A R epoRt to the M ontAnA L egisLAtuRe F -c A inAnciAL oMpLiAnce udit Public Employees’ Retirement Board For the Fiscal Year Ended June 30, 2012 F 2013 ebRuARy L A egisLAtive udit d ivision 12-08A Financial-Compliance Audits Legislative Audit Financial-compliance audits are conducted by the Legislative Committee Audit Division to determine whether an agency’s financial Representatives operations are properly conducted, the financial reports are Randy Brodehl presented fairly, and the agency has complied with applicable laws [email protected] and regulations. In performing the audit work, the audit staff uses Virginia Court standards set forth by the American Institute of Certified Public [email protected] Accountants and the United States Government Accountability Mike Cuffe Office. Financial-compliance audit staff members hold degrees [email protected] with an emphasis in accounting. Most staff members hold Mary McNally Certified Public Accountant (CPA) licenses. [email protected] Ryan Osmundson Government Auditing Standards, the Single Audit Act [email protected] Amendments of 1996 and OMB Circular A-133 require the J.P. Pomnichowski auditor to issue certain financial, internal control, and compliance [email protected] reports. This individual agency audit report is not intended to comply with these reporting requirements and is therefore Senators not intended for distribution to federal grantor agencies. The Dee Brown Legislative Audit Division issues a statewide biennial Single Audit [email protected] Report which complies with the above reporting requirements. Taylor Brown The Single Audit Report for the two fiscal years ended June 30, [email protected] 2011, was issued March 29, 2012. The Single Audit Report for the Greg Jergeson two fiscal years ended June 30, 2013, will be issued by March 31, [email protected] 2014. Copies of the Single Audit Report can be obtained by Cliff Larsen contacting: [email protected] Fredrick (Eric) Moore Single Audit Coordinator Legislative Audit Division [email protected] Office of Budget and Program Planning Room 160, State Capitol Mitch Tropila, Chair Room 277, State Capitol P.O. Box 201705 [email protected] P.O. Box 200802 Helena, MT 59620-1705 Helena, MT 59620-0802 Members serve until a Audit Staff member’s legislative term Brenda Kedish Paul J. O’Loughlin of office ends or until a Delsi Plummer successor is appointed, whichever occurs first. §5-13-202(2), MCA Fraud Hotline Reports can be found in electronic format at: (Statewide) http://leg.mt.gov/audit 1-800-222-4446 (in Helena) 444-4446 [email protected] LEGISLATIVE AUDIT DIVISION Tori Hunthausen, Legislative Auditor Deputy Legislative Auditors Deborah F. Butler, Legal Counsel Cindy Jorgenson Angus Maciver February 2013 The Legislative Audit Committee of the Montana State Legislature: This is our financial-compliance audit report on the Public Employees’ Retirement Board (PERB), a component unit of the state of Montana, for the fiscal year ended June 30, 2012. There are two recommendations in this report related to the actuarial soundness of four systems and not following established internal controls for the Section 457 deferred compensation plan. PERB issues a Comprehensive Annual Financial Report (CAFR). Copies of the PERB’s CAFR for fiscal year 2012 can be obtained from the Montana Public Employee Retirement Administration. The CAFR contains additional background, statistical, and actuarial information which may be of interest to legislators or the public. We thank the executive director and her staff for their assistance and cooperation throughout the audit. The PERB response to the audit recommendations begins on page B-1 at the end of the audit report. Respectfully submitted, /s/ Tori Hunthausen Tori Hunthausen, CPA Legislative Auditor Room 160 • State Capitol Building • PO Box 201705 • Helena, MT • 59620-1705 Phone (406) 444-3122 • FAX (406) 444-9784 • E-Mail [email protected] i Table of Contents Figures and Tables .....................................................................................................................ii Appointed and Administrative Officials ..................................................................................iii Report Summary ...................................................................................................................S-1 CHAPTER I – INTRODUCTION ���������������������������������������������������������������������������������������������������������������1 Audit Scope ...............................................................................................................................1 Internal Control Deficiency ......................................................................................................1 Background ...............................................................................................................................2 Defined Benefit Plans .......................................................................................................2 Defined Contribution Plans ..............................................................................................2 Prior Audit Recommendation ...........................................................................................3 CHAPTER II – FINDINGS AND RECOMMENDATIONS ����������������������������������������������������������������������5 Four Retirement Systems Actuarially Unsound ........................................................................5 Incomplete Reconciliations .......................................................................................................6 INDEPENDENT AUDITOR’S REPORT Independent Auditor’s Report ...............................................................................................A-1 PUBLIC EMPLOYEES’ RETIREMENT BOARD MANAGEMENT’S DISCUSSION AND ANALYSIS, FINANCIAL STATEMENTS, NOTES, REQUIRED SUPPLEMENTARY INFORMATION AND SUPPLEMENTARY INFORMATION Management’s Discussion and Analysis ................................................................................A-5 Statement of Fiduciary Net Assets - Pension Trust Funds as of June 30, 2012 ............................................................................A-24 Statement of Changes in Fiduciary Net Assets - Pension Trust Funds for the Year Ended June 30, 2012 ......................................................A-26 Notes to the Financial Statements for the Fiscal Year Ended June 30, 2012..............................................................................A-28 Schedule of Funding Progress .............................................................................................A-70 Schedule of Funding Progress for OPEB .............................................................................A-72 Notes to the Required Supplementary Information for OPEB ...........................................A-73 Schedule of Employer Contributions & Other Contributing Entities ..........................................................................................................A-74 Notes to the Required Supplementary Information ............................................................A-76 Schedule of Administrative Expenses Year Ended June 30, 2012 ...................................................................................................A-79 Schedule of Investment Expenses Year Ended June 30, 2012 ...................................................................................................A-80 Schedule of Professional/Consultant Fees Year Ended June 30, 2012 ...................................................................................................A-81 Detail of Fiduciary Net Assets (PERS-DBRP and PERS-DBEd) as of June 30, 2012 ..............................................................................................................A-82 Detail of Changes in Fiduciary Net Assets (PERS-DBRP and PERS-DBEd) for the Fiscal Year Ended June 30, 2012..............................................................................A-83 12-08A ii Montana Legislative Audit Division Detail of Fiduciary Net Assets (PERS-DCRP and PERS-DCEd) and PERS-DC Disability as of June 30, 2012 .....................................................................A-84 Detail of Changes in Fiduciary Net Assets (PERS-DCRP and PERS-DCEd) and PERS-DC Disability) for the Fiscal Year Ended June 30, 2012 ...................................A-85 BOARD RESPONSE Public Employees’ Retirement Board ...................................................................................B-1 iii Figures and Tables Tables Table 1 Summary of Deficiency in Internal Control ..........................................................................1 12-08A iv Montana Legislative Audit Division Appointed and Administrative Officials Term Expires Public Employees’ Scott Moore, President Miles City 3/31/15 Retirement Board Terrence Smith, Vice President Bozeman 3/31/14 Darcy Halpin Belgrade 3/31/13 Bob Bugni Helena 3/31/14 Dianna Porter Butte 3/31/13 Melissa Strecker Missoula 3/31/17 Timm Twardoski Helena 3/31/16 Administrative Officials Roxanne Minnehan, Executive Director Patricia Davis, Member Services Bureau Chief Barbara Quinn, Fiscal Services Bureau Chief Melanie Symons, Chief Legal Counsel Hollie Koehler, Internal Auditor June Dosier, Information Systems Manager For additional information concerning the Montana Public Employees’ Retirement Board, contact: Roxanne Minnehan, Executive Director 100 North Park Avenue, Suite 200 P.O. Box 200131 Helena, MT 59620-0131 (406) 444-3154 e-mail: [email protected] S-1 M L a d ontana egisLative udit ivision F -c a inanciaL oMpLiance udit Public Employees’ Retirement Board For the Fiscal Year Ended June 30, 2012 February 2013 12-08a report suMMary There are eight defined benefit plans and two defined contribution plans administered by PERB. As noted in the results section below, four of the defined benefit plans are actuarially unsound at June 30, 2012. For fiscal year 2012, PERB reported approximately 36,497 active members and 22,231 members receiving retirement or disability payments. In the 457 deferred compensation plan, PERB reported approximately 8,156 participating members of which 4,584 were actively contributing in fiscal year 2012. Context Results The PERB is an independent, seven-member This report contains two recommendations. board, appointed by the Governor to One recommendation relates to the actuarial administer ten retirement systems consisting soundness of four defined benefit plans. The of eight defined benefit plans and two defined Public Employees’ Retirement System Defined contribution plans accounted for in pension Benefit Retirement Plan, Sheriffs’ Retirement trust funds. The defined benefit plans include System, Game Wardens’ and Peace Officers’ the Public Employees’ Retirement System- Retirement System, and Highway Patrol Defined Benefit Retirement Plan, Judges’ Officers’ Retirement System are not actuarially Retirement System, Highway Patrol Officers’ sound. The Montana Constitution requires Retirement System, Sheriffs’ Retirement public retirement systems to be funded on an System, Game Wardens’ and Peace Officers’ actuarially sound basis. Retirement System, Municipal Police Officers’ Retirement System, Firefighters’ Unified The second recommendation relates to Retirement System, and the Volunteer incomplete reconciliations in the 457 deferred Firefighters’ Compensation Act. The two compensation plan that resulted in an defined contribution plans are the Public $18 million misstatement on the state Employees’ Retirement System-Defined accounting records at fiscal year-end 2012. Contribution Retirement Plan and the Section 457 Deferred Compensation Plan. Recommendation Concurrence Fiscal year 2012 additions to plan net assets Concur 2 were $347.5 million in the defined benefit plans and $47.4 million in the defined contribution Partially Concur 0 plans. Fiscal year 2012 deductions to plan Do Not Concur 0 net assets were $333.8 million in the defined benefit plans and $22.0 million in the defined Source: Agency audit response included in final report. contribution plans. For a complete copy of the report (12-08A) or for further information, contact the Legislative Audit Division at 406-444-3122; e-mail to lad@mt�gov; or check the web site at http://leg�mt�gov/audit Report Fraud, Waste, and Abuse to the Legislative Auditor’s FRAUD HOTLINE Call toll-free 1-800-222-4446, or e-mail ladhotline@mt�gov�