete. Financial accountability is defined as:
1. Appointment of a voting majority of the component unit’s board and either (a) the ability to impose will by the
primary government or (b) the possibility that the component unit will provide a financial benefit to or impose a
financial burden on the primary government; or
2. Fiscal dependency on the primary government.
Based upon the required criteria, the System has no component units.

B. Measurement Focus and Basis of Accounting
For both the defined benefit plan and the self-managed plan (SMP), the financial transactions are recorded
using the economic resources measurement focus and accrual basis of accounting. Member and employer con-tributions
are recognized as revenue when due pursuant to statutory or contractual requirements. Benefits and
refunds are recognized as expenses when due and payable in accordance with the terms of the plans.

C. Use of Estimates
The preparation of the System’s financial statements in conformity with accounting principles generally accept-ed
in the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and changes therein, and disclosure of contingent assets and liabili-ties.
Actual results could differ from those estimates and those differences could be material. The System uses an
actuary to determine the actuarial accrued liability for the defined benefit plan and to determine the actuarially
required contribution.
D. Risks and Uncertainties
The System invests in various investment securities. Investment securities are exposed to various risks such as
interest rate, market, and credit risk. Due to the level of risk associated with certain investment securities, it is
at least reasonably possible that changes in the values of investment securities will occur in the near-term and
those such changes could materially affect the amounts reported in the Statement of Plan Net Assets.
E. Description of Plans
The system is the administrator of a cost-sharing, multiple-employer defined benefit plan and a multiple-employer
defined contribution plan. Legislation effective January 1, 1998, required State Universities Retirement
System (SURS or the System) to introduce a portable benefit package to the existing defined benefit plan and to
offer a defined contribution plan. The portable benefit package and the defined contribution plan are available
to all participants whose employers elect to make the options available. As of June 30, 2011, the defined benefit
plan has two options available. These options are known as the traditional benefit package and the portable ben-efit
package. The defined contribution plan is known as the self-managed plan. The membership, contributions,
and benefit provisions related to these plans are presented in the following summary of the provisions of SURS
in effect as of June 30, 2011, as defined in the Illinois Compiled Statutes. Interested parties should refer to the
SURS Member Guide or the Statutes for more complete information.
1. Defined Benefit Plan
SURS was established on July 12, 1941 to provide retirement annuities and other benefits for staff members and
employees of the state universities, certain affiliated organizations and certain other state educational and scien-tific
agencies and for survivors, dependents and other beneficiaries of such employees.
SURS 2011 | 9 A COMPONENT UNIT
OF THE STATE OF ILLINOIS
Notes to the Financial Statements
SURS is included in the State of Illinois’ financial reports as a component unit. SURS is governed by Chapter 40,
Act 5, Article 15, of the Illinois Compiled Statutes. These statutes assign the authority to establish and amend the
benefit provisions of the plan to the State Legislature. Operation of the System and the direction of its policies are
the responsibility of the Board of Trustees of the System. It is also these statutes that define the scope of SURS’
reporting entity. There are no statutory provisions for termination of the System. The Illinois Constitution pro-vides
that the pension obligation of the state shall be an enforceable contractual relationship, the benefits of which
shall not be diminished or impaired.
a. Membership
Participation is required as a condition of employ-ment.
Employees are ineligible to participate if (a)
employed less than full-time and attending classes
with an employer; (b) receiving a retirement annuity from SURS; or (c) excluded by subdivision (a)(7)(f) or (a)
(19) of Section 210 of the Federal Social Security Act from the definition of employment given in that Section.
b. Benefit Provisions
A traditional benefit plan was established in 1941. Public Act 90-448 was enacted effective January 1, 1998, which
established an alternative defined benefit program known as the portable benefit package. This option is offered
in addition to the traditional benefit option. The traditional and portable plan Tier 1 refers to members that began
participation prior to January 1, 2011. The traditional benefit plan and the portable benefit plan were revised in
2010 and became effective for new members who begin participation on or after January 1, 2011 and do not have
any other eligible Illinois reciprocal system service. The revised plan is referred to as Tier 2. New employees are
allowed 6 months from their date of hire to make an irrevocable election. The following is a summary of the benefit
provisions as of June 30, 2011.
Defined Benefit Plan
26.2%
Benefit Recipients
36.7%
Active Members
37.1%
Inactive Members
At June 30, 2011 and 2010, the number of participating
employers was:
2011 2010
Universities 9 9
Community Colleges 39 39
Allied Agencies 15 15
State of Illinois 2 2
65 65
At June 30, 2011 and 2010, defined benefit plan membership
consisted of:
2011 2010
Benefit Recipients 51,370 48,903
Active Members 71,888 72,996
Inactive Members 72,903 71,870
196,161 193,769
Retirement Vesting
Retirement Age Requirement
Final Rate of Earnings (FRE)
Retirement Benefit AAI (Automatic
Annual Increase)
Survivor Benefits
Survivor AAI
(Automatic Annual Increase)
Traditional Plan - Tier 1
5 years of service
Age 62, with at least 5 years
Age 60, with at least 8 years
At any age with at least 30 years
• Average earnings during 4 high
consecutive academic years; or
• Average of the last 48 months
prior to termination.
The AAI is 3% compounded annually.
An eligible survivor receives a
minimum of 50% of the member’s
earned retirement annuity.
The AAI is 3%, compounded annu-ally.
Traditional Plan - Tier 2
10 years of service
Age 67, with at least 10 years of
service
• Average earnings during 8 high
consecutive academic years of the
last 10; or
• Average of the high 96 consecu-tive
months of last 120 months (if
applicable).
The AAI is calculated using the
lesser of 3% or one-half of the con-sumer
price index. The increase will
not be compounded.
An eligible survivor receives 66 2/3%
of the member’s earned retirement
annuity.
The AAI is calculated using the
lesser of 3% or one-half of the con-sumer
price index. The increase will
not be compounded.
Portable Plan
5 years of service (Tier 1) and 10
years of service (Tier 2)
• Tier 1-Same as Traditional Plan
Tier 1 Age Requirement
• Tier 2-Same as Traditional Plan
Tier 2 Age Requirement
• Tier 1-Same as Traditional Plan
Tier 1 FRE
• Tier 2-Same as Traditional Plan
Tier 2 FRE
• Tier 1-Same as Traditional Plan
Tier 1 AAI
• Tier 2-Same as Traditional Plan
Tier 2 AAI
Based upon selection at retirement
of 50%, 75% or 100% of the mem-ber’s
earned retirement annuity.
• Tier 1-Same as Traditional Plan
Tier 1 Survivor AAI
• Tier 2-Same as Traditional Plan
Tier 2 Survivor AAI
FINANCIAL 10 | Creating Value
Notes to the Financial Statements
SURS also provides retirement, disability, death and survivor benefits as authorized in Chapter 40, Act 5, Article
15, of the Illinois Compiled Statutes.
Disability benefits are payable to all participants with at least 2 years of service credit if they are unable to rea-sonably
perform the duties of their assigned position due to a physical or mental impairment as certified by a
physician. The benefit becomes payable when sick leave payments are exhausted or after 60 days of the disability,
whichever is later. The benefit is payable at a rate of 50% of the monthly rate of compensation on the date the dis-ability
began. Disability benefits are reduced by any payments received under the Workers’ Compensation or the
Occupational Diseases Act. If a participant remains disabled after receiving the maximum benefits due, they may
be eligible for a disability retirement annuity equal to 35% of the monthly rate of compensation on the date the
disability began.
Death benefits are payable to named beneficiaries upon the death of any participant of this System. Under the
traditional benefit package, monthly survivor benefits may be paid to eligible survivors if the participant estab-lished
a minimum of 1.5 years of service credit prior to the date of death. If no qualified survivor exists at the date
of retirement, the member is paid a refund of all survivor contributions plus interest. Under the portable benefit
package, survivor benefits are available through a reduction of the retirement annuity calculated as described
above. No refund of survivor contributions is available if there is no qualified survivor at the time of retirement.
These provisions are designed to allow the impact of the portable benefit package’s enhanced refund opportunity to
be cost neutral.
Upon the death of an annuitant, SURS will pay either a death benefit to a non-survivor beneficiary or a monthly
survivor benefit to an eligible survivor. The amount of the monthly survivor benefit will differ depending upon
whether the annuitant had selected the traditional benefit package or the portable benefit package.
Upon termination of service, a lump sum refund is available to all members. Under the traditional benefit package,
this refund consists of all member contributions and interest at 4-1/2%. Under the portable benefit package, this
refund consists of all member contributions and total interest credited, plus for those members with greater than
or equal to 5 years of service credit, an equal amount of employer contributions. Under both defined benefit plan
options, a member with 5 or more years of service credit who does not apply for a refund may apply for a normal
retirement benefit payable at age 62.
c. Funded Status and Funding Progress
The funded status of the plan as of June 30, 2011, the most recent actuarial valuation date, is as follows (in millions):
Actuarial Value Accrued Unfunded Funding Covered UAAL as %
of Assets Actuarial Accrued Ratio* Payroll of Covered
Liabilities Actuarial Payroll
Liabilities
$13,945.7 $31,514.3 $17,568.6 44.3% $3,460.8 507.6%
The schedule of funding progress, presented as required supplementary information (RSI) following the notes to the
financial statements, presents multi-year trend information about whether the plan assets are increasing or decreasing
over time relative to the actuarial accrued liabilities for benefits.
*If calculated using the market value of assets of $14,274.0, the funding ratio would be 45.3%.
d. Actuarial Value of Assets
The actuarial value of assets is used in determining the funding progress of the System and in establishing the
employer contribution rates necessary to adhere to the statutory funding plan. The actuarial value of assets is
based on a smoothed investment income rate. Investment income in excess or shortfall of the expected 7.75% rate
on fair value is smoothed over a five-year period with 20% of a year’s excess or shortfall being recognized each
year beginning with the current year. The use of this actuarial method began with the valuation for the period
ending June 30, 2009, as required by Public Act 96-0043 , which was signed into law on July 15, 2009.
SURS 2011 | 11 A COMPONENT UNIT
OF THE STATE OF ILLINOIS
Notes to the Financial Statements
Calculation of Actuarial Value of Assets (in thousands)
Actuarial Value of Assets at July 1, 2010 $ 13,966,642.8
Total investment income/(loss) 2,801,108.8
Less: Projected investment income @ 7.75% 914,753.4
Investment income/(loss) in excess of projected 1,886,355.4
Less: Deferral to smooth asset values over 5 years 1,509,084.3
Recognized investment income - current year 377,271.1
Projected investment income 914,753.4
Recognized investment loss - prior years (664,339.2)
Excess of contributions over disbursements (648,647.6)
Actuarial value of assets at June 30, 2011 $ 13,945,680.5
e. Additional actuarial valuation information
Valuation date June 30, 2011
Actuarial cost method Projected unit credit
Amortization method Level percent, open

Remaining amortization period 30 years, open
Asset valuation method 5-year smoothed market
Actuarial assumptions:

Investment rate of return* 7.75%
Projected salary increases 0.5 - 8.25%
Cost-of-living adjustment 3.0% before January 2011 hires and 1.375% after
Assumed wage inflation rate 2.75%
Postretirement benefits 3.0%
Mortality table RP 2000 Mortality Table projected to 2017, with the rates multiplied
by 80 percent for males and 85 percent for females.
*Assumed investment rate of return change from 8.5 percent in Fiscal Year 2009 to 7.75 percent in Fiscal Year 2010 by action of the System
Board of Trustees. Includes assumed wage inflation of 2.75 percent.
2. Self-Managed Plan
SURS is the plan sponsor and administrator of a defined contribution plan established as of January 1, 1998, by
the Illinois General Assembly as an amendment to the Illinois Pension Code through Illinois Public Act 90-448.
This plan is referred to as the self-managed plan (SMP) and is offered to employees of all SURS employers who
elect to participate. This plan is a qualified money purchase pension plan under Section 401(a) of the Internal
Revenue Code. The assets of the SMP are maintained under a trust administered by the SURS Board of Trustees
in accordance with the Illinois Pension Code.

a. Membership
A member may elect participation in the SMP if (a) all participation criteria for the defined benefit plan are met;
(b) the employer has elected through Board action to offer the self-managed plan; (c) the employee is on active
status at the plan offering date; and (d) the employee is not eligible to retire as of the employer plan offering date.
The member election is irrevocable. New employees are allowed 6 months from the date of hire in which to make
their election. If no election is received, members are considered to be part of the defined benefit plan, under the
traditional benefit option.
At June 30, 2011 and 2010, the SMP membership
consisted of:
2011 2010
Annuity Benefit Recipients 182 153
Active Members 9,723 9,746
Inactive Members 7,019 8,568
16,924 18,467
At June 30, 2011 and 2010, the number of SMP
participating employers was:
2011 2010
Universities 9 9
Community Colleges 39 39
Allied Agencies 13 13
State of Illinois 1 1
62 62
FINANCIAL 12 | Creating Value
Notes to the Financial Statements
b. Benefit Provisions
The SMP provides retirement, disability, death, and survivor benefits as authorized in Chapter 40, Act 5, Article 15,
of the Illinois Compiled Statutes, and amended by Public Act 90-448.
Retirement benefits are payable to participants meeting minimum vesting requirements of 5 years of service
credit at age 62, 8 years of service credit at age 55, or 30 years of service credit regardless of age. The distribution
options available upon reaching retirement eligibility are the following: a lump sum distribution consisting of all
employee and employer contributions and related investment earnings; a single life annuity; a 50% or 100% joint
and survivor annuity; a single life annuity with a guaranteed period of 10, 15, or 20 years as elected by the partici-pant;
and a 50% or 100% joint and survivor annuity with a guaranteed period of 10, 15, or 20 years as elected by the
participant.
Disability benefits are payable to all participants with at least 2 years of service credit if they are unable to reason-ably
perform the duties of their assigned position due to physical impairment as certified by a physician. The benefit
becomes payable when sick leave payments are exhausted or after 60 days of the disability, whichever is later. The
benefit is payable at a rate of 50% of the monthly rate of compensation on the date the disability began. Disability
benefits are reduced by any payments under the Workers’ Compensation or the Occupational Diseases Act.
Upon termination of service with less than 5 years of service credit, a lump sum distribution is available which
consists of employee contributions and related investment earnings. The employer contributions and related
investment earnings are forfeited. Upon termination of service with greater than 5 years of service credit but
where the participant is not yet eligible for retirement, a lump sum distribution is available which consists of
employee and employer contributions and related investment earnings.
Death benefits are payable to named beneficiaries upon the death of any participant of this plan. If the
participant has less than 1.5 years of service credit, the death benefit payable is the employee contributions and
related investment earnings. If the participant has 1.5 or more years of service credit, the death benefit payable is
the employee and employer contributions and related investment earnings.
F. Cash and Short-Term Investments
Included in the $505,492,014 of cash and short-term investments presented in the Statement of Plan Net Assets
is $121,731,430 of short-term investments with less than 90 days maturity. For purposes of the various data tables
presented in Note III, this group of short-term investments is included as part of fixed income investments. Short-term
investments are generally reported at cost, which approximates fair value.
G. Investments
Investments are governed by Chapter 40, Act 5, Articles 1 and 15, of the Illinois Compiled Statutes. The most
important aspect of the statutes is the prudent expert rule, which establishes a standard of care for all fiduciaries.
(A fiduciary is any person who has authority or control with respect to the management or administration of plan
assets.) The prudent expert rule states that fiduciaries must discharge their duties with the care, skill, prudence,
and diligence that a prudent person acting in a like capacity and familiar with such matters would use under con-ditions
prevailing at the time. Purchases and sales of securities are recorded on a trade-date basis. Interest income is
reported on the accrual basis. Dividends are recorded on the ex-dividend date.
For the defined benefit plan, investments are reported at fair value. Marketable securities (stocks, bonds, warrants,
and options) are traded on public exchanges. The Northern Trust Company, SURS’ custodial bank, establishes
these prices using third-party pricing services. Generally, these values are reported at the last reported sales price.
Certain investments that do not have an established market value are reported at estimated fair value obtained
from a custodial bank or investment management firm. These investments include commingled investment pools,
where the underlying assets are individually marked to market (i.e., estimated fair value) on a daily basis and indi-vidually
traded on publicly recognized exchanges. The investment manager, using methods approved by the CFA
Institute (formerly known as the Association for Investment Management Research) or other industry standards,
values non-marketable securities (real estate and venture capital). These methods generally include detailed prop-erty
level appraisals and discounted cash flow analysis.
For the SMP, investments are reported at fair value by the Service Providers. These investments include both mutual
and variable annuity funds where the underlying assets are marked to market (i.e., estimated fair value) on a daily
basis and individually traded on publicly recognized exchanges. Generally, the values on the underlying investments
are reported at the last reported sales price.
SURS 2011 | 13 A COMPONENT UNIT
OF THE STATE OF ILLINOIS
Notes to the Financial Statements
H. Capital Assets
Capital assets are recorded at historical cost and depreciated over the estimated useful life of each asset. Annual
depreciation is computed using the straight-line method.

I. Administrative Expenses
System administrative expenses (which include amounts for both the defined benefit and self-managed plans) are
budgeted and approved by the System’s Board of Trustees. Funding for these expenses is included in the employer
contribution as determined by the annual actuarial valuation and appropriated by the State of Illinois.
J. Prior Year Comparative Information
The basic financial statements include certain prior-year summarized comparative information in total but not at the
level of detail required for a presentation in conformity with accounting principles generally accepted in the United
States of America. Accordingly, such information should be read in conjunction with the System’s financial state-ments
as of and for the year ended June 30, 2010, from which the summarized comparative information was derived.
K. New Accounting Pronouncements
The Governmental Accounting Standards Board Statement No. 59, Financial Instruments Omnibus, has been issued
and is effective for all reporting periods beginning after June 15, 2010. The objective of this Statement is to update
and improve existing standards regarding financial reporting and disclosure requirements of certain financial
instruments and external investment pools for which significant issues have been identified in practice. The require-ments
of the Statement will improve financial reporting by providing more complete information, by improving
consistency of measurements, and by providing clarifications of existing standards. SURS has implemented this
Statement for the year ending June 30, 2011, with no significant impact on system financial statements.
Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provisions – An
Amendment to GASB Statement No. 53, will be effective for the System beginning with its year ending June 30,
2012. The objective of this statement is to enhance comparability and improve financial reporting by clarifying the
circumstances in which hedge accounting should continue when a swap counterparty, or swap counterparty’s credit
support provider, is replaced.
L. Actuarial Experience Review
In accordance with Illinois Compiled Statutes, an actuarial review is to be performed at least once every five years
to determine the reasonableness of actuarial assumptions regarding the retirement, disability, mortality, turnover,
interest and salary of the members and benefit recipients of SURS. An experience review for the years June 30, 2006
to June 30, 2010 was performed in March 2011, resulting in the adoption of new assumptions as of June 30, 2011. The
impact of adopting the recommended assumptions was a decrease in the unfunded actuarial accrued liability by $2.5
million and no change to the actuarial value of assets.
II. Contributions and Net Assets Designations
A. Defined Benefit Plan
1. Membership Contributions
In accordance with Chapter 40, Act 5, Article
15, of the Illinois Compiled Statutes, members
of the traditional benefit package contribute
8% of their gross earnings; 6-1/2% of those are
designated for retirement annuities, 1/2% for
post-retirement increases, and 1% for survivor
benefits. Police officers and fire fighters contrib-ute
9-1/2% of earnings; the additional 1-1/2% is a
normal retirement contribution. Members of the
portable benefit package contribute 8% of their
gross earnings; 6-1/2% of those are designated
for retirement annuities, 1/2% for post-retirement increases, and 1% for enhanced refund benefits. Police officers and
fire fighters contribute 9-1/2% of earnings; the additional 1-1/2% is a normal retirement contribution. These stat-utes
assign the authority to establish and amend the contribution provisions of the plan to the State Legislature.
The member contributions are picked up by the employer and treated as employer contributions for income tax
purposes. Retirement contributions are based on the gross earnings before the employer pick-up and are included in earnings.
Member Contributions
12.5%
Survivor Benefits
6.2%
Cost of Living
Increases
81.3%
Retirement Benefits
FINANCIAL 14 | Creating Value
Notes to the Financial Statements
All contributions on pre-1981 earnings and service credit payments, plus future other public employment, prior ser-vice,
refund repayments, leave payments, military service payments, and the employee portion of Early Retirement
Option payments are considered as previously taxed, unless qualifying funds are rolled over to SURS to make these
purchases, or unless the payments are made in installments through employer deductions from payroll. Previously
taxed contributions will be recovered tax-free when distributed to the employee in the form of benefits or payments
or to his or her beneficiary as a death and/or survivor benefit.
2. Interest Credited on Member Contributions
For the traditional and portable benefit packages, the interest rate credited is fixed by the Board of Trustees and
is 7.5% for the year ended June 30, 2011. As of July 1, 2011, the rate will remain at 7.5%. For purposes of lump sum
refunds to former members, the traditional benefit package offers an interest rate of 4-1/2%, compounded annually,
and the portable benefit package offers an interest rate equal to the credited rate, compounded annually. A change
brought forth by the enactment of Public Act 94-0004 and effective July 1, 2005, calls for the Comptroller of the
State of Illinois to set the interest rate credited to member contribution balances for purposes of the calculation of
retirement annuities under the money purchase formula. That rate is 7.0% for the year ended June 30, 2011 and is
6.75% as of July 1, 2011.
Members certified after July 1, 2005 will not be eligible for the money purchase formula calculation. Rather their
retirement annuity will be calculated using the general formula.
3. Employer Contributions
On an annual basis, an actuarial valuation is performed in order to determine the amount of statutorily required
contributions from the State of Illinois. An actuarial experience study is performed every 5 years to determine the
assumptions to be used in the annual valuation. The actuarial assumptions are also reviewed at least annually by
the System. The last actuarial experience study was performed in March 2011. To determine the funding method,
Public Act 88-0593 was passed by the Illinois General Assembly in 1994. This act, which took effect on July 1, 1995,
provides a 15-year phase-in to a 35-year plan that requires the state to make continuing appropriations to meet the
normal actuarially-determined cost of the System, plus amortize the unfunded accrued liability. Under this plan, the
System is expected to be 90% funded by fiscal year 2045.
As required by Public Act 96-1497 the State of Illinois issued $3.7 billion in general obligation bonds on
March 10, 2011, at an interest rate of 5.56%. The proceeds of these bonds were used to fund the state’s contribution
to the five retirement systems, including $713.5 million paid to SURS.
4. Net Asset Accounts
The System maintains two designated accounts that reflect the assignment of net assets to employee and benefit
accounts:
a. The Employee Contribution Account records the pension assets contributed by each employee and the
interest income earned by those contributions.
b. The Benefits from Employee and Employer Contributions Account records the net assets available for
annuities in force and available for future retirement, death and disability benefits, the undistributed
investment income, the unexpended administrative expense allocation, and the variations in actuarial
assumptions.
Balances in these designated accounts as of June 30, 2011 are as follows:

Employee contributions $ 6,007,401,403
Benefits from employee and employer contributions 8,266,601,894
Total Net Assets $ 14,274,003,297
5. Ownership of Greater than 5 Percent of Net Assets Available for Benefits
There are no significant investments in any one organization that represents 5% or more of net assets available for
benefits.
B. Self-Managed Plan
1. Membership Contributions
In accordance with Chapter 40, Act 5, Article 15, of the Illinois Compiled Statutes, members contribute 8% of their
gross earnings. These statutes assign the authority to establish and amend the contribution provisions of the plan
to the State Legislature.
SURS 2011 | 15 A COMPONENT UNIT
OF THE STATE OF ILLINOIS
Notes to the Financial Statements
The member contributions are picked up by the employer and treated as employer contributions for income tax
purposes. Retirement contributions are based on the gross earnings before the employer pick-up and are included
in earnings.
Service credit purchase payments are considered as previously taxed, unless qualifying funds are rolled over to
SURS to make these purchases. Previously taxed contributions will be recovered tax-free when distributed to the
employee in the form of benefits or refunds or to his or her beneficiary as a death and/or survivor benefit.
2. Employer Contributions
In accordance with Chapter 40, Act 5, Article 15, of the Illinois Compiled Statutes, employer contributions credited
to the SMP participant are at a rate of 7.6% of the participant’s gross earnings, less the amount retained by SURS
(currently 0.5%) to provide disability benefits to the participant. The amounts credited are paid into the partici-pant’s
account. The State of Illinois shall make the employer contribution to SURS on behalf of the SMP partici-pants.
3. Net Asset Accounts
The SMP maintains three designated accounts that reflect the assignment of net assets to employee
contributions, disability benefits, and employer forfeiture accounts:
a. The Employee Contribution Account records the pension assets contributed by each employee and the
corresponding employer contribution, and the investment income earned by those contributions.
b. The Disability Benefits Account reflects the pension assets contributed by the employer and held to fund
member disability benefits.
c. The Employer Forfeiture Account reflects the pension assets contributed by the employer but forfeited from
member accounts due to termination prior to reaching 5 years of service. Future employer contributions are
reduced by the total forfeitures held by the defined contribution plan.
The assets related to disability benefits and employer forfeitures are commingled with the investment assets
of the defined benefit plan. Investment income or loss is credited to these balances based upon the annual
investment return or loss of the commingled assets. For fiscal year 2011, the investment income credited to
these balances was $11,637,810.
Balances in these designated accounts as of June 30, 2011 are as follows:

Employee contributions $ 894,243,083
Disability benefits 57,251,841
Employer forfeitures 9,042,929
Total Net Assets $ 960,537,853
4. Ownership of Greater than 5 Percent of Net Assets Available for Benefits
There are no significant investments in any one organization that represent 5% or more of net assets available for
benefits.
III. Deposits and Investments
Custodial Credit Risk for Deposits
Custodial credit risk for deposits is the risk that in the event of a financial institution failure, State Universities
Retirement System deposits may not be returned. Cash held in the investment related bank account in excess
of $250,000 is uninsured and uncollateralized. SURS has no deposit policy for custodial credit risk. Deposits are
under the custody of The Northern Trust Company which has an AA Long Term Deposit/Debt rating by Standard
& Poor’s, an Aa3 rating by Moody’s and an AA/AA- rating by Fitch. At June 30, 2011, the carrying amount of cash
was $383,760,585 and the bank balance was $389,751,479 of which $11,765,337 was foreign currency deposits and was
exposed to custodial credit risk. The remaining $121,731,430 was made up of short-term invested funds which are con-sidered
to be investments for the purpose of assessing custodial credit risk.
FINANCIAL 16 | Creating Value
Investment Policies
Investments are governed by Chapter 40, Act 5, Articles 1 and 15, of the Illinois Compiled Statutes. The most impor-tant
aspect of the statutes is the prudent expert rule, which establishes a standard of care for all fiduciaries. (A fidu-ciary
is any person who has authority or control with respect to the management or administration of plan assets.)
The prudent expert rule states that fiduciaries must discharge their duties with the care, skill, prudence, and diligence
that a prudent person acting in a like capacity and familiar with such matters would use under conditions prevailing
at the time. The SURS Board of Trustees has adopted an Investment Policy that contains general policies for invest-ments.
The Investment Section of this report contains a summary of these policies. Within the prudent expert frame-work,
the SURS Board of Trustees establishes specific investment guidelines in the investment management agree-ment
of each individual investment management firm.
Investment Commitments
Alternative investment portfolios consist of passive interests in limited partnerships. The System had outstanding
commitments to private equity limited partnerships of approximately $413.1 million and $498.4 million as of
June 30, 2011 and 2010, respectively. The System had outstanding commitments to real estate partnerships of approx-imately
$123.1 million, to infrastructure partnerships of approximately $42.4 million and to Public-Private Investment
Program (PPIP) partnerships of approximately $42.8 million at June 30, 2011.
Investments
The carrying values of investments by type at June 30, 2011 are summarized below:
Equity investments

U.S. equities $ 6,827,305,941
Non-U.S. equities 2,276,837,747
U.S. private equity 1,277,772,613
Non-U.S. private equity 96,328,790
Equity futures (346,631,918)
Fixed income investments

U.S. government obligations 1,042,688,876
U.S. agency obligations 667,773,114
U.S. corporate fixed income 1,091,747,938
U.S. fixed income, other 26,430,487
Non-U.S. fixed income securities 302,613,071
U.S. fixed income derivatives 30,336,970
Non-U.S. fixed income derivatives 37,194,250
U.S. fixed income futures (32,560,281)
Non-U.S. fixed income futures (37,194,250)
U.S. short term investments 615,286,069
Non-U.S. short term investments 45,804,982
U.S. swaps and options 10,507,920
Non-U.S. swaps and options 4,033,438
Real estate investments

Real estate 375,589,750
Mutual fund and variable annuities

Self-managed plan mutual funds and variable annuity funds 890,678,243
Total Investments $ 15,202,543,750

(a) Fixed income investments presented in this table include $121,731,430 of short-term investments with
maturities of less than 90 days and $472,910,911 of investments in the form of cash and cash-equivalents.
Both are included in the cash and short-term investments total on the financial statements.
(b) U.S. short-term investments principally consist of money market funds and options.
(c) Fixed income investments presented in this table include $64,258,712 of short-term bills and notes with
maturities greater than 90 days.
Custodial Credit Risk
Custodial credit risk for investments is the risk that, in the event of a failure of the counterparty to a transaction, the
System will not be able to recover the value of its investment or collateral securities that are in the possession of an
outside party. SURS has not adopted a formal policy specific to custodial credit risk. At June 30, 2011, no investments
were uninsured and unregistered, with securities held by the counterparty or by its trust department or agent but not
in the System’s name.
Notes to the Financial Statements
SURS 2011 | 17 A COMPONENT UNIT
OF THE STATE OF ILLINOIS
Concentration of Credit Risk
Concentration of credit risk is the risk of loss that may be attributed to the magnitude of the System’s investment
in a single issue. SURS has not adopted a formal policy specific to concentration of credit risk. However, this area is
addressed with each of the relevant investment managers in the Investment Management Agreement between the
parties. The System’s investment portfolios are managed by professional investment management firms. These firms
must maintain diversified portfolios and must comply with risk management guidelines specific to each of their
investment management agreements. Excluding U.S. government and agency issues, the portfolios are limited to a 5%
allocation in any single investment grade U.S. issuer. Allocation limits also apply to international issuers. At June 30,
2011, SURS had no investments in any one issuer that represented 5% or more of the System’s total investments.
Credit Risk of Debt Securities
Credit risk is the risk that the issuer or other counterparty to an investment will not fulfill obligations. SURS has not
adopted a formal policy specific to credit risk of debt securities. However, this area is addressed with each of the rel-evant
investment managers in the Investment Management Agreement between the parties. The quality ratings of
investments in fixed income securities of the System as described by Standard & Poor’s rating agency at
June 30, 2011 are as follows:
Quality Rating: Standard & Poor’s Domestic** International Total

AAA $ 738,049,787 $ 135,453,680 $ 873,503,467
AA+ 144,158,496 10,122,027 154,280,523
AA 30,094,476 36,946,512 67,040,988
AA- 22,884,918 7,826,074 30,710,992
A+ 95,995,319 43,517,713 139,513,032
A 136,414,160 48,078,790 184,492,950
A- 95,063,095 19,481,227 114,544,322
BBB+ 75,471,052 23,237,034 98,708,086
BBB 64,998,314 14,994,331 79,992,645
BBB- 75,413,258 43,998,805 119,412,063
BB+ 52,644,806 2,175,375 54,820,181
BB 28,404,898 11,470,836 39,875,734
BB- 34,633,137 - 34,633,137
B+ 37,880,531 1,424,250 39,304,781
B 11,715,883 1,322,750 13,038,633
B- 6,455,990 - 6,455,990
CCC+ 1,768,565 - 1,768,565
CCC 28,591,569 - 28,591,569
CCC- 8,519,571 - 8,519,571
CC 5,326,435 - 5,326,435
C - 1,010,750 1,010,750
D 30,109,796 1,580,050 31,689,846
Not rated 225,976,567 25,921,720 251,898,287
Total credit risk: debt securities 1,950,570,623 428,561,924 2,379,132,547

U.S. government and agencies * 1,042,688,877 – 1,042,688,877
Total debt securities investments $ 2,993,259,500 $ 428,561,924 $ 3,421,821,424

* Obligations of the U.S. government or obligations explicitly guaranteed by the
U.S. government are not considered to have credit risk.

** Includes $104,577,795 from self-managed plan variable annuities and mutual funds.
Notes to the Financial Statements
FINANCIAL 18 | Creating Value
Notes to the Financial Statements
Interest Rate Risk
Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The
State Universities Retirement System manages its exposure to fair value loss arising from increasing interest rates
by diversifying the debt securities portfolio. The System has not adopted a formal policy specific to interest rate risk.
However, this area is addressed with each of the relevant investment managers in the Investment Management
Agreement between the parties.
At June 30, 2011, the segmented time distribution of the various investment types of debt securities of the
System are as follows:
Maturities in Years
2011 Less than 1 to 5 6 to 10 10 to 20 More than
Type Fair Value 1 year years years years 20 years

U.S. Gov’t & Agency $ 1,830,819,909 $ 123,059,932 $ 437,174,217 $ 388,621,765 $ 351,741,038 $ 530,222,957
fixed income *
U.S. corporate 1,162,439,591 128,839,790 254,012,810 385,002,639 25,881,471 368,702,881
fixed income **
Non-U.S. fixed income 428,561,924 138,075,564 142,325,401 101,038,623 19,211,387 27,910,949
Total $ 3,421,821,424 $ 389,975,286 $ 833,512,428 $ 874,663,027 $ 396,833,896 $ 926,836,787
* Includes $18,239,091 from self-managed plan mutual fund.

** Includes $86,338,704 from self-managed plan variable annuities and mutual funds.
SURS 2011 | 19 A COMPONENT UNIT
OF THE STATE OF ILLINOIS
Notes to the Financial Statements
Foreign Currency Risk
Foreign currency risk is the risk that changes in currency exchange rates will adversely affect the fair value of an
investment or a deposit. SURS has not adopted a formal policy specific to foreign currency risk. However, this area
is addressed with each of the relevant investment managers in the Investment Management Agreement between
the parties. International investment management firms maintain portfolios with diversified foreign currency risk
for SURS. The System’s exposure to foreign currency risk derives from its positions in foreign currency and foreign
currency-denominated equity and fixed income investments. At June 30, 2011 the System’s exposure to foreign cur-rency
risk is as follows:
Currency Equity Fixed Income* Total
Australian dollar $ 94,560,675 $ 5,217,146 $ 99,777,821
Brazilian real 20,391,413 10,980,668 31,372,081
British pound sterling 368,942,416 14,467,971 383,410,387
Canadian dollar 57,140,858 39,454,674 96,595,532
Chinese yuan renminbi 65,008 18,600,300 18,665,308
Czech koruna 2,465,678 - 2,465,678
Danish krone 17,645,467 864,000 18,509,467
Euro 462,191,234 (31,012,111) 431,179,123
Hong Kong dollar 91,244,851 1,968,369 93,213,220
Indian rupee - 5,364,313 5,364,313
Indonesian rupiah 1,365,801 3,102,572 4,468,373
Japanese yen 261,831,704 (810,693) 261,021,011
Malaysian ringgit 2,194,058 10,344,004 12,538,062
Mexican peso 1,578,478 14,862,541 16,441,019
New Israeli shekel 2,930,696 27,836 2,958,532
New Taiwan dollar 17,803,811 4,242,401 22,046,212
New Zealand dollar 599,544 96,896 696,440
Norwegian krone 26,184,073 (8,054,704) 18,129,369
Peruvian nuevo sol - 1,753 1,753
Philippine peso 2,239,335 5,039,009 7,278,344
Polish zloty 1,517,074 - 1,517,074
Singapore dollar 42,823,817 12,344,360 55,168,177
South African rand 580,560 1,187,603 1,768,163
South Korean won 24,262,630 13,623,059 37,885,689
Swedish krona 17,311,893 5,808,739 23,120,632
Swiss franc 133,021,519 217,345 133,238,864
Thai baht 690,220 - 690,220
Turkish lira - 1,379,283 1,379,283

Total securities 1,651,582,813 129,317,334 1,708,900,147
subject to foreign
currency risk

Foreign investments 669,050,086 223,134,157 892,184,243
denominated in
U.S. Dollars

Total foreign $ 2,320,632,899 $ 352,451,491 $ 2,673,084,390
investment securities
*Includes Swaps, Options and Short-Term Investments

FINANCIAL 20 | Creating Value
Notes to the Financial Statements
Derivative Securities
The System invests in derivative securities through its investment managers. A derivative security is an investment
whose value is derived from other financial instruments such as commodity prices, bond and stock prices, or a market
index. The System’s derivatives are considered investments. The fair value of all derivative financial instruments is
reported in the Statement of Plan Net Assets as either assets or liabilities, and the change in the fair value is recorded
in the Statement of Changes in Plan Net Assets as net appreciation in fair value of investments.

In the case of an obligation to purchase (long a financial future or a call option), the full value of the obligation is held
in cash or cash equivalents. For obligations to sell (short a financial future or a put option), the reference security is
held in the portfolio. 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. Market risk is
the possibility that a change in interest rate risk or 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 con-stantly
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 senior management, and the risk
positions of the investment managers are reviewed on a periodic basis to monitor compliance with the limits. The
System has not adopted a formal policy specific to master netting arrangements. As of June 30, 2011, SURS’ derivative
investments included foreign currency forward contracts, rights and warrants, futures, options, swaps and swaptions.
Foreign currency forward contracts are used to protect against the currency risk in SURS’ foreign stock and fixed
income security portfolios. 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. The gain or loss arising from the dif-ference
between the original contracts and the closing of such contracts is included in the investment income in the
Statement of Changes in Plan Net Assets. At June 30, 2011, SURS’ investments in foreign currency forward contracts
are as follows:
Pending Pending

Foreign Exchange Foreign Exchange Fair Value Change In
Currency Purchases Sales 2011 Fair Value

Australian dollar $ 322 $ (68,715) $ (68,393) $ (7,155,251)
Brazilian real - (128,302) (128,302) 1,128,744
British pound sterling 108,400 (2,694) 105,706 8,132,883
Canadian dollar - (478,173) (478,173) (6,592,643)
Chinese yuan renminbi - (7,682) (7,682) (22,057,452)
Danish krone - - - (503,862)
Euro 169,773 (1,940,888) (1,771,115) 79,869,147
Hong Kong dollar - (2) (2) (3,278,863)
Indonesian rupiah - (6,811) (6,811) (1,024,140)
Japanese yen 2,851 (661,404) (658,553) (15,391,432)
Malaysian ringgit - - - (1,335,662)
Mexican peso 54,703 - 54,703 (62,199)
New Taiwan dollar - - - 832,051
New Zealand dollar - (2,180) (2,180) (2,180)
Norwegian krone 513 (280,518) (280,005) 3,161,068
Philippine peso 3 - 3 3
Russian ruble 3,530 - 3,530 3,530
Singapore dollar - (13,471) (13,471) (1,459,253)
South African rand 3,930 (19,638) (15,708) 67,899
South Korean won - (14,683) (14,683) (2,090,924)
Swedish krona - (7,106) (7,106) (1,756,831)
Swiss franc - (191,013) (191,013) (344,707)
Turkish lira - (17,915) (17,915) (17,915)
Total securities subject to foreign currency risk $ 344,025 $ (3,841,195) $ (3,497,170) $ 30,122,011
Foreign investments denominated in U.S. dollars 3,348,597 (461,947) 2,886,650 (37,613,445)
Total foreign investment securities $ 3,692,622 $ (4,303,142) $ (610,520) $ (7,491,434)
SURS 2011 | 21 A COMPONENT UNIT
OF THE STATE OF ILLINOIS
Notes to the Financial Statements
Rights and warrants provide SURS investment managers the right, but not the obligation, to purchase or sell a
company’s stock at a fixed price until a specified expiration date. Rights normally are issued with common stock
and expire after two to four weeks. Warrants typically are issued together with a bond or preferred stock and may
not expire for several years. The fair value of rights and warrants is reported in the investments in the Statement of
Plan Net Assets. The gain or loss from rights and warrants is included in the investment income in the Statement of
Changes in Plan Net Assets. At June 30, 2011, SURS’ investments in rights and warrants had the following balances:
Notional Value 2011 Fair Value 2011 Change in Fair Value
Total Rights and Warrants $ 1,543,371 $ 5,096,584 $ 4,747,745
SURS 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 (arbi-trage).
Additionally, SURS investment managers use futures contracts to improve the yield or adjust the duration of
the fixed income portfolio. 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. Futures contracts are traded on organized exchanges, thereby
minimizing the System’s credit risk. The net change in the futures contracts value is settled daily in cash with the
exchanges. The cash or securities to fulfill these obligations are held in the investment portfolio. As the market value
of the futures contract varies from the original contract price, a gain or loss is paid to or received from the clearing-house
and recognized in the Statement of Changes in Plan Net Assets. At June 30, 2011, the notional future balances
of SURS’ investments are as follows:
Notional Value 2011 Fair Value 2011 Change in Fair Value

Equity derivatives futures
Long $ 346,631,918 $ 2,919,716 $ 3,715,318
Fixed income derivatives futures
Long 1,623,748,822 136,870 67,171
Short (4,666,750) 20,000 (1,703)

Total Futures $ 1,965,713,990 $ 3,076,586 $ 3,780,876

SURS investment managers use options in an attempt to add value to the portfolio (collect premiums) or protect
(hedge) a position in the portfolio. Financial options are an agreement that gives one party the right, but not the
obligation, to buy or sell a specific amount of an asset for a specified price, called the strike price, on or before a
specified expiration date. As a writer of financial options, the System receives a premium at the outset of the agree-ment
and bears the risk of an unfavorable change in the price of the financial instrument underlying the option. All
written financial options are recognized as a liability on the System’s financial statements. As a purchaser of financial
options, the System pays a premium at the outset of the agreement and the counterparty bears the risk of an unfavor-able
change in the price of the financial instrument underlying the option. At June 30, 2011, SURS’ investments had
the following option balances:
Notional Value 2011 Fair Value 2011 Change in Fair Value

Equity options

Call $ - $ - $ 5,288
Put - - 364,250
Fixed income options

Call (80,700,000) (241,161) 1,401,631
Put (278,100,000) (2,018,300) (1,961,552)
Cash and cash equivalent options

Call (3,900,000) (23,494) (15,544)
Put (2,034,140) (5,845) 147,987
Swaptions

Call (66,400,000) (341,744) 4,127,168
Put (509,751,600) (157,685) (634,789)

Total Options $ (940,885,740) $ (2,788,229) $ 3,434,439
FINANCIAL 22 | Creating Value
SURS fixed income managers invest in swaps and swaptions to manage exposure to credit, currency, inflation and
interest rate risks. Swaptions are options on swaps that give the purchaser the right, but not the obligation, to enter
into a swap at a specific date in the future. Swap agreements are privately negotiated agreements with a counterparty
to exchange or swap investment cash flows, assets, foreign currencies or market-linked returns at specified, future
intervals. In connection with swap agreements, securities or cash may be identified as collateral in accordance with
the terms of the respective swap agreements to provide assets of value and recourse in the event of default, bankrupt-cy
or insolvency. Swaps are marked to market daily based upon values from third party vendors or quotations from
market makers to the extent available and any change in value is recorded as an unrealized gain or loss. SURS invest-ment
managers have entered into credit default, inflation-linked, total return and interest rate swap agreements.

Maturities in Years
Notional Value Fair Value Less than 1 to 5 6 to 10 10 to 20 More than Change In
2011 2011 1 year years years years 20 years Fair Value

Swaps
Credit default $343,209,487 $5,355,677 $ (321,197) $ 1,264,462 $ 3,287,977 $ - $ 1,124,435 -
Credit default 73,436,692 1,089,924 16,000 1,065,863 8,061 - - -
Credit default 33,205,600 1,156,111 - (168) 1,156,279 - - -
Total, Credit Default 449,851,779 7,601,712 (305,197) 2,330,157 4,452,317 - 1,124,435 (3,751,218)
Inflation-linked - - - - - - - (90,758)
Interest rate 221,642,219 (8,243,756) 613,669 412,500 (3,285,928) (5,066,399) (917,598) -
Interest rate 59,891,872 (993,918) 235,262 136,223 (23,344) (1,307,683) (34,376) -
Interest rate 1,152,184 46,303 32,122 14,181 - - - -
Total, Interest Rate 282,686,275 (9,191,371) 881,053 562,904 (3,309,272) (6,374,082) (951,974) 604,745
Total return 142,438 1,714,382 1,714,382 - - - - 66,936,516

Total swaps $732,680,492 $ 124,723 $ 2,290,238 $2,893,061 $ 1,143,045 $(6,374,082) $ 172,461 $63,699,285
Credit default swap agreements involve one party making a stream of payments (the buyer of protection) to another
party (the seller of protection) in exchange for the right to receive a specified return in the event of a default or other
credit event for the referenced entity, obligation or index. The seller of protection generally receives from the buyer
of protection a fixed rate of income throughout the term of the swap provided there is no credit event. The seller
effectively adds leverage to its portfolio as it is subject to investment exposure on the notional amount of the swap. At
June 30, 2011, the total notional value of written credit default swaps (selling protection) was $208.0 million and the
notional value of purchased credit default swaps (buying protection) was $241.8 million. .
Inflation-linked swap agreements involve a stream of fixed payments in exchange for variable payments linked to
an inflation index. These swaps can protect against unfavorable changes in inflation expectations and are utilized to
transfer inflation risk from one counterparty to another.
Total return swap agreements involve a stream of payments based on a set rate, either fixed or variable, by one party
while the other party makes payments based on the return of an underlying asset, which includes both the income it
generates and any capital gains. In total return swaps, the underlying asset (reference asset), usually an equity index,
loans, or bonds, is owned by the party receiving the set rate payments. These swaps allow the party receiving the total
return to gain exposure and benefit from a reference asset without owning it.
Interest rate swap agreements involve the exchange of a set of variable and fixed-rate interest payments linked to a
referenced interest rate without an exchange of the underlying principal amount. These agreements are used to limit
or manage exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would be avail-able
without the swap. Gains and losses on swaps are determined based on market values and are recorded in the
Statement of Changes in Plan Net Assets.
Derivatives which are exchange traded are not subject to credit risk. No derivatives held are subject to custodial
credit risk. The maximum loss that would be recognized at June 30, 2011, if all counter parties fail to perform as con-tracted
is $25.5 million. This maximum exposure is reduced by $13.4 million in collateral held and approximately $25.3
million in liabilities, resulting in no net exposure to credit risk.
Notes to the Financial Statements
SURS 2011 | 23 A COMPONENT UNIT
OF THE STATE OF ILLINOIS
Notes to the Financial Statements
Securities Lending
The SURS Board of Trustees policies permit the System to lend its securities to broker-dealers and other entities with
a simultaneous agreement to return the collateral for the same securities in the future. Credit Suisse AG, New York
Branch, the System’s third party agent lender, lends securities in exchange for cash collateral at 102% for U.S. securi-ties
and 105% for international securities. Cash collateral is shown on the System’s financial statements. Securities lent
are included in the Statement of Plan Net Assets. At year end, the System had no credit risk as a result of its securi-ties
lending program as the collateral received exceeded the fair value of the securities loaned. The contract with the
System’s third party agent lender requires it to indemnify the System if the borrowers fail to return the securities (and
if the collateral is inadequate to replace the securities lent) or fail to pay the System for income distributions by the
securities’ issuers while the securities are out on loan.
All securities loans can be terminated on demand by either the System or the borrower, although the average term of the
loans is 1.05 days. Cash collateral is invested in the System’s short-term investment pool, which at year end has a weighted
average final maturity of 123.48 days and a weighted average reset of 24.85 days, and with a fair value of $1,481.4 million.
Collateral as of June 30, 2011 ($ millions)

Securities on loan as of June 30, 2011 $ 1,631.1
Fair value of cash collateral invested $ 1,516.2
Fair value of collateral received $ 1,516.0
Change in fair value* $ 0.2
*Included in net appreciation in fair value of investments in Statement of Changes in Plan Net Assets.
Self-Managed Plan
The SMP participants have the ability to invest their account balances in 31 mutual and variable annuity funds.
These funds are offered by two providers: Fidelity Investments and Teachers Insurance and Annuity Association-
College Retirement Equities Fund (TIAA-CREF). As of June 30, 2011, the SMP had investments of $956,966,027. A
detailed schedule (unaudited) of the funds and balances at June 30, 2011 is located in the Investment Section of The
Comprehensive Annual Financial Report.
IV. Capital Assets
Capital assets activity for the year ended June 30, 2011 was as follows:
Beginning Balance Additions Disposals Ending Balance
Land $ 531,834 $ – $ – $ 531,834
Office building 6,896,790 - – 6,896,790
Information system
equipment & software 14,588,456 206,473 367,016 14,427,913
Furniture and fixtures 2,121,368 2,740 – 2,124,108
24,138,448 209,213 367,016 23,980,645
Less accumulated
depreciation:
Office building 2,142,290 179,400 – 2,321,690
Information system
equipment and software 13,559,432 378,926 367,016 13,571,342
Furniture and fixtures 2,027,813 56,621 – 2,084,434
17,729,535 614,947 367,016 17,977,466
$ 6,408,913 $ (405,734) $ – $ 6,003,179
The average estimated useful lives for depreciable capital assets are as follows:
Office building 40 years Information systems equipment 3 years
Information systems software 10 years Furniture and fixtures 3 years
FINANCIAL 24 | Creating Value
Notes to the Financial Statements
V. Compensated Absences
The System is obligated to pay employees at termination for unused vacation and sick time. The maximum time for
which any individual may be paid is 448 hours of vacation and one-half of unused sick time earned between January 1,
1984 and December 31, 1997. No sick time earned after December 31, 1997 will be compensable at termination. At
June 30, 2011, the System had a liability of $1,025,840 for compensated absences, based upon the vesting method used
for calculation of sick leave payable. The liability is included in the administrative expenses payable on the Statement of
Plan Net Assets, and the annual increase or decrease in liability is reflected in the financial statements as an increase
or decrease in salary expense.
Compensated absences payable for the year ended June 30, 2011 was as follows:
Beginning Additions Reductions Ending Estimate
Balance Balance Amount Due
Within One Year
Compensated absences payable $ 1,099,057 $ 751,698 $ 824,915 $ 1,025,840 $ 76,000
VI. Insurance Coverage
The System is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors
and omissions; injuries to employees; and natural disasters. The System has minimized the risk of loss through private
insurance carriers for commercial, business owners, and automobile policies. The deductible for this insurance cover-age
ranges from $250 to $500 per occurrence. There has been no significant reduction of insurance coverage from the
prior year. The System has not had any insurance claims filed or paid in the past five fiscal years.
VII. Post-Employment Benefits
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 self-insurance plan and insurance contracts currently in force. Annuitants
may be required to contribute toward 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 Universities Retirement System do not contribute toward 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; therefore, those annuitants with twenty or more years of credited service do not have
to contribute toward 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 $5,000.
The State pays the State Universities Retirement System’s portion of employer costs for the benefits provided. The
total cost of the State’s portion of health, dental, vision, and life insurance benefits of all members, including post-employment
health, dental, vision, and life insurance benefits, is recognized as an expenditure by the State in the
Illinois Comprehensive Annual Financial Report. The State finances the costs on a pay-as-you-go basis. The total costs
incurred for health, dental, vision, and life insurance benefits are not separated by department or component unit for
annuitants and their dependents nor active employees and their dependents.
A summary of post-employment benefit provisions, changes in benefit provisions, employee eligibility requirements
including eligibility for vesting, and the authority under which benefit provisions are established are included as an
integral part of the financial statements of the Department of Healthcare and Family Services. A copy of the financial
statements of the Department of Healthcare and Family Services may be obtained by writing to the Department of
Healthcare and Family Services, 201 South Grand Ave., Springfield, Illinois, 62763.
SURS 2011 | 25 A COMPONENT UNIT
OF THE STATE OF ILLINOIS
Required Supplementary Information
Defined Benefit Plan
Schedule of Funding Progress ($ millions)
Unfunded
Actuarial Accrued Accrued

Fiscal Value of Actuarial Actuarial Funding UAAL as %

Year** Assets (A) Liabilities Liabilities Ratio Payroll of Payroll
2002 $ 9,814.7 $ 16,654.0 $ 6,839.3 58.9% $ 2,607.2 262.3%
2003 9,714.5 18,025.0 8,310.5 53.9% 2,763.4 300.7%
2004 12,586.3 19,078.6 6,492.3 66.0% 2,814.1 230.7%
2005 13,350.3 20,349.9 6,999.6 65.6% 2,939.1 238.1%

2006 14,175.1 21,688.9 7,513.8 65.4% 3,054.1 246.0%
2007 15,985.7 23,362.1 7,376.4 68.4% 3,181.0 231.9%
2008 14,586.3 24,917.7 10,331.4 58.5% 3,303.2 312.8%
2009 14,282.0 26,316.2 12,034.2 54.3% 3,463.9 347.4%
2010 13,966.6 30,120.4 16,153.8 46.4% 3,491.1 462.7%
2011 13,945.7 31,514.3 17,568.6 44.3% 3,460.8 507.6%
(A) Per public Act 96-0043, beginning fiscal year 2009, measures of financial soundness will be calculated using an actuarial value of assets based on
a smoothed investment income rate. Investment income in excess or shortfall of the expected 7.75% rate on fair value is smoothed over a five-year
period with 20% of a year’s excess or shortfall being recognized each year beginning with the current year.

Schedule of Employer Contributions ($ millions)
Fiscal** Member Net ER/State Actual ER/State State Contributions Total Contributions
Year Total ARC* Contributions ARC Contribution as % of Net ARC as % of Total ARC
2002 $ 686.9 $ 250.0 $ 436.9 $ 256.1 58.6% 73.7%
2003 843.8 246.3 597.5 285.3 47.7% 63.0%
2004 934.8 243.8 691.0 1,757.5 254.4% 214.1%
2005 859.7 251.9 607.8 285.4 47.0% 62.5%
2006 914.9 252.9 662.0 180.0 27.2% 47.3%
2007 968.3 262.4 705.9 261.1 37.0% 54.1%
2008 971.6 264.1 707.5 344.9 48.8% 62.7%
2009 1,147.3 273.3 874.0 451.6 51.7% 63.2%
2010 1,278.3 275.0 1,003.3 696.6 69.4% 76.0%
2011 1,519.2 260.2 1,259.0 773.6 61.4% 68.0%
* Annual Required Contribution as defined in GASB Statement No. 25, “Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for
Defined Contribution Plans.”
** The source of these schedules is the annual actuarial valuation which is performed as of June 30 for each fiscal year listed.
FINANCIAL 26 | Creating Value
Supporting Schedules
Defined Benefit Plan
Summary Schedule of Administrative Expenses
For the Years Ended June 30, 2011 and 2010
2011 2010
Personnel Services

Salary and wages $ 6,467,302 $ 6,343,007
Retirement contributions 747,959 598,565
Insurance and payroll taxes 1,717,639 1,573,896
8,932,900 8,515,468
Professional Services

Computer services 545,026 527,460
Medical consultation 5,675 17,706
Technical and actuarial 590,438 477,612
Legal services 249,763 324,778
1,390,902 1,347,556
Communications

Postage 311,354 260,939
Printing and copying 95,122 84,785
Telephone 91,556 94,599
498,032 440,323
Other Services

Equipment repairs, rental and maintenance 94,541 76,788
Building operations and maintenance 265,199 228,966
Surety bonds and insurance 203,210 203,873
Memberships and subscriptions 40,394 37,532
Transportation and travel 98,185 147,142
Education 21,077 30,804
Supplies 114,399 107,580

837,005 832,685
Depreciation and amortization 614,947 972,149
Total administrative expenses - DB Plan $ 12,273,786 $ 12,108,181

Self Managed Plan

Salary and wages 225,655 229,824
Retirement contributions 22,337 21,904
Insurance and payroll taxes 60,166 55,705
Technical and actuarial 6,000 8,000
Postage 19,788 20,564
Transportation and travel 1,283 2,438
Printing 9,029 8,968
Total administrative expenses - SMP $ 344,258 $ 347,403

Total administrative expenses $ 12,618,044 $ 12,455,584
SURS 2011 | 27 A COMPONENT UNIT
OF THE STATE OF ILLINOIS
Supporting Schedules
Defined Benefit Plan
Summary Schedule of Consultant Payments
For the Years Ended June 30, 2011 and 2010
2011 2010
Defined benefit plan

Technical and actuarial services:
Aurico $ 562 $ -
Berwyn Group 4,150 4,025

Centurion - 869

Corley Photography - 865

Economic Research 4,989 4,989

EFL Associates 15,000 80,283

Alice Faron 3,560 -

Gabriel, Roeder, Smith & Co. 269,755 147,161

GII of Illinois 9,000 19,500

Governmental Consulting Solutions 48,000 36,000

ICS/Merrill 4,395 920

INFRE 308 308 900
Janet Jones & Associates 30,000 -

McLagan 2,500 2,500

Meador Investigations 830 1,745

Miscellaneous 1,598 1,140

Morrill and Associates 24,000 48,000

National Student Clearinghouse 425 -

Navigant Consulting 14,129 -
Open position advertising/Recruitment 21,305 20,811

Pen-Cin Partners 300 -
Reed Group - 1,185
Resolutions EAP 125 -

Smith Investigations 305 225
Spectrum 1,202 -

The Northern Trust 91,043 86,150

University of Illinois Business Consulting 16,000 4,500
VIA 32 -

Woolard Marketing Consultants 26,925 15,844

590,438 477,612
Legal services:

Areawide Reporting Services 850 3,195
Burke, Burns & Pinelli 149,512 151,998

Investors Responsibility Support Services 25,000 25,000
Mayer Brown LLP 52,043 99,141

Thomas, Mamer & Haughey 8,542 22,331
Winters, Featherstun, et al 13,816 23,113
249,763 324,778
Self-managed plan

Technical and actuarial services:

Callan Associates 2,000 -

Ennis, Knupp Investment Consulting 4,000 8,000
6,000 8,000
Total consultant payments $ 846,201 $ 810,390
FINANCIAL 28 | Creating Value
Defined Benefit Plan
Summary Schedule of Investment Fees, Commissions, and Administrative Expenses
For the Years Ended June 30, 2011 and 2010
2011 2010
Master trustee & custodian
The No rthern Trust Company $ 1,032,120 $ 1,058,006

Investment manager

Aberdeen Asset Management 1,553,530 1,238,663

Adams Street Partners 4,351,150 4,479,557

Alinda Capital Partners 1,160,940 1,385,616
Angelo Gordon GECC 600,000 803,056
Ativo Capital Management 61,630 30,164
BlackRock Institutional Trust (formerly Barclays Global Investors) 3,060,061 387,638

BlackRock Financial Management 323,883 4,192,526
Buford, Dickson, Harper & Sparrow 47,537 34,438
Calamos Advisors 943,676 729,877

Capital Guardian Trust Company - 488,562
Channing Capital Management 119,374 107,227
Chicago Equity Partners 307,550 -
Dune Capital Management 542,587 1,309,574
EARNEST Partners 1,957 -
Fiduciary Management Associate 27,101 -
Garcia, Hamilton & Associates 63,104 59,511
GlobeFlex Capital, L.P. 652,620 243,182
Herndon Capital Management 298,386 173,979
Holland Capital Management 113,920 96,715
ING Clarion Real Estate Securities 1,084,232 929,511

Jacobs Levy Equity Management 1,135,456 771,844
LM Capital Group 66,506 -
Lombardia Capital Partners 274,009 450,535
Longfellow Investment Management 63,398 12,526

Macquarie Capital 450,000 1,351,788

Martin Currie, Inc. 1,265,864 1,520,079

Metropolitan West Asset Management 1,379,193 1,180,690

Mondrian Investment Partners 424,187 480,394

Muller and Monroe 350,347 405,806
NCM Capital Management 161,602 175,739
Neuberger Berman 298,748 -
New Century Advisors 136,765 28,648
Northern Trust Investments 156,429 152,702

Oaktree Capital Management 32,683 2,149
Pacific Investment Management Company 12,875,085 14,708,190
Pantheon Ventures 2,655,664 2,575,329
Paradigm Asset Management (6,337) 58,268
Payden & Rygel 782,742 628,276
Piedmont Investment Advisors 133,636 114,496
Profit Investment Management 191,520 197,535
Progress Investment Management Company 1,664,419 1,279,161
Pugh Capital Management 115,974 88,699
Pyramis Global Advisors Trust Company 449,815 344,946
RhumbLine Advisers 180,752 162,732
RLJ Western Asset Management 250,620 162,971

RREEF 2,685,642 1,676,528
Smith, Graham & Company 91,912 86,556
State Street Global Advisors 55,149 -
Strategic Global Advisors 139,702 117,917
T. Rowe Price 2,238,212 1,687,422
Taplin, Canida & Habacht 93,556 65,511
UBS Realty Investors 1,438,125 1,193,020
Wellington Management Company 750,951 800,604
Western Asset Management 529,752 1,508,041
48,825,316 50,678,898

Investment consultant, measurement & counsel
Callan Associates, Inc. 151,000 -
EnnisKnupp + Associates, Inc. 158,856 383,500

Burk, Burns, & Pinelli, Ltd. 23,697 -
Mayer, Brown, Rowe & Maw 64,473 248,751
Bryan Cave - 25,000

398,026 657,251

Investment administrative expenses

Personnel 1,079,210 903,288

Resources, board and travel 160,277 131,688

Performance measurement and database 79,620 95,350

1,319,107 1,130,326

Total investment expenses $ 51,574,569 $ 53,524,481
Supporting Schedules
SURS 2011 | 29 A COMPONENT UNIT
OF THE STATE OF ILLINOIS
Supporting Schedules
Beginning cash and
short-term investments balance $ 758.4
Receipts
Member contributions $ 263.7
Employer contributions 773.6
Investment income (loss) 2,850.7
Investments redeemed 61,647.2
Total receipts $ 65,535.2
Disbursements
Benefit payments $ 1,611.1
Administrative expenses 10.8
Investment expenses 51.6
Fixed asset purchases .2
Refunds 58.9
SMP balance transfers 1.0
Investments purchased 64,054.5
Total disbursements $ 65,788.1
Ending cash and short-term
investments balance $ 505.5
Defined Benefit Plan
Summary Schedule of Cash Receipts and Disbursements
For the Year Ended June 30, 2011 ($ millions)
30
Independent Auditors’ Report on Internal Control Over Financial
Reporting and on Compliance and Other Matters Based on an
Audit of Financial Statements Performed in Accordance With
Government Auditing Standards
Honorable William G. Holland
Auditor General, State of Illinois
Springfield, Illinois
Board of Trustees
State Universities Retirement System
Springfield, Illinois
As Special Assistant Auditors for the Auditor General, we have audited the Statement of Plan Net Assets and Statement
of Changes in Plan Net Assets of the State Universities Retirement System of Illinois (System), as of and for the year
ended June 30, 2011, and have issued our report thereon dated December 12, 2011. We conducted our audit 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.
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 financial statements, and not for the
purpose of expressing an opinion on the effectiveness of the System’s internal control over financial reporting.
Accordingly, we do not express an opinion on the effectiveness of the System’s internal control over financial reporting.
A deficiency in internal control exists when the design or operation of a control does not allow management or employees,
in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements 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.
Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of
this section and was not designed to identify all deficiencies in the 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 that we consider to be material weaknesses, as defined above.
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 of our tests disclosed no instances of noncompliance or
other matters that are required to be reported under Government Auditing Standards.
This report is intended solely for the information and use of the Auditor General, the General Assembly, the Legislative
Audit Commission, the Governor, System management, and Board of Trustees, and is not intended to be and should not
be used by anyone other than these specified parties.
Schaumburg, Illinois
December 12, 2011

Description

Title

FY11-SURS-Fin-Full

Transcript

STATE OF ILLINOIS STATE UNIVERSITIES RETIREMENT SYSTEM FINANCIAL REPORT YEAR ENDED JUNE 30, 2011 PERFORMED AS SPECIAL ASSISTANT AUDITORS FOR THE AUDITOR GENERAL, STATE OF ILLINOIS State of Illinois State Universities Retirement System Financial Audit For the Year Ended June 30, 2011 Contents Financial Statement Report Summary 1 Independent Auditors’ Report 2 Management’s Discussion and Analysis 3 Statement of Plan Net Assets 6 Statement of Changes in Plan Net Assets 7 Notes to the Financial Statements 8 Required Supplementary Information Schedule of Funding Progress – Defined Benefit Plan 25 Schedule of Employer Contributions – Defined Benefit Plan 25 Supporting Schedules Defined Benefit Plan Summary Schedule of Administrative Expenses 26 Summary Schedule of Consultant Payments 27 Summary Schedule of Investment Fees, Commissions, and Administrative Expenses 28 Summary Schedule of Cash Receipts and Disbursements 29 Independent Auditors’ Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 30 We will issue under a separate cover the Compliance Examination Report for the year ended June 30, 2011. 1 State of Illinois State Universities Retirement System Financial Statement Report June 30, 2011 Summary The audit of the accompanying financial statements of the State of Illinois, State Universities Retirement System (System) was performed by McGladrey & Pullen, LLP. Based on their audit, the auditors expressed an unqualified opinion on the System’s financial statements. 2 Independent Auditors’ Report Honorable William G. Holland, Auditor General – State of Illinois Board of Trustees, State Universities Retirement System of Illinois As Special Assistant Auditors for the Auditor General, we have audited the accompanying Statement of Plan Net Assets of the State Universities Retirement System of Illinois (System), a component unit of the State of Illinois, as of June 30, 2011, and the related Statement of Changes in Plan Net Assets for the year then ended, as listed in the table of contents. 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 audit. The prior year comparative information has been derived from the System’s financial statements as of June 30, 2010 and for the year then ended, on which we expressed an unqualified opinion in our report dated December 13, 2010. We conducted our audit 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the System’s internal control over financial reporting. Accordingly, we express no such opinion. 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 the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the plan net assets of the State Universities Retirement System of Illinois as of June 30, 2011, and the changes in plan net assets for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated December 12, 2011 on our consideration of the System’s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and 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 compliance. That report is an integral part of an audit performed 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 the schedules of funding progress and employer contributions are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Our audit was conducted for the purpose of forming an opinion on the System’s basic financial statements. The accompanying supporting schedules, as listed in the table of contents, are presented for purposes of additional analysis and are not a required part of the basic financial statements. The 2011 supporting schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated, in all material respects, in relation to the basic financial statements as of and for the year ended June 30, 2011, taken as a whole. We have also previously audited, 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, the System’s basic financial statements for the year ended June 30, 2010, which are not presented with the accompanying financial statements. In our report dated December 13, 2010, we expressed an unqualified opinion on those statements. In our opinion, the 2010 supporting schedules are fairly stated, in all material respects, in relation to the basic financial statements for the year ended June 30, 2010, taken as a whole. Schaumburg, Illinois December 12, 2011 SURS 2011 3 A COMPONENT UNIT OF THE STATE OF ILLINOIS This section presents management’s discussion and analysis of the State Universities Retirement System’s (SURS or the System) financial statements and the major factors affecting the operations and investment performance of the System during the year ended June 30, 2011, with comparative reporting entity totals for the year ended June 30, 2010. Financial Highlights • The System’s net assets increased by $2.4 billion, or 18.6% from the previous fiscal year 2011. • The System’s return on investment, net of investment management fees, was 23.8% for fiscal year 2011. • The System was actuarial funded at 44.3% as of June 30, 2011, compared to 46.4% as of June 30, 2010. Overview of Financial Statements and Accompanying Information • The financial statements presented in this report are the Statement of Plan Net Assets as of June 30, 2011 and the Statement of Changes in Plan Net Assets for the year ended June 30, 2011. These statements present separate totals for the defined benefit plan and the self-managed plan, with reporting entity totals for the years ended June 30, 2011 and 2010. The Statement of Plan Net Assets presents the assets on hand as of June 30, 2011 and 2010 and available to be used in the payment of benefits. The Statement of Changes in Plan Net Assets presents the additions to and deductions from the plan net assets during the years ended June 30, 2011 and 2010. • The notes to the financial statements are an integral part of the financial statements and provide facts and detailed information to assist the reader in understanding the statements. Disclosures include the description of the plan, summary of significant accounting policies, and detailed presentations of major assets and liabilities. • Required supplementary information presents schedules related to employer contributions and the funding of the plan. • Other supplementary schedules consist of detailed information supporting administrative and investment expenses, fees paid to consultants, and a summary of cash receipts and disbursements. General Market Risk SURS is exposed to general market risk. This general market risk is reflected in asset valuations fluctuating with market volatility. Any impact from market volatility on SURS investment portfolios depends in large measure on how deep the market downturn is, how long it lasts, and how it fits within fiscal year reporting periods. The resulting mar-ket risk and associated realized and unrealized gains and losses could significantly impact SURS’ financial condition. Financial Analysis of the System The State Universities Retirement System serves 196,161 members in its defined benefit plan and 16,742 members in its self-managed plan. The funds needed to finance the benefits provided by SURS are accumulated through the collection of member and employer contributions and through income on investments. The total net assets of the System increased from $12.8 billion as of June 30, 2010 to $15.2 billion as of June 30, 2011, chiefly due to investment income. Plan Net Assets The summary of plan net assets for the System is presented below: Condensed Statement of Plan Net Assets Reporting Entity Total (in millions) 2011 2010 Change Amount % Cash and short-term investments $ 505.5 $ 758.4 $ (252.9) (33.3) Receivables and prepaid expenses 57.3 57.0 0.3 0.5 Pending investment sales 597.2 729.2 (132.0) (18.1) Investments and securities lending collateral 16,124.1 14,104.6 2,019.5 14.3 Capital assets, net 6.0 6.4 (0.4) (6.3) Total assets 17,290.1 15,655.6 1,634.5 10.4 Payable to brokers-unsettled trades 511.1 851.9 (340.8) (40.0) Securities lending collateral 1,516.0 1,935.3 (419.3) (21.7) Other liabilities 28.5 26.9 1.6 5.9 Total liabilities 2,055.6 2,814.1 (758.5) (27.0) Total plan net assets $ 15,234.5 $ 12,841.5 $ 2,393.0 18.6 Management’s Discussion and Analysis FINANCIAL 4 Creating Value Management’s Discussion and Analysis Overall, plan net assets increased by $2.4 billion, or 18.6%, chiefly due to an increase in investments attributable to the positive return on defined benefit plan investments of 23.80%. The investment allocation strategy for the plans making up the reporting entity as of June 30, 2011 and 2010 is as follows: 2011 2010 Defined Benefit Plan Equities 60.0% 65.0% Opportunity Fund 2.0 3.0 Fixed income 18.0 18.0 Private Equity 6.0 0.0 TIPS* 4.0 4.0 Real Estate Investment Trusts 4.0 4.0 Real Estate 6.0 6.0 Total 100.0% 100.0% Self-Managed Plan Equities 70.0% 65.0% Fixed income 29.0 34.0 Real Estate 1.0 1.0 Total 100.0% 100.0% *TIPS denotes Treasury Inflation Protected Securities Proper implementation of the investment policy requires that a periodic adjustment, or rebalancing, of assets be made to ensure conformance with policy target levels. Such rebalancing is necessary to reflect sizable cash flows and performance imbalances among investment managers who are hired to manage assets with a specified strategy. SURS’ rebalancing policy calls for rebalancing, as soon as practical, if a strategy exceeds or falls below its target allocation by 3%. Ongoing rebalancing of the investment portfolio occurred as needed during the year with the assis-tance of System cash flows. The allocation of assets within the self-managed plan is totally determined by the indi-vidual participants, and also reflects gains or losses over the past year. Liabilities decreased by $0.7 billion or 27.0%. This was primarily due to a decrease in the obligation for securities lending collateral and payables to brokers-unsettled trades. Changes in Plan Net Assets The summary of changes in plan net assets for the System is presented below: Condensed Statement of Changes in Plan Net Assets Reporting Entity (in millions) 2011 2010 Change Amount % Employer contributions $ 818.5 $ 739.7 $ 78.8 10.7 Participant contributions 309.9 323.6 (13.7) (4.2) Net investment income/(loss) 2,973.6 1,725.3 1,248.3 72.4 Total additions 4,102.0 2,788.6 1,313.4 47.1 Benefits 1,622.5 1,483.7 138.8 9.4 Refunds 73.9 57.5 16.4 28.5 Administrative expense 12.6 12.5 0.1 0.8 Total deductions $ 1,709.0 $ 1,553.7 155.3 10.0 Net increase/(decrease) in plan net assets $ 2,393.0 $ 1,234.9 $ 1,158.1 93.8 SURS 2011 5 A COMPONENT UNIT OF THE STATE OF ILLINOIS Management’s Discussion and Analysis Additions Additions to plan net assets are in the form of employer and participant contributions and investment income or loss-es. For fiscal year 2011, employer contributions increased by $78.8 million due to higher employer contributions from the State of Illinois as required by Public Act 88-0593. Participant contributions remained decreased from the prior year due to an increase in refund of participant contributions that exceed the 80% maximum benefit. The investment net income for fiscal year 2011 was $3.0 billion for the System, representing a $1.2 billion increase from the prior year. For the defined benefit plan, the overall rate of return was 23.8% (net of all investment management fees). Given the long-term orientation of the SURS defined benefit investment program, it is important to track investment returns over several time periods to correctly assess performance, especially given recent market volatil-ity. The defined benefit plan returns are as follows: Time Period 1-year 3-year 5-year 10-year 20-year Annualized Return 23.80% 4.6% 5.3% 6.1% 8.5% The 20-year return corresponds to the average active service term of the System member. At 8.5%, it can be com-pared to the actuarial rate of return assumption, recently changed from 8.5% to 7.75% and effective as of the June 30, 2010 actuarial valuation. While this assumed rate is normally determined every five years as part of the experience study performed by the System actuaries, the rate can be changed outside of this timetable by the System Board of Trustees, should changes in market conditions or plan demographics call for such an adjustment. Deductions The expenses of the Retirement System relate to the provision of retirement annuities and other benefits, refunds to ter-minated employees, and the cost of administering the System. These expenses for fiscal year 2011 were $1.71 billion, an increase of $155.3 million or 10.0% over expenses for 2010. This increase is primarily due to the $138.8 million increase in defined benefit plan retirement and survivor annuity payments, and a $16.4 million increase in portable lump sum distributions and refunds. Administration expenses increased by $0.1 million or 0.8% from fiscal year 2010 to 2011. Future Outlook Participant contributions are expected to grow in the future, at least at the pace of wage inflation experienced by the employers. The employer contribution for fiscal year 2012, mainly provided by the State of Illinois, will increase by approximately $201 million or 25%. The employer contributions for fiscal years 2012 and beyond should remain at a level percent of pay of approximately 34% as required by the funding plan set out by Public Act 88-0593. Under this plan, con-tributions will be at levels sufficient to fund the employer normal cost while amortizing the unfunded accrued actuarial liability for the period of 2012 to 2045, allowing the System to reach a funding ratio of 90%. Benefit payments are projected to continue to grow at a rate of approximately 7 - 8 % annually as a result of increasing numbers of retirees, the 3% annual increase, and the impact of salary increases at the participating agencies. This results in expenditure levels greater than combined participant and employer contributions such that the System will continue to liquidate investments by approximately $500 to $700 million annually in order to pay current benefits. SURS will continue to structure its portfolio with the objective of maximizing returns over the long term, taking advantage of investment income to help offset the shortages in employer contributions. FINANCIAL 6 Creating Value Financial Statements Statement of Plan Net Assets as of June 30, 2011 With Comparative Reporting Entity Totals as of June 30, 2010 2011 2010 Defined Benefit Self-Managed Plan Plan Total Total Assets Cash and short-term investments $ 505,492,014 $ - $ 505,492,014 $ 758,435,840 Receivables Participants 9,936,358 2,262,025 12,198,383 15,208,630 Federal, trust funds, and other 3,317,220 1,309,800 4,627,020 3,768,845 Pending investment sales 597,196,141 - 597,196,141 729,180,673 Interest and dividends 40,462,379 - 40,462,379 37,970,185 Total receivables 650,912,098 3,571,825 654,483,923 786,128,333 Prepaid expenses 22,777 - 22,777 22,480 Investments, at fair value Equity investments 10,086,790,110 44,823,063 10,131,613,173 7,634,359,192 Fixed income investments 3,189,219,461 20,800,782 3,210,020,243 3,596,346,644 Real estate investments 374,925,811 663,939 375,589,750 266,184,186 Mutual fund and variable annuities - 890,678,243 890,678,243 667,015,195 Total investments 13,650,935,382 956,966,027 14,607,901,409 12,163,905,217 Securities lending collateral 1,516,154,400 - 1,516,154,400 1,940,729,837 Capital assets, at cost, net of accumulated depreciation $17,977,466 and $17,729,535 respectively 6,003,179 - 6,003,179 6,408,913 Total assets 16,329,519,850 960,537,852 17,290,057,702 15,655,630,620 Liabilities Benefits payable 7,159,269 - 7,159,269 6,577,950 Refunds payable 3,416,995 - 3,416,995 3,863,392 Securities lending collateral 1,515,998,213 - 1,515,998,213 1,935,311,903 Payable to brokers for unsettled trades 511,135,516 - 511,135,516 851,863,268 Administrative expenses payable 17,806,560 - 17,806,560 16,491,806 Total liabilities 2,055,516,553 - 2,055,516,553 2,814,108,319 Net assets held in trust for pension benefits $ 14,274,003,297 $ 960,537,852 $ 15,234,541,149 $ 12,841,522,301 SURS 2011 7 A COMPONENT UNIT OF THE STATE OF ILLINOIS Financial Statements Statement of Changes in Plan Net Assets For the Year Ended June 30, 2011 With Comparative Reporting Entity Totals For the Year Ended June 30, 2010 2011 2010 Defined Benefit Self-Managed Plan Plan Total Total Additions Contributions Employer $ 773,594,666 $ 44,841,140 $ 818,435,806 $ 739,711,843 Participant 260,177,436 49,756,972 309,934,408 323,570,314 Total Contributions 1,033,772,102 94,598,112 1,128,370,214 1,063,282,157 Investment Income Net appreciation in fair value of investments 2,474,258,890 172,505,597 2,646,764,487 1,294,472,087 Interest 192,587,174 - 192,587,174 324,588,475 Dividends 181,007,663 - 181,007,663 153,916,871 Securities lending 5,347,769 - 5,347,769 6,534,929 2,853,201,496 172,505,597 3,025,707,093 1,779,512,362 Less investment expense Asset management expense 51,574,569 - 51,574,569 53,524,481 Securities lending expense 518,100 - 518,100 652,536 Net investment income 2,801,108,827 172,505,597 2,973,614,424 1,725,335,345 Total additions 3,834,880,929 267,103,709 4,101,984,638 2,788,617,502 Deductions Benefits 1,611,228,356 11,224,239 1,622,452,595 1,483,740,506 Refunds of contributions 58,917,601 14,977,550 73,895,151 57,467,779 Administrative expense 12,273,786 344,258 12,618,044 12,455,584 Total deductions 1,682,419,743 26,546,047 1,708,965,790 1,553,663,869 Net increase 2,152,461,186 240,557,662 2,393,018,848 1,234,953,633 Net assets held in trust for pension benefits Beginning of year 12,121,542,111 719,980,190 12,841,522,301 11,606,568,668 End of Year $ 14,274,003,297 $ 960,537,852 $ 15,234,541,149 $ 12,841,522,301 FINANCIAL 8 Creating Value Notes to the Financial Statements I. Summary of Significant Accounting Policies A. Reporting Entity The System is a component unit of the State of Illinois. As defined by accounting principles generally accepted in the United States of America established by the Governmental Accounting Standards Board (GASB), the financial reporting entity consists of a primary government, as well as its component units, which are legally separate organizations for which the elected officials of the primary government are financially accountable, or for which the nature and significance to the primary government are such that exclusion would cause the report-ing entity’s financial statements to be misleading or otherwise incomplete. Financial accountability is defined as: 1. Appointment of a voting majority of the component unit’s board and either (a) the ability to impose will by the primary government or (b) the possibility that the component unit will provide a financial benefit to or impose a financial burden on the primary government; or 2. Fiscal dependency on the primary government. Based upon the required criteria, the System has no component units. B. Measurement Focus and Basis of Accounting For both the defined benefit plan and the self-managed plan (SMP), the financial transactions are recorded using the economic resources measurement focus and accrual basis of accounting. Member and employer con-tributions are recognized as revenue when due pursuant to statutory or contractual requirements. Benefits and refunds are recognized as expenses when due and payable in accordance with the terms of the plans. C. Use of Estimates The preparation of the System’s financial statements in conformity with accounting principles generally accept-ed in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and changes therein, and disclosure of contingent assets and liabili-ties. Actual results could differ from those estimates and those differences could be material. The System uses an actuary to determine the actuarial accrued liability for the defined benefit plan and to determine the actuarially required contribution. D. Risks and Uncertainties The System invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risk. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near-term and those such changes could materially affect the amounts reported in the Statement of Plan Net Assets. E. Description of Plans The system is the administrator of a cost-sharing, multiple-employer defined benefit plan and a multiple-employer defined contribution plan. Legislation effective January 1, 1998, required State Universities Retirement System (SURS or the System) to introduce a portable benefit package to the existing defined benefit plan and to offer a defined contribution plan. The portable benefit package and the defined contribution plan are available to all participants whose employers elect to make the options available. As of June 30, 2011, the defined benefit plan has two options available. These options are known as the traditional benefit package and the portable ben-efit package. The defined contribution plan is known as the self-managed plan. The membership, contributions, and benefit provisions related to these plans are presented in the following summary of the provisions of SURS in effect as of June 30, 2011, as defined in the Illinois Compiled Statutes. Interested parties should refer to the SURS Member Guide or the Statutes for more complete information. 1. Defined Benefit Plan SURS was established on July 12, 1941 to provide retirement annuities and other benefits for staff members and employees of the state universities, certain affiliated organizations and certain other state educational and scien-tific agencies and for survivors, dependents and other beneficiaries of such employees. SURS 2011 9 A COMPONENT UNIT OF THE STATE OF ILLINOIS Notes to the Financial Statements SURS is included in the State of Illinois’ financial reports as a component unit. SURS is governed by Chapter 40, Act 5, Article 15, of the Illinois Compiled Statutes. These statutes assign the authority to establish and amend the benefit provisions of the plan to the State Legislature. Operation of the System and the direction of its policies are the responsibility of the Board of Trustees of the System. It is also these statutes that define the scope of SURS’ reporting entity. There are no statutory provisions for termination of the System. The Illinois Constitution pro-vides that the pension obligation of the state shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired. a. Membership Participation is required as a condition of employ-ment. Employees are ineligible to participate if (a) employed less than full-time and attending classes with an employer; (b) receiving a retirement annuity from SURS; or (c) excluded by subdivision (a)(7)(f) or (a) (19) of Section 210 of the Federal Social Security Act from the definition of employment given in that Section. b. Benefit Provisions A traditional benefit plan was established in 1941. Public Act 90-448 was enacted effective January 1, 1998, which established an alternative defined benefit program known as the portable benefit package. This option is offered in addition to the traditional benefit option. The traditional and portable plan Tier 1 refers to members that began participation prior to January 1, 2011. The traditional benefit plan and the portable benefit plan were revised in 2010 and became effective for new members who begin participation on or after January 1, 2011 and do not have any other eligible Illinois reciprocal system service. The revised plan is referred to as Tier 2. New employees are allowed 6 months from their date of hire to make an irrevocable election. The following is a summary of the benefit provisions as of June 30, 2011. Defined Benefit Plan 26.2% Benefit Recipients 36.7% Active Members 37.1% Inactive Members At June 30, 2011 and 2010, the number of participating employers was: 2011 2010 Universities 9 9 Community Colleges 39 39 Allied Agencies 15 15 State of Illinois 2 2 65 65 At June 30, 2011 and 2010, defined benefit plan membership consisted of: 2011 2010 Benefit Recipients 51,370 48,903 Active Members 71,888 72,996 Inactive Members 72,903 71,870 196,161 193,769 Retirement Vesting Retirement Age Requirement Final Rate of Earnings (FRE) Retirement Benefit AAI (Automatic Annual Increase) Survivor Benefits Survivor AAI (Automatic Annual Increase) Traditional Plan - Tier 1 5 years of service Age 62, with at least 5 years Age 60, with at least 8 years At any age with at least 30 years • Average earnings during 4 high consecutive academic years; or • Average of the last 48 months prior to termination. The AAI is 3% compounded annually. An eligible survivor receives a minimum of 50% of the member’s earned retirement annuity. The AAI is 3%, compounded annu-ally. Traditional Plan - Tier 2 10 years of service Age 67, with at least 10 years of service • Average earnings during 8 high consecutive academic years of the last 10; or • Average of the high 96 consecu-tive months of last 120 months (if applicable). The AAI is calculated using the lesser of 3% or one-half of the con-sumer price index. The increase will not be compounded. An eligible survivor receives 66 2/3% of the member’s earned retirement annuity. The AAI is calculated using the lesser of 3% or one-half of the con-sumer price index. The increase will not be compounded. Portable Plan 5 years of service (Tier 1) and 10 years of service (Tier 2) • Tier 1-Same as Traditional Plan Tier 1 Age Requirement • Tier 2-Same as Traditional Plan Tier 2 Age Requirement • Tier 1-Same as Traditional Plan Tier 1 FRE • Tier 2-Same as Traditional Plan Tier 2 FRE • Tier 1-Same as Traditional Plan Tier 1 AAI • Tier 2-Same as Traditional Plan Tier 2 AAI Based upon selection at retirement of 50%, 75% or 100% of the mem-ber’s earned retirement annuity. • Tier 1-Same as Traditional Plan Tier 1 Survivor AAI • Tier 2-Same as Traditional Plan Tier 2 Survivor AAI FINANCIAL 10 Creating Value Notes to the Financial Statements SURS also provides retirement, disability, death and survivor benefits as authorized in Chapter 40, Act 5, Article 15, of the Illinois Compiled Statutes. Disability benefits are payable to all participants with at least 2 years of service credit if they are unable to rea-sonably perform the duties of their assigned position due to a physical or mental impairment as certified by a physician. The benefit becomes payable when sick leave payments are exhausted or after 60 days of the disability, whichever is later. The benefit is payable at a rate of 50% of the monthly rate of compensation on the date the dis-ability began. Disability benefits are reduced by any payments received under the Workers’ Compensation or the Occupational Diseases Act. If a participant remains disabled after receiving the maximum benefits due, they may be eligible for a disability retirement annuity equal to 35% of the monthly rate of compensation on the date the disability began. Death benefits are payable to named beneficiaries upon the death of any participant of this System. Under the traditional benefit package, monthly survivor benefits may be paid to eligible survivors if the participant estab-lished a minimum of 1.5 years of service credit prior to the date of death. If no qualified survivor exists at the date of retirement, the member is paid a refund of all survivor contributions plus interest. Under the portable benefit package, survivor benefits are available through a reduction of the retirement annuity calculated as described above. No refund of survivor contributions is available if there is no qualified survivor at the time of retirement. These provisions are designed to allow the impact of the portable benefit package’s enhanced refund opportunity to be cost neutral. Upon the death of an annuitant, SURS will pay either a death benefit to a non-survivor beneficiary or a monthly survivor benefit to an eligible survivor. The amount of the monthly survivor benefit will differ depending upon whether the annuitant had selected the traditional benefit package or the portable benefit package. Upon termination of service, a lump sum refund is available to all members. Under the traditional benefit package, this refund consists of all member contributions and interest at 4-1/2%. Under the portable benefit package, this refund consists of all member contributions and total interest credited, plus for those members with greater than or equal to 5 years of service credit, an equal amount of employer contributions. Under both defined benefit plan options, a member with 5 or more years of service credit who does not apply for a refund may apply for a normal retirement benefit payable at age 62. c. Funded Status and Funding Progress The funded status of the plan as of June 30, 2011, the most recent actuarial valuation date, is as follows (in millions): Actuarial Value Accrued Unfunded Funding Covered UAAL as % of Assets Actuarial Accrued Ratio* Payroll of Covered Liabilities Actuarial Payroll Liabilities $13,945.7 $31,514.3 $17,568.6 44.3% $3,460.8 507.6% The schedule of funding progress, presented as required supplementary information (RSI) following the notes to the financial statements, presents multi-year trend information about whether the plan assets are increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. *If calculated using the market value of assets of $14,274.0, the funding ratio would be 45.3%. d. Actuarial Value of Assets The actuarial value of assets is used in determining the funding progress of the System and in establishing the employer contribution rates necessary to adhere to the statutory funding plan. The actuarial value of assets is based on a smoothed investment income rate. Investment income in excess or shortfall of the expected 7.75% rate on fair value is smoothed over a five-year period with 20% of a year’s excess or shortfall being recognized each year beginning with the current year. The use of this actuarial method began with the valuation for the period ending June 30, 2009, as required by Public Act 96-0043 , which was signed into law on July 15, 2009. SURS 2011 11 A COMPONENT UNIT OF THE STATE OF ILLINOIS Notes to the Financial Statements Calculation of Actuarial Value of Assets (in thousands) Actuarial Value of Assets at July 1, 2010 $ 13,966,642.8 Total investment income/(loss) 2,801,108.8 Less: Projected investment income @ 7.75% 914,753.4 Investment income/(loss) in excess of projected 1,886,355.4 Less: Deferral to smooth asset values over 5 years 1,509,084.3 Recognized investment income - current year 377,271.1 Projected investment income 914,753.4 Recognized investment loss - prior years (664,339.2) Excess of contributions over disbursements (648,647.6) Actuarial value of assets at June 30, 2011 $ 13,945,680.5 e. Additional actuarial valuation information Valuation date June 30, 2011 Actuarial cost method Projected unit credit Amortization method Level percent, open Remaining amortization period 30 years, open Asset valuation method 5-year smoothed market Actuarial assumptions: Investment rate of return* 7.75% Projected salary increases 0.5 - 8.25% Cost-of-living adjustment 3.0% before January 2011 hires and 1.375% after Assumed wage inflation rate 2.75% Postretirement benefits 3.0% Mortality table RP 2000 Mortality Table projected to 2017, with the rates multiplied by 80 percent for males and 85 percent for females. *Assumed investment rate of return change from 8.5 percent in Fiscal Year 2009 to 7.75 percent in Fiscal Year 2010 by action of the System Board of Trustees. Includes assumed wage inflation of 2.75 percent. 2. Self-Managed Plan SURS is the plan sponsor and administrator of a defined contribution plan established as of January 1, 1998, by the Illinois General Assembly as an amendment to the Illinois Pension Code through Illinois Public Act 90-448. This plan is referred to as the self-managed plan (SMP) and is offered to employees of all SURS employers who elect to participate. This plan is a qualified money purchase pension plan under Section 401(a) of the Internal Revenue Code. The assets of the SMP are maintained under a trust administered by the SURS Board of Trustees in accordance with the Illinois Pension Code. a. Membership A member may elect participation in the SMP if (a) all participation criteria for the defined benefit plan are met; (b) the employer has elected through Board action to offer the self-managed plan; (c) the employee is on active status at the plan offering date; and (d) the employee is not eligible to retire as of the employer plan offering date. The member election is irrevocable. New employees are allowed 6 months from the date of hire in which to make their election. If no election is received, members are considered to be part of the defined benefit plan, under the traditional benefit option. At June 30, 2011 and 2010, the SMP membership consisted of: 2011 2010 Annuity Benefit Recipients 182 153 Active Members 9,723 9,746 Inactive Members 7,019 8,568 16,924 18,467 At June 30, 2011 and 2010, the number of SMP participating employers was: 2011 2010 Universities 9 9 Community Colleges 39 39 Allied Agencies 13 13 State of Illinois 1 1 62 62 FINANCIAL 12 Creating Value Notes to the Financial Statements b. Benefit Provisions The SMP provides retirement, disability, death, and survivor benefits as authorized in Chapter 40, Act 5, Article 15, of the Illinois Compiled Statutes, and amended by Public Act 90-448. Retirement benefits are payable to participants meeting minimum vesting requirements of 5 years of service credit at age 62, 8 years of service credit at age 55, or 30 years of service credit regardless of age. The distribution options available upon reaching retirement eligibility are the following: a lump sum distribution consisting of all employee and employer contributions and related investment earnings; a single life annuity; a 50% or 100% joint and survivor annuity; a single life annuity with a guaranteed period of 10, 15, or 20 years as elected by the partici-pant; and a 50% or 100% joint and survivor annuity with a guaranteed period of 10, 15, or 20 years as elected by the participant. Disability benefits are payable to all participants with at least 2 years of service credit if they are unable to reason-ably perform the duties of their assigned position due to physical impairment as certified by a physician. The benefit becomes payable when sick leave payments are exhausted or after 60 days of the disability, whichever is later. The benefit is payable at a rate of 50% of the monthly rate of compensation on the date the disability began. Disability benefits are reduced by any payments under the Workers’ Compensation or the Occupational Diseases Act. Upon termination of service with less than 5 years of service credit, a lump sum distribution is available which consists of employee contributions and related investment earnings. The employer contributions and related investment earnings are forfeited. Upon termination of service with greater than 5 years of service credit but where the participant is not yet eligible for retirement, a lump sum distribution is available which consists of employee and employer contributions and related investment earnings. Death benefits are payable to named beneficiaries upon the death of any participant of this plan. If the participant has less than 1.5 years of service credit, the death benefit payable is the employee contributions and related investment earnings. If the participant has 1.5 or more years of service credit, the death benefit payable is the employee and employer contributions and related investment earnings. F. Cash and Short-Term Investments Included in the $505,492,014 of cash and short-term investments presented in the Statement of Plan Net Assets is $121,731,430 of short-term investments with less than 90 days maturity. For purposes of the various data tables presented in Note III, this group of short-term investments is included as part of fixed income investments. Short-term investments are generally reported at cost, which approximates fair value. G. Investments Investments are governed by Chapter 40, Act 5, Articles 1 and 15, of the Illinois Compiled Statutes. The most important aspect of the statutes is the prudent expert rule, which establishes a standard of care for all fiduciaries. (A fiduciary is any person who has authority or control with respect to the management or administration of plan assets.) The prudent expert rule states that fiduciaries must discharge their duties with the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use under con-ditions prevailing at the time. Purchases and sales of securities are recorded on a trade-date basis. Interest income is reported on the accrual basis. Dividends are recorded on the ex-dividend date. For the defined benefit plan, investments are reported at fair value. Marketable securities (stocks, bonds, warrants, and options) are traded on public exchanges. The Northern Trust Company, SURS’ custodial bank, establishes these prices using third-party pricing services. Generally, these values are reported at the last reported sales price. Certain investments that do not have an established market value are reported at estimated fair value obtained from a custodial bank or investment management firm. These investments include commingled investment pools, where the underlying assets are individually marked to market (i.e., estimated fair value) on a daily basis and indi-vidually traded on publicly recognized exchanges. The investment manager, using methods approved by the CFA Institute (formerly known as the Association for Investment Management Research) or other industry standards, values non-marketable securities (real estate and venture capital). These methods generally include detailed prop-erty level appraisals and discounted cash flow analysis. For the SMP, investments are reported at fair value by the Service Providers. These investments include both mutual and variable annuity funds where the underlying assets are marked to market (i.e., estimated fair value) on a daily basis and individually traded on publicly recognized exchanges. Generally, the values on the underlying investments are reported at the last reported sales price. SURS 2011 13 A COMPONENT UNIT OF THE STATE OF ILLINOIS Notes to the Financial Statements H. Capital Assets Capital assets are recorded at historical cost and depreciated over the estimated useful life of each asset. Annual depreciation is computed using the straight-line method. I. Administrative Expenses System administrative expenses (which include amounts for both the defined benefit and self-managed plans) are budgeted and approved by the System’s Board of Trustees. Funding for these expenses is included in the employer contribution as determined by the annual actuarial valuation and appropriated by the State of Illinois. J. Prior Year Comparative Information The basic financial statements include certain prior-year summarized comparative information in total but not at the level of detail required for a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the System’s financial state-ments as of and for the year ended June 30, 2010, from which the summarized comparative information was derived. K. New Accounting Pronouncements The Governmental Accounting Standards Board Statement No. 59, Financial Instruments Omnibus, has been issued and is effective for all reporting periods beginning after June 15, 2010. The objective of this Statement is to update and improve existing standards regarding financial reporting and disclosure requirements of certain financial instruments and external investment pools for which significant issues have been identified in practice. The require-ments of the Statement will improve financial reporting by providing more complete information, by improving consistency of measurements, and by providing clarifications of existing standards. SURS has implemented this Statement for the year ending June 30, 2011, with no significant impact on system financial statements. Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provisions – An Amendment to GASB Statement No. 53, will be effective for the System beginning with its year ending June 30, 2012. The objective of this statement is to enhance comparability and improve financial reporting by clarifying the circumstances in which hedge accounting should continue when a swap counterparty, or swap counterparty’s credit support provider, is replaced. L. Actuarial Experience Review In accordance with Illinois Compiled Statutes, an actuarial review is to be performed at least once every five years to determine the reasonableness of actuarial assumptions regarding the retirement, disability, mortality, turnover, interest and salary of the members and benefit recipients of SURS. An experience review for the years June 30, 2006 to June 30, 2010 was performed in March 2011, resulting in the adoption of new assumptions as of June 30, 2011. The impact of adopting the recommended assumptions was a decrease in the unfunded actuarial accrued liability by $2.5 million and no change to the actuarial value of assets. II. Contributions and Net Assets Designations A. Defined Benefit Plan 1. Membership Contributions In accordance with Chapter 40, Act 5, Article 15, of the Illinois Compiled Statutes, members of the traditional benefit package contribute 8% of their gross earnings; 6-1/2% of those are designated for retirement annuities, 1/2% for post-retirement increases, and 1% for survivor benefits. Police officers and fire fighters contrib-ute 9-1/2% of earnings; the additional 1-1/2% is a normal retirement contribution. Members of the portable benefit package contribute 8% of their gross earnings; 6-1/2% of those are designated for retirement annuities, 1/2% for post-retirement increases, and 1% for enhanced refund benefits. Police officers and fire fighters contribute 9-1/2% of earnings; the additional 1-1/2% is a normal retirement contribution. These stat-utes assign the authority to establish and amend the contribution provisions of the plan to the State Legislature. The member contributions are picked up by the employer and treated as employer contributions for income tax purposes. Retirement contributions are based on the gross earnings before the employer pick-up and are included in earnings. Member Contributions 12.5% Survivor Benefits 6.2% Cost of Living Increases 81.3% Retirement Benefits FINANCIAL 14 Creating Value Notes to the Financial Statements All contributions on pre-1981 earnings and service credit payments, plus future other public employment, prior ser-vice, refund repayments, leave payments, military service payments, and the employee portion of Early Retirement Option payments are considered as previously taxed, unless qualifying funds are rolled over to SURS to make these purchases, or unless the payments are made in installments through employer deductions from payroll. Previously taxed contributions will be recovered tax-free when distributed to the employee in the form of benefits or payments or to his or her beneficiary as a death and/or survivor benefit. 2. Interest Credited on Member Contributions For the traditional and portable benefit packages, the interest rate credited is fixed by the Board of Trustees and is 7.5% for the year ended June 30, 2011. As of July 1, 2011, the rate will remain at 7.5%. For purposes of lump sum refunds to former members, the traditional benefit package offers an interest rate of 4-1/2%, compounded annually, and the portable benefit package offers an interest rate equal to the credited rate, compounded annually. A change brought forth by the enactment of Public Act 94-0004 and effective July 1, 2005, calls for the Comptroller of the State of Illinois to set the interest rate credited to member contribution balances for purposes of the calculation of retirement annuities under the money purchase formula. That rate is 7.0% for the year ended June 30, 2011 and is 6.75% as of July 1, 2011. Members certified after July 1, 2005 will not be eligible for the money purchase formula calculation. Rather their retirement annuity will be calculated using the general formula. 3. Employer Contributions On an annual basis, an actuarial valuation is performed in order to determine the amount of statutorily required contributions from the State of Illinois. An actuarial experience study is performed every 5 years to determine the assumptions to be used in the annual valuation. The actuarial assumptions are also reviewed at least annually by the System. The last actuarial experience study was performed in March 2011. To determine the funding method, Public Act 88-0593 was passed by the Illinois General Assembly in 1994. This act, which took effect on July 1, 1995, provides a 15-year phase-in to a 35-year plan that requires the state to make continuing appropriations to meet the normal actuarially-determined cost of the System, plus amortize the unfunded accrued liability. Under this plan, the System is expected to be 90% funded by fiscal year 2045. As required by Public Act 96-1497 the State of Illinois issued $3.7 billion in general obligation bonds on March 10, 2011, at an interest rate of 5.56%. The proceeds of these bonds were used to fund the state’s contribution to the five retirement systems, including $713.5 million paid to SURS. 4. Net Asset Accounts The System maintains two designated accounts that reflect the assignment of net assets to employee and benefit accounts: a. The Employee Contribution Account records the pension assets contributed by each employee and the interest income earned by those contributions. b. The Benefits from Employee and Employer Contributions Account records the net assets available for annuities in force and available for future retirement, death and disability benefits, the undistributed investment income, the unexpended administrative expense allocation, and the variations in actuarial assumptions. Balances in these designated accounts as of June 30, 2011 are as follows: Employee contributions $ 6,007,401,403 Benefits from employee and employer contributions 8,266,601,894 Total Net Assets $ 14,274,003,297 5. Ownership of Greater than 5 Percent of Net Assets Available for Benefits There are no significant investments in any one organization that represents 5% or more of net assets available for benefits. B. Self-Managed Plan 1. Membership Contributions In accordance with Chapter 40, Act 5, Article 15, of the Illinois Compiled Statutes, members contribute 8% of their gross earnings. These statutes assign the authority to establish and amend the contribution provisions of the plan to the State Legislature. SURS 2011 15 A COMPONENT UNIT OF THE STATE OF ILLINOIS Notes to the Financial Statements The member contributions are picked up by the employer and treated as employer contributions for income tax purposes. Retirement contributions are based on the gross earnings before the employer pick-up and are included in earnings. Service credit purchase payments are considered as previously taxed, unless qualifying funds are rolled over to SURS to make these purchases. Previously taxed contributions will be recovered tax-free when distributed to the employee in the form of benefits or refunds or to his or her beneficiary as a death and/or survivor benefit. 2. Employer Contributions In accordance with Chapter 40, Act 5, Article 15, of the Illinois Compiled Statutes, employer contributions credited to the SMP participant are at a rate of 7.6% of the participant’s gross earnings, less the amount retained by SURS (currently 0.5%) to provide disability benefits to the participant. The amounts credited are paid into the partici-pant’s account. The State of Illinois shall make the employer contribution to SURS on behalf of the SMP partici-pants. 3. Net Asset Accounts The SMP maintains three designated accounts that reflect the assignment of net assets to employee contributions, disability benefits, and employer forfeiture accounts: a. The Employee Contribution Account records the pension assets contributed by each employee and the corresponding employer contribution, and the investment income earned by those contributions. b. The Disability Benefits Account reflects the pension assets contributed by the employer and held to fund member disability benefits. c. The Employer Forfeiture Account reflects the pension assets contributed by the employer but forfeited from member accounts due to termination prior to reaching 5 years of service. Future employer contributions are reduced by the total forfeitures held by the defined contribution plan. The assets related to disability benefits and employer forfeitures are commingled with the investment assets of the defined benefit plan. Investment income or loss is credited to these balances based upon the annual investment return or loss of the commingled assets. For fiscal year 2011, the investment income credited to these balances was $11,637,810. Balances in these designated accounts as of June 30, 2011 are as follows: Employee contributions $ 894,243,083 Disability benefits 57,251,841 Employer forfeitures 9,042,929 Total Net Assets $ 960,537,853 4. Ownership of Greater than 5 Percent of Net Assets Available for Benefits There are no significant investments in any one organization that represent 5% or more of net assets available for benefits. III. Deposits and Investments Custodial Credit Risk for Deposits Custodial credit risk for deposits is the risk that in the event of a financial institution failure, State Universities Retirement System deposits may not be returned. Cash held in the investment related bank account in excess of $250,000 is uninsured and uncollateralized. SURS has no deposit policy for custodial credit risk. Deposits are under the custody of The Northern Trust Company which has an AA Long Term Deposit/Debt rating by Standard & Poor’s, an Aa3 rating by Moody’s and an AA/AA- rating by Fitch. At June 30, 2011, the carrying amount of cash was $383,760,585 and the bank balance was $389,751,479 of which $11,765,337 was foreign currency deposits and was exposed to custodial credit risk. The remaining $121,731,430 was made up of short-term invested funds which are con-sidered to be investments for the purpose of assessing custodial credit risk. FINANCIAL 16 Creating Value Investment Policies Investments are governed by Chapter 40, Act 5, Articles 1 and 15, of the Illinois Compiled Statutes. The most impor-tant aspect of the statutes is the prudent expert rule, which establishes a standard of care for all fiduciaries. (A fidu-ciary is any person who has authority or control with respect to the management or administration of plan assets.) The prudent expert rule states that fiduciaries must discharge their duties with the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use under conditions prevailing at the time. The SURS Board of Trustees has adopted an Investment Policy that contains general policies for invest-ments. The Investment Section of this report contains a summary of these policies. Within the prudent expert frame-work, the SURS Board of Trustees establishes specific investment guidelines in the investment management agree-ment of each individual investment management firm. Investment Commitments Alternative investment portfolios consist of passive interests in limited partnerships. The System had outstanding commitments to private equity limited partnerships of approximately $413.1 million and $498.4 million as of June 30, 2011 and 2010, respectively. The System had outstanding commitments to real estate partnerships of approx-imately $123.1 million, to infrastructure partnerships of approximately $42.4 million and to Public-Private Investment Program (PPIP) partnerships of approximately $42.8 million at June 30, 2011. Investments The carrying values of investments by type at June 30, 2011 are summarized below: Equity investments U.S. equities $ 6,827,305,941 Non-U.S. equities 2,276,837,747 U.S. private equity 1,277,772,613 Non-U.S. private equity 96,328,790 Equity futures (346,631,918) Fixed income investments U.S. government obligations 1,042,688,876 U.S. agency obligations 667,773,114 U.S. corporate fixed income 1,091,747,938 U.S. fixed income, other 26,430,487 Non-U.S. fixed income securities 302,613,071 U.S. fixed income derivatives 30,336,970 Non-U.S. fixed income derivatives 37,194,250 U.S. fixed income futures (32,560,281) Non-U.S. fixed income futures (37,194,250) U.S. short term investments 615,286,069 Non-U.S. short term investments 45,804,982 U.S. swaps and options 10,507,920 Non-U.S. swaps and options 4,033,438 Real estate investments Real estate 375,589,750 Mutual fund and variable annuities Self-managed plan mutual funds and variable annuity funds 890,678,243 Total Investments $ 15,202,543,750 (a) Fixed income investments presented in this table include $121,731,430 of short-term investments with maturities of less than 90 days and $472,910,911 of investments in the form of cash and cash-equivalents. Both are included in the cash and short-term investments total on the financial statements. (b) U.S. short-term investments principally consist of money market funds and options. (c) Fixed income investments presented in this table include $64,258,712 of short-term bills and notes with maturities greater than 90 days. Custodial Credit Risk Custodial credit risk for investments is the risk that, in the event of a failure of the counterparty to a transaction, the System will not be able to recover the value of its investment or collateral securities that are in the possession of an outside party. SURS has not adopted a formal policy specific to custodial credit risk. At June 30, 2011, no investments were uninsured and unregistered, with securities held by the counterparty or by its trust department or agent but not in the System’s name. Notes to the Financial Statements SURS 2011 17 A COMPONENT UNIT OF THE STATE OF ILLINOIS Concentration of Credit Risk Concentration of credit risk is the risk of loss that may be attributed to the magnitude of the System’s investment in a single issue. SURS has not adopted a formal policy specific to concentration of credit risk. However, this area is addressed with each of the relevant investment managers in the Investment Management Agreement between the parties. The System’s investment portfolios are managed by professional investment management firms. These firms must maintain diversified portfolios and must comply with risk management guidelines specific to each of their investment management agreements. Excluding U.S. government and agency issues, the portfolios are limited to a 5% allocation in any single investment grade U.S. issuer. Allocation limits also apply to international issuers. At June 30, 2011, SURS had no investments in any one issuer that represented 5% or more of the System’s total investments. Credit Risk of Debt Securities Credit risk is the risk that the issuer or other counterparty to an investment will not fulfill obligations. SURS has not adopted a formal policy specific to credit risk of debt securities. However, this area is addressed with each of the rel-evant investment managers in the Investment Management Agreement between the parties. The quality ratings of investments in fixed income securities of the System as described by Standard & Poor’s rating agency at June 30, 2011 are as follows: Quality Rating: Standard & Poor’s Domestic** International Total AAA $ 738,049,787 $ 135,453,680 $ 873,503,467 AA+ 144,158,496 10,122,027 154,280,523 AA 30,094,476 36,946,512 67,040,988 AA- 22,884,918 7,826,074 30,710,992 A+ 95,995,319 43,517,713 139,513,032 A 136,414,160 48,078,790 184,492,950 A- 95,063,095 19,481,227 114,544,322 BBB+ 75,471,052 23,237,034 98,708,086 BBB 64,998,314 14,994,331 79,992,645 BBB- 75,413,258 43,998,805 119,412,063 BB+ 52,644,806 2,175,375 54,820,181 BB 28,404,898 11,470,836 39,875,734 BB- 34,633,137 - 34,633,137 B+ 37,880,531 1,424,250 39,304,781 B 11,715,883 1,322,750 13,038,633 B- 6,455,990 - 6,455,990 CCC+ 1,768,565 - 1,768,565 CCC 28,591,569 - 28,591,569 CCC- 8,519,571 - 8,519,571 CC 5,326,435 - 5,326,435 C - 1,010,750 1,010,750 D 30,109,796 1,580,050 31,689,846 Not rated 225,976,567 25,921,720 251,898,287 Total credit risk: debt securities 1,950,570,623 428,561,924 2,379,132,547 U.S. government and agencies * 1,042,688,877 – 1,042,688,877 Total debt securities investments $ 2,993,259,500 $ 428,561,924 $ 3,421,821,424 * Obligations of the U.S. government or obligations explicitly guaranteed by the U.S. government are not considered to have credit risk. ** Includes $104,577,795 from self-managed plan variable annuities and mutual funds. Notes to the Financial Statements FINANCIAL 18 Creating Value Notes to the Financial Statements Interest Rate Risk Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The State Universities Retirement System manages its exposure to fair value loss arising from increasing interest rates by diversifying the debt securities portfolio. The System has not adopted a formal policy specific to interest rate risk. However, this area is addressed with each of the relevant investment managers in the Investment Management Agreement between the parties. At June 30, 2011, the segmented time distribution of the various investment types of debt securities of the System are as follows: Maturities in Years 2011 Less than 1 to 5 6 to 10 10 to 20 More than Type Fair Value 1 year years years years 20 years U.S. Gov’t & Agency $ 1,830,819,909 $ 123,059,932 $ 437,174,217 $ 388,621,765 $ 351,741,038 $ 530,222,957 fixed income * U.S. corporate 1,162,439,591 128,839,790 254,012,810 385,002,639 25,881,471 368,702,881 fixed income ** Non-U.S. fixed income 428,561,924 138,075,564 142,325,401 101,038,623 19,211,387 27,910,949 Total $ 3,421,821,424 $ 389,975,286 $ 833,512,428 $ 874,663,027 $ 396,833,896 $ 926,836,787 * Includes $18,239,091 from self-managed plan mutual fund. ** Includes $86,338,704 from self-managed plan variable annuities and mutual funds. SURS 2011 19 A COMPONENT UNIT OF THE STATE OF ILLINOIS Notes to the Financial Statements Foreign Currency Risk Foreign currency risk is the risk that changes in currency exchange rates will adversely affect the fair value of an investment or a deposit. SURS has not adopted a formal policy specific to foreign currency risk. However, this area is addressed with each of the relevant investment managers in the Investment Management Agreement between the parties. International investment management firms maintain portfolios with diversified foreign currency risk for SURS. The System’s exposure to foreign currency risk derives from its positions in foreign currency and foreign currency-denominated equity and fixed income investments. At June 30, 2011 the System’s exposure to foreign cur-rency risk is as follows: Currency Equity Fixed Income* Total Australian dollar $ 94,560,675 $ 5,217,146 $ 99,777,821 Brazilian real 20,391,413 10,980,668 31,372,081 British pound sterling 368,942,416 14,467,971 383,410,387 Canadian dollar 57,140,858 39,454,674 96,595,532 Chinese yuan renminbi 65,008 18,600,300 18,665,308 Czech koruna 2,465,678 - 2,465,678 Danish krone 17,645,467 864,000 18,509,467 Euro 462,191,234 (31,012,111) 431,179,123 Hong Kong dollar 91,244,851 1,968,369 93,213,220 Indian rupee - 5,364,313 5,364,313 Indonesian rupiah 1,365,801 3,102,572 4,468,373 Japanese yen 261,831,704 (810,693) 261,021,011 Malaysian ringgit 2,194,058 10,344,004 12,538,062 Mexican peso 1,578,478 14,862,541 16,441,019 New Israeli shekel 2,930,696 27,836 2,958,532 New Taiwan dollar 17,803,811 4,242,401 22,046,212 New Zealand dollar 599,544 96,896 696,440 Norwegian krone 26,184,073 (8,054,704) 18,129,369 Peruvian nuevo sol - 1,753 1,753 Philippine peso 2,239,335 5,039,009 7,278,344 Polish zloty 1,517,074 - 1,517,074 Singapore dollar 42,823,817 12,344,360 55,168,177 South African rand 580,560 1,187,603 1,768,163 South Korean won 24,262,630 13,623,059 37,885,689 Swedish krona 17,311,893 5,808,739 23,120,632 Swiss franc 133,021,519 217,345 133,238,864 Thai baht 690,220 - 690,220 Turkish lira - 1,379,283 1,379,283 Total securities 1,651,582,813 129,317,334 1,708,900,147 subject to foreign currency risk Foreign investments 669,050,086 223,134,157 892,184,243 denominated in U.S. Dollars Total foreign $ 2,320,632,899 $ 352,451,491 $ 2,673,084,390 investment securities *Includes Swaps, Options and Short-Term Investments FINANCIAL 20 Creating Value Notes to the Financial Statements Derivative Securities The System invests in derivative securities through its investment managers. A derivative security is an investment whose value is derived from other financial instruments such as commodity prices, bond and stock prices, or a market index. The System’s derivatives are considered investments. The fair value of all derivative financial instruments is reported in the Statement of Plan Net Assets as either assets or liabilities, and the change in the fair value is recorded in the Statement of Changes in Plan Net Assets as net appreciation in fair value of investments. In the case of an obligation to purchase (long a financial future or a call option), the full value of the obligation is held in cash or cash equivalents. For obligations to sell (short a financial future or a put option), the reference security is held in the portfolio. 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. Market risk is the possibility that a change in interest rate risk or 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 con-stantly 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 senior management, and the risk positions of the investment managers are reviewed on a periodic basis to monitor compliance with the limits. The System has not adopted a formal policy specific to master netting arrangements. As of June 30, 2011, SURS’ derivative investments included foreign currency forward contracts, rights and warrants, futures, options, swaps and swaptions. Foreign currency forward contracts are used to protect against the currency risk in SURS’ foreign stock and fixed income security portfolios. 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. The gain or loss arising from the dif-ference between the original contracts and the closing of such contracts is included in the investment income in the Statement of Changes in Plan Net Assets. At June 30, 2011, SURS’ investments in foreign currency forward contracts are as follows: Pending Pending Foreign Exchange Foreign Exchange Fair Value Change In Currency Purchases Sales 2011 Fair Value Australian dollar $ 322 $ (68,715) $ (68,393) $ (7,155,251) Brazilian real - (128,302) (128,302) 1,128,744 British pound sterling 108,400 (2,694) 105,706 8,132,883 Canadian dollar - (478,173) (478,173) (6,592,643) Chinese yuan renminbi - (7,682) (7,682) (22,057,452) Danish krone - - - (503,862) Euro 169,773 (1,940,888) (1,771,115) 79,869,147 Hong Kong dollar - (2) (2) (3,278,863) Indonesian rupiah - (6,811) (6,811) (1,024,140) Japanese yen 2,851 (661,404) (658,553) (15,391,432) Malaysian ringgit - - - (1,335,662) Mexican peso 54,703 - 54,703 (62,199) New Taiwan dollar - - - 832,051 New Zealand dollar - (2,180) (2,180) (2,180) Norwegian krone 513 (280,518) (280,005) 3,161,068 Philippine peso 3 - 3 3 Russian ruble 3,530 - 3,530 3,530 Singapore dollar - (13,471) (13,471) (1,459,253) South African rand 3,930 (19,638) (15,708) 67,899 South Korean won - (14,683) (14,683) (2,090,924) Swedish krona - (7,106) (7,106) (1,756,831) Swiss franc - (191,013) (191,013) (344,707) Turkish lira - (17,915) (17,915) (17,915) Total securities subject to foreign currency risk $ 344,025 $ (3,841,195) $ (3,497,170) $ 30,122,011 Foreign investments denominated in U.S. dollars 3,348,597 (461,947) 2,886,650 (37,613,445) Total foreign investment securities $ 3,692,622 $ (4,303,142) $ (610,520) $ (7,491,434) SURS 2011 21 A COMPONENT UNIT OF THE STATE OF ILLINOIS Notes to the Financial Statements Rights and warrants provide SURS investment managers the right, but not the obligation, to purchase or sell a company’s stock at a fixed price until a specified expiration date. Rights normally are issued with common stock and expire after two to four weeks. Warrants typically are issued together with a bond or preferred stock and may not expire for several years. The fair value of rights and warrants is reported in the investments in the Statement of Plan Net Assets. The gain or loss from rights and warrants is included in the investment income in the Statement of Changes in Plan Net Assets. At June 30, 2011, SURS’ investments in rights and warrants had the following balances: Notional Value 2011 Fair Value 2011 Change in Fair Value Total Rights and Warrants $ 1,543,371 $ 5,096,584 $ 4,747,745 SURS 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 (arbi-trage). Additionally, SURS investment managers use futures contracts to improve the yield or adjust the duration of the fixed income portfolio. 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. Futures contracts are traded on organized exchanges, thereby minimizing the System’s credit risk. The net change in the futures contracts value is settled daily in cash with the exchanges. The cash or securities to fulfill these obligations are held in the investment portfolio. As the market value of the futures contract varies from the original contract price, a gain or loss is paid to or received from the clearing-house and recognized in the Statement of Changes in Plan Net Assets. At June 30, 2011, the notional future balances of SURS’ investments are as follows: Notional Value 2011 Fair Value 2011 Change in Fair Value Equity derivatives futures Long $ 346,631,918 $ 2,919,716 $ 3,715,318 Fixed income derivatives futures Long 1,623,748,822 136,870 67,171 Short (4,666,750) 20,000 (1,703) Total Futures $ 1,965,713,990 $ 3,076,586 $ 3,780,876 SURS investment managers use options in an attempt to add value to the portfolio (collect premiums) or protect (hedge) a position in the portfolio. Financial options are an agreement that gives one party the right, but not the obligation, to buy or sell a specific amount of an asset for a specified price, called the strike price, on or before a specified expiration date. As a writer of financial options, the System receives a premium at the outset of the agree-ment and bears the risk of an unfavorable change in the price of the financial instrument underlying the option. All written financial options are recognized as a liability on the System’s financial statements. As a purchaser of financial options, the System pays a premium at the outset of the agreement and the counterparty bears the risk of an unfavor-able change in the price of the financial instrument underlying the option. At June 30, 2011, SURS’ investments had the following option balances: Notional Value 2011 Fair Value 2011 Change in Fair Value Equity options Call $ - $ - $ 5,288 Put - - 364,250 Fixed income options Call (80,700,000) (241,161) 1,401,631 Put (278,100,000) (2,018,300) (1,961,552) Cash and cash equivalent options Call (3,900,000) (23,494) (15,544) Put (2,034,140) (5,845) 147,987 Swaptions Call (66,400,000) (341,744) 4,127,168 Put (509,751,600) (157,685) (634,789) Total Options $ (940,885,740) $ (2,788,229) $ 3,434,439 FINANCIAL 22 Creating Value SURS fixed income managers invest in swaps and swaptions to manage exposure to credit, currency, inflation and interest rate risks. Swaptions are options on swaps that give the purchaser the right, but not the obligation, to enter into a swap at a specific date in the future. Swap agreements are privately negotiated agreements with a counterparty to exchange or swap investment cash flows, assets, foreign currencies or market-linked returns at specified, future intervals. In connection with swap agreements, securities or cash may be identified as collateral in accordance with the terms of the respective swap agreements to provide assets of value and recourse in the event of default, bankrupt-cy or insolvency. Swaps are marked to market daily based upon values from third party vendors or quotations from market makers to the extent available and any change in value is recorded as an unrealized gain or loss. SURS invest-ment managers have entered into credit default, inflation-linked, total return and interest rate swap agreements. Maturities in Years Notional Value Fair Value Less than 1 to 5 6 to 10 10 to 20 More than Change In 2011 2011 1 year years years years 20 years Fair Value Swaps Credit default $343,209,487 $5,355,677 $ (321,197) $ 1,264,462 $ 3,287,977 $ - $ 1,124,435 - Credit default 73,436,692 1,089,924 16,000 1,065,863 8,061 - - - Credit default 33,205,600 1,156,111 - (168) 1,156,279 - - - Total, Credit Default 449,851,779 7,601,712 (305,197) 2,330,157 4,452,317 - 1,124,435 (3,751,218) Inflation-linked - - - - - - - (90,758) Interest rate 221,642,219 (8,243,756) 613,669 412,500 (3,285,928) (5,066,399) (917,598) - Interest rate 59,891,872 (993,918) 235,262 136,223 (23,344) (1,307,683) (34,376) - Interest rate 1,152,184 46,303 32,122 14,181 - - - - Total, Interest Rate 282,686,275 (9,191,371) 881,053 562,904 (3,309,272) (6,374,082) (951,974) 604,745 Total return 142,438 1,714,382 1,714,382 - - - - 66,936,516 Total swaps $732,680,492 $ 124,723 $ 2,290,238 $2,893,061 $ 1,143,045 $(6,374,082) $ 172,461 $63,699,285 Credit default swap agreements involve one party making a stream of payments (the buyer of protection) to another party (the seller of protection) in exchange for the right to receive a specified return in the event of a default or other credit event for the referenced entity, obligation or index. The seller of protection generally receives from the buyer of protection a fixed rate of income throughout the term of the swap provided there is no credit event. The seller effectively adds leverage to its portfolio as it is subject to investment exposure on the notional amount of the swap. At June 30, 2011, the total notional value of written credit default swaps (selling protection) was $208.0 million and the notional value of purchased credit default swaps (buying protection) was $241.8 million. . Inflation-linked swap agreements involve a stream of fixed payments in exchange for variable payments linked to an inflation index. These swaps can protect against unfavorable changes in inflation expectations and are utilized to transfer inflation risk from one counterparty to another. Total return swap agreements involve a stream of payments based on a set rate, either fixed or variable, by one party while the other party makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains. In total return swaps, the underlying asset (reference asset), usually an equity index, loans, or bonds, is owned by the party receiving the set rate payments. These swaps allow the party receiving the total return to gain exposure and benefit from a reference asset without owning it. Interest rate swap agreements involve the exchange of a set of variable and fixed-rate interest payments linked to a referenced interest rate without an exchange of the underlying principal amount. These agreements are used to limit or manage exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would be avail-able without the swap. Gains and losses on swaps are determined based on market values and are recorded in the Statement of Changes in Plan Net Assets. Derivatives which are exchange traded are not subject to credit risk. No derivatives held are subject to custodial credit risk. The maximum loss that would be recognized at June 30, 2011, if all counter parties fail to perform as con-tracted is $25.5 million. This maximum exposure is reduced by $13.4 million in collateral held and approximately $25.3 million in liabilities, resulting in no net exposure to credit risk. Notes to the Financial Statements SURS 2011 23 A COMPONENT UNIT OF THE STATE OF ILLINOIS Notes to the Financial Statements Securities Lending The SURS Board of Trustees policies permit the System to lend its securities to broker-dealers and other entities with a simultaneous agreement to return the collateral for the same securities in the future. Credit Suisse AG, New York Branch, the System’s third party agent lender, lends securities in exchange for cash collateral at 102% for U.S. securi-ties and 105% for international securities. Cash collateral is shown on the System’s financial statements. Securities lent are included in the Statement of Plan Net Assets. At year end, the System had no credit risk as a result of its securi-ties lending program as the collateral received exceeded the fair value of the securities loaned. The contract with the System’s third party agent lender requires it to indemnify the System if the borrowers fail to return the securities (and if the collateral is inadequate to replace the securities lent) or fail to pay the System for income distributions by the securities’ issuers while the securities are out on loan. All securities loans can be terminated on demand by either the System or the borrower, although the average term of the loans is 1.05 days. Cash collateral is invested in the System’s short-term investment pool, which at year end has a weighted average final maturity of 123.48 days and a weighted average reset of 24.85 days, and with a fair value of $1,481.4 million. Collateral as of June 30, 2011 ($ millions) Securities on loan as of June 30, 2011 $ 1,631.1 Fair value of cash collateral invested $ 1,516.2 Fair value of collateral received $ 1,516.0 Change in fair value* $ 0.2 *Included in net appreciation in fair value of investments in Statement of Changes in Plan Net Assets. Self-Managed Plan The SMP participants have the ability to invest their account balances in 31 mutual and variable annuity funds. These funds are offered by two providers: Fidelity Investments and Teachers Insurance and Annuity Association- College Retirement Equities Fund (TIAA-CREF). As of June 30, 2011, the SMP had investments of $956,966,027. A detailed schedule (unaudited) of the funds and balances at June 30, 2011 is located in the Investment Section of The Comprehensive Annual Financial Report. IV. Capital Assets Capital assets activity for the year ended June 30, 2011 was as follows: Beginning Balance Additions Disposals Ending Balance Land $ 531,834 $ – $ – $ 531,834 Office building 6,896,790 - – 6,896,790 Information system equipment & software 14,588,456 206,473 367,016 14,427,913 Furniture and fixtures 2,121,368 2,740 – 2,124,108 24,138,448 209,213 367,016 23,980,645 Less accumulated depreciation: Office building 2,142,290 179,400 – 2,321,690 Information system equipment and software 13,559,432 378,926 367,016 13,571,342 Furniture and fixtures 2,027,813 56,621 – 2,084,434 17,729,535 614,947 367,016 17,977,466 $ 6,408,913 $ (405,734) $ – $ 6,003,179 The average estimated useful lives for depreciable capital assets are as follows: Office building 40 years Information systems equipment 3 years Information systems software 10 years Furniture and fixtures 3 years FINANCIAL 24 Creating Value Notes to the Financial Statements V. Compensated Absences The System is obligated to pay employees at termination for unused vacation and sick time. The maximum time for which any individual may be paid is 448 hours of vacation and one-half of unused sick time earned between January 1, 1984 and December 31, 1997. No sick time earned after December 31, 1997 will be compensable at termination. At June 30, 2011, the System had a liability of $1,025,840 for compensated absences, based upon the vesting method used for calculation of sick leave payable. The liability is included in the administrative expenses payable on the Statement of Plan Net Assets, and the annual increase or decrease in liability is reflected in the financial statements as an increase or decrease in salary expense. Compensated absences payable for the year ended June 30, 2011 was as follows: Beginning Additions Reductions Ending Estimate Balance Balance Amount Due Within One Year Compensated absences payable $ 1,099,057 $ 751,698 $ 824,915 $ 1,025,840 $ 76,000 VI. Insurance Coverage The System is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The System has minimized the risk of loss through private insurance carriers for commercial, business owners, and automobile policies. The deductible for this insurance cover-age ranges from $250 to $500 per occurrence. There has been no significant reduction of insurance coverage from the prior year. The System has not had any insurance claims filed or paid in the past five fiscal years. VII. Post-Employment Benefits 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 self-insurance plan and insurance contracts currently in force. Annuitants may be required to contribute toward 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 Universities Retirement System do not contribute toward 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; therefore, those annuitants with twenty or more years of credited service do not have to contribute toward 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 $5,000. The State pays the State Universities Retirement System’s portion of employer costs for the benefits provided. The total cost of the State’s portion of health, dental, vision, and life insurance benefits of all members, including post-employment health, dental, vision, and life insurance benefits, is recognized as an expenditure by the State in the Illinois Comprehensive Annual Financial Report. The State finances the costs on a pay-as-you-go basis. The total costs incurred for health, dental, vision, and life insurance benefits are not separated by department or component unit for annuitants and their dependents nor active employees and their dependents. A summary of post-employment benefit provisions, changes in benefit provisions, employee eligibility requirements including eligibility for vesting, and the authority under which benefit provisions are established are included as an integral part of the financial statements of the Department of Healthcare and Family Services. A copy of the financial statements of the Department of Healthcare and Family Services may be obtained by writing to the Department of Healthcare and Family Services, 201 South Grand Ave., Springfield, Illinois, 62763. SURS 2011 25 A COMPONENT UNIT OF THE STATE OF ILLINOIS Required Supplementary Information Defined Benefit Plan Schedule of Funding Progress ($ millions) Unfunded Actuarial Accrued Accrued Fiscal Value of Actuarial Actuarial Funding UAAL as % Year** Assets (A) Liabilities Liabilities Ratio Payroll of Payroll 2002 $ 9,814.7 $ 16,654.0 $ 6,839.3 58.9% $ 2,607.2 262.3% 2003 9,714.5 18,025.0 8,310.5 53.9% 2,763.4 300.7% 2004 12,586.3 19,078.6 6,492.3 66.0% 2,814.1 230.7% 2005 13,350.3 20,349.9 6,999.6 65.6% 2,939.1 238.1% 2006 14,175.1 21,688.9 7,513.8 65.4% 3,054.1 246.0% 2007 15,985.7 23,362.1 7,376.4 68.4% 3,181.0 231.9% 2008 14,586.3 24,917.7 10,331.4 58.5% 3,303.2 312.8% 2009 14,282.0 26,316.2 12,034.2 54.3% 3,463.9 347.4% 2010 13,966.6 30,120.4 16,153.8 46.4% 3,491.1 462.7% 2011 13,945.7 31,514.3 17,568.6 44.3% 3,460.8 507.6% (A) Per public Act 96-0043, beginning fiscal year 2009, measures of financial soundness will be calculated using an actuarial value of assets based on a smoothed investment income rate. Investment income in excess or shortfall of the expected 7.75% rate on fair value is smoothed over a five-year period with 20% of a year’s excess or shortfall being recognized each year beginning with the current year. Schedule of Employer Contributions ($ millions) Fiscal** Member Net ER/State Actual ER/State State Contributions Total Contributions Year Total ARC* Contributions ARC Contribution as % of Net ARC as % of Total ARC 2002 $ 686.9 $ 250.0 $ 436.9 $ 256.1 58.6% 73.7% 2003 843.8 246.3 597.5 285.3 47.7% 63.0% 2004 934.8 243.8 691.0 1,757.5 254.4% 214.1% 2005 859.7 251.9 607.8 285.4 47.0% 62.5% 2006 914.9 252.9 662.0 180.0 27.2% 47.3% 2007 968.3 262.4 705.9 261.1 37.0% 54.1% 2008 971.6 264.1 707.5 344.9 48.8% 62.7% 2009 1,147.3 273.3 874.0 451.6 51.7% 63.2% 2010 1,278.3 275.0 1,003.3 696.6 69.4% 76.0% 2011 1,519.2 260.2 1,259.0 773.6 61.4% 68.0% * Annual Required Contribution as defined in GASB Statement No. 25, “Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans.” ** The source of these schedules is the annual actuarial valuation which is performed as of June 30 for each fiscal year listed. FINANCIAL 26 Creating Value Supporting Schedules Defined Benefit Plan Summary Schedule of Administrative Expenses For the Years Ended June 30, 2011 and 2010 2011 2010 Personnel Services Salary and wages $ 6,467,302 $ 6,343,007 Retirement contributions 747,959 598,565 Insurance and payroll taxes 1,717,639 1,573,896 8,932,900 8,515,468 Professional Services Computer services 545,026 527,460 Medical consultation 5,675 17,706 Technical and actuarial 590,438 477,612 Legal services 249,763 324,778 1,390,902 1,347,556 Communications Postage 311,354 260,939 Printing and copying 95,122 84,785 Telephone 91,556 94,599 498,032 440,323 Other Services Equipment repairs, rental and maintenance 94,541 76,788 Building operations and maintenance 265,199 228,966 Surety bonds and insurance 203,210 203,873 Memberships and subscriptions 40,394 37,532 Transportation and travel 98,185 147,142 Education 21,077 30,804 Supplies 114,399 107,580 837,005 832,685 Depreciation and amortization 614,947 972,149 Total administrative expenses - DB Plan $ 12,273,786 $ 12,108,181 Self Managed Plan Salary and wages 225,655 229,824 Retirement contributions 22,337 21,904 Insurance and payroll taxes 60,166 55,705 Technical and actuarial 6,000 8,000 Postage 19,788 20,564 Transportation and travel 1,283 2,438 Printing 9,029 8,968 Total administrative expenses - SMP $ 344,258 $ 347,403 Total administrative expenses $ 12,618,044 $ 12,455,584 SURS 2011 27 A COMPONENT UNIT OF THE STATE OF ILLINOIS Supporting Schedules Defined Benefit Plan Summary Schedule of Consultant Payments For the Years Ended June 30, 2011 and 2010 2011 2010 Defined benefit plan Technical and actuarial services: Aurico $ 562 $ - Berwyn Group 4,150 4,025 Centurion - 869 Corley Photography - 865 Economic Research 4,989 4,989 EFL Associates 15,000 80,283 Alice Faron 3,560 - Gabriel, Roeder, Smith & Co. 269,755 147,161 GII of Illinois 9,000 19,500 Governmental Consulting Solutions 48,000 36,000 ICS/Merrill 4,395 920 INFRE 308 308 900 Janet Jones & Associates 30,000 - McLagan 2,500 2,500 Meador Investigations 830 1,745 Miscellaneous 1,598 1,140 Morrill and Associates 24,000 48,000 National Student Clearinghouse 425 - Navigant Consulting 14,129 - Open position advertising/Recruitment 21,305 20,811 Pen-Cin Partners 300 - Reed Group - 1,185 Resolutions EAP 125 - Smith Investigations 305 225 Spectrum 1,202 - The Northern Trust 91,043 86,150 University of Illinois Business Consulting 16,000 4,500 VIA 32 - Woolard Marketing Consultants 26,925 15,844 590,438 477,612 Legal services: Areawide Reporting Services 850 3,195 Burke, Burns & Pinelli 149,512 151,998 Investors Responsibility Support Services 25,000 25,000 Mayer Brown LLP 52,043 99,141 Thomas, Mamer & Haughey 8,542 22,331 Winters, Featherstun, et al 13,816 23,113 249,763 324,778 Self-managed plan Technical and actuarial services: Callan Associates 2,000 - Ennis, Knupp Investment Consulting 4,000 8,000 6,000 8,000 Total consultant payments $ 846,201 $ 810,390 FINANCIAL 28 Creating Value Defined Benefit Plan Summary Schedule of Investment Fees, Commissions, and Administrative Expenses For the Years Ended June 30, 2011 and 2010 2011 2010 Master trustee & custodian The No rthern Trust Company $ 1,032,120 $ 1,058,006 Investment manager Aberdeen Asset Management 1,553,530 1,238,663 Adams Street Partners 4,351,150 4,479,557 Alinda Capital Partners 1,160,940 1,385,616 Angelo Gordon GECC 600,000 803,056 Ativo Capital Management 61,630 30,164 BlackRock Institutional Trust (formerly Barclays Global Investors) 3,060,061 387,638 BlackRock Financial Management 323,883 4,192,526 Buford, Dickson, Harper & Sparrow 47,537 34,438 Calamos Advisors 943,676 729,877 Capital Guardian Trust Company - 488,562 Channing Capital Management 119,374 107,227 Chicago Equity Partners 307,550 - Dune Capital Management 542,587 1,309,574 EARNEST Partners 1,957 - Fiduciary Management Associate 27,101 - Garcia, Hamilton & Associates 63,104 59,511 GlobeFlex Capital, L.P. 652,620 243,182 Herndon Capital Management 298,386 173,979 Holland Capital Management 113,920 96,715 ING Clarion Real Estate Securities 1,084,232 929,511 Jacobs Levy Equity Management 1,135,456 771,844 LM Capital Group 66,506 - Lombardia Capital Partners 274,009 450,535 Longfellow Investment Management 63,398 12,526 Macquarie Capital 450,000 1,351,788 Martin Currie, Inc. 1,265,864 1,520,079 Metropolitan West Asset Management 1,379,193 1,180,690 Mondrian Investment Partners 424,187 480,394 Muller and Monroe 350,347 405,806 NCM Capital Management 161,602 175,739 Neuberger Berman 298,748 - New Century Advisors 136,765 28,648 Northern Trust Investments 156,429 152,702 Oaktree Capital Management 32,683 2,149 Pacific Investment Management Company 12,875,085 14,708,190 Pantheon Ventures 2,655,664 2,575,329 Paradigm Asset Management (6,337) 58,268 Payden & Rygel 782,742 628,276 Piedmont Investment Advisors 133,636 114,496 Profit Investment Management 191,520 197,535 Progress Investment Management Company 1,664,419 1,279,161 Pugh Capital Management 115,974 88,699 Pyramis Global Advisors Trust Company 449,815 344,946 RhumbLine Advisers 180,752 162,732 RLJ Western Asset Management 250,620 162,971 RREEF 2,685,642 1,676,528 Smith, Graham & Company 91,912 86,556 State Street Global Advisors 55,149 - Strategic Global Advisors 139,702 117,917 T. Rowe Price 2,238,212 1,687,422 Taplin, Canida & Habacht 93,556 65,511 UBS Realty Investors 1,438,125 1,193,020 Wellington Management Company 750,951 800,604 Western Asset Management 529,752 1,508,041 48,825,316 50,678,898 Investment consultant, measurement & counsel Callan Associates, Inc. 151,000 - EnnisKnupp + Associates, Inc. 158,856 383,500 Burk, Burns, & Pinelli, Ltd. 23,697 - Mayer, Brown, Rowe & Maw 64,473 248,751 Bryan Cave - 25,000 398,026 657,251 Investment administrative expenses Personnel 1,079,210 903,288 Resources, board and travel 160,277 131,688 Performance measurement and database 79,620 95,350 1,319,107 1,130,326 Total investment expenses $ 51,574,569 $ 53,524,481 Supporting Schedules SURS 2011 29 A COMPONENT UNIT OF THE STATE OF ILLINOIS Supporting Schedules Beginning cash and short-term investments balance $ 758.4 Receipts Member contributions $ 263.7 Employer contributions 773.6 Investment income (loss) 2,850.7 Investments redeemed 61,647.2 Total receipts $ 65,535.2 Disbursements Benefit payments $ 1,611.1 Administrative expenses 10.8 Investment expenses 51.6 Fixed asset purchases .2 Refunds 58.9 SMP balance transfers 1.0 Investments purchased 64,054.5 Total disbursements $ 65,788.1 Ending cash and short-term investments balance $ 505.5 Defined Benefit Plan Summary Schedule of Cash Receipts and Disbursements For the Year Ended June 30, 2011 ($ millions) 30 Independent Auditors’ Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards Honorable William G. Holland Auditor General, State of Illinois Springfield, Illinois Board of Trustees State Universities Retirement System Springfield, Illinois As Special Assistant Auditors for the Auditor General, we have audited the Statement of Plan Net Assets and Statement of Changes in Plan Net Assets of the State Universities Retirement System of Illinois (System), as of and for the year ended June 30, 2011, and have issued our report thereon dated December 12, 2011. We conducted our audit 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. 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 financial statements, and not for the purpose of expressing an opinion on the effectiveness of the System’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the System’s internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements 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. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in the 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 that we consider to be material weaknesses, as defined above. 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 of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. This report is intended solely for the information and use of the Auditor General, the General Assembly, the Legislative Audit Commission, the Governor, System management, and Board of Trustees, and is not intended to be and should not be used by anyone other than these specified parties. Schaumburg, Illinois December 12, 2011

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