For summary reporting of asset allocation, the bureau combines the Judges, Public School Employees, State Employees, and State Police Retirement Systems into one unit called the State of Michigan Retirement Systems (SMRS). The bureau compares investment performance with a group of similar state retirement systems.

At September 30, 1994, the market value of the investments for the retirement systems and the common cash fund was approximately $27.4 billion including $916 million, or 3.3% of their holdings, in derivatives. As of September 30, 1994, the bureau had 75 employees. Total operating expenses for fiscal year 1993-94 were approximately $6 million which were from appropriated funds.

Conclusion: As of September 30, 1994, the rate of return on SMRS assets was approximately 1.4% below the median rate of return of similar state pension funds for the last five completed fiscal years. However, it should be noted that the rates of return for the one, two, and three years ended September 30, 1994 had improved to the point where they equaled or exceeded the median of the other state pension plans.

SMRS rates of return for its two largest investment categories, equities and fixed income, were below the rates of return for comparable state and public pension plans for the last five completed fiscal years. The bureau stated that 4 factors negatively impacted the rate of return: (1) the South African divestiture restrictions had a large impact in fiscal years 1989-90 and 1990-91, (2) value investing was out of favor, (3) SMRS had a larger percentage of cash equivalent investments than its peer group, and (4) poor real estate returns.

Audit Objective: To assess whether the bureau has developed meaningful overall performance indicators and maintained accurate data to measure the performance of the divisions within the bureau and the individual analysts.

Conclusion: We concluded that the bureau was reasonably effective in developing meaningful performance goals, objectives, and benchmarks for measuring and evaluating investment performance. We also concluded that the bureau maintained accurate data for measuring performance within the bureau. However, we identified deficiencies in the bureau's measurement, evaluation, and monitoring of investment performance. The bureau established specific performance benchmarks that were based on average rather than superior performance. Also, the bureau did not consistently develop measurable goals and objectives for all levels within the organization. In addition, the bureau did not have a system to document the evaluation and monitoring of its performance. (Finding 1)

Audit Objective: To assess the efficiency of the bureau's administration of the investment function.

Conclusion: We concluded that the bureau was efficiently administering the investment function. We did, however, note that the department did not periodically evaluate whether it was using the most cost-effective method for paying for banking services. The department used the compensating balance method rather than the direct charge method, which could result in increased cost in a low interest rate environment (Finding 2). Also, the department did not obtain its central banking services through a competitive bid process (Finding 3). In addition, the department had not developed formal operating procedures for all investment activities (Finding 4).

Our audit methodology included a review of agency records, interviews with agency staff, and comparisons of investment performance data compiled by other agencies.

The department complied with 7 of our 9 prior audit recommendations.