Comprehensive annual financial report / Elected Officials' Retirement Plan

              ELECTED OFFICIALS’
RETIREMENT PLAN
31st COMPREHENSIVE ANNUAL FINANCIAL REPORT
A PENSION TRUST FUND OF THE STATE OF ARIZONA
FOR THE FISCAL YEAR ENDED JUNE 30, 2012
VISION
VALUES
MISSION
 Invest, secure and manage responsibly the retirement funds of its members in accordance with all
legal, investment and financial requirements and in a manner consistent with the quality to which its
members have become accustomed.
 To be a low cost, highly personalized quality service provider of funds management and benefit ser-vices.
 To manage long-term investments with the goal of consistently outperforming over time the com-posite
weighted market return benchmark net of all investment related costs so as to assure the fi-nancial
integrity of the funds and the security of the benefits these funds provide.
Do what is best for our members and financial health and integrity of the System.
 Be proactive.
 Committed to high quality, uniform, sustainable service.
 Innovative and cost effective in Plan administration and services.
Use best practices in HR management.
Our Vision, Mission & Values
Elected Officials’
Retirement Plan
A Pension Trust Fund of the State of Arizona
Thirty-First
Comprehensive Annual Financial Report
For the Fiscal Year Ended
June 30, 2012
Prepared by the Staff of PSPRS
Public Safety Personnel Retirement System
3010 E. Camelback Road, Suite 200
Phoenix, AZ 85016
Phone (602)255-5575 Fax (602)255-5572
www.psprs.com
TABLE OF CONTENTS
INTRODUCTORY SECTION
Certificate of Achievement 6
Board of Trustees Transmittal Letter 7
Letter from the Administrator 10
Board of Trustees 14
Executive Staff and Organizational Chart 15
Professional Advisors 16
FINANCIAL SECTION
Independent Auditor Report 18
Management Discussion and Analysis 20
Basic Financial Statements
Statement of Plan Net Assets 24
Statement of Changes in Plan Net Assets 25
Notes to the Financial Statements 26
Required Supplementary Information
Schedule of Funding Progress 37
Schedule of Employer Contributions 37
Notes to the Required Supplementary Information 39
Supporting Schedules Information
Schedule of Changes in Reserve Balances 40
Schedule of Receipts and Disbursements 41
Schedule of Administrative Expenses 42
Schedule of Consultant Expenses 43
Other Supplementary Information
Agency Fund Statement of Changes in Assets and Liabilities 44
Agency Fund Schedule of Funding Progress 44
INVESTMENT SECTION
Chief Investment Officer’s Letter 46
Fund Investment Objectives 48
Investment Performance
Asset Allocation 48
Annualized Rates of Return, Benchmark and Indices 49
Top 10 Investment Holdings 50
Summary of Changes in Investment Portfolio 50
Schedule of Commissions Paid to Brokers 50
TABLE OF CONTENTS (continued)
Equity Portfolio 53
Fixed Income Portfolio 54
Alternative Investments Portfolio
Credit Opportunities Portfolio 56
Private Equity Portfolio 57
Real Assets Portfolio 59
Real Estate Portfolio 60
GTAA Securities Portfolio 60
ACTUARIAL SECTION
Actuary Certification Letter 62
Actuarial Balance Sheet 65
Summary of Valuation Assumptions 66
Solvency Test 68
Summary of Active Member Data 69
Summary of Retirees and Inactive Members 70
Schedule of Experience Gain/Loss 71
STATISTICAL SECTION
Statistical Summary 74
Changes in Plan Net Assets - Last Ten Fiscal Years 75
Schedule of Revenue by Source - Last Ten Fiscal Years 76
Schedule of Expenses by Type - Last Ten Fiscal Years 76
Deductions from Plan Net Assets for Benefits and Refunds by Type - Last Ten Fiscal Years 76
Valuation Assets vs. Pension Liabilities - Last Ten Fiscal Years 77
Contribution Rates - Last Ten Fiscal Years 79
Distribution of Benefit Recipients by Location 80
System Membership - Last Ten Fiscal Years 80
Principal Participating Employers 81
Summary of Benefit Increases - Last Ten Fiscal Years 81
Summary of Growth of the System - Last Ten Fiscal Years 82
Benefits Payable by Benefit Type 82
Average Monthly Benefits and Membership - Last Ten Fiscal Years 83
Participating Employers 84
Absolute Return Portfolio 59
THIS PAGE INTENTIONALLY BLANK
INTRODUCTORY SECTION
Certificate of Achievement 6
Board of Trustees Transmittal Letter 7
Letter from the Administrator 10
Board of Trustees 14
Executive Staff and Organizational Chart 15
Professional Advisors 16
INTRODUCTORY SECTION
EORP Comprehensive Annual Financial Report
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7
EORP Comprehensive Annual Financial Report
INTRODUCTORY SECTION
PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM
Brian P. Tobin, Chairman CORRECTIONS OFFICER RETIREMENT PLAN
Gregory Ferguson, Vice Chair ELECTED OFFICIALS' RETIREMENT PLAN
Jeff Allen McHenry, Trustee 3010 East Camelback Road, Suite 200
Richard J. Petrenka, Trustee Phoenix, Arizona 85016-4416 James M. Hacking
Randie A. Stein, Trustee www.psprs.com Administrator
Lauren Kingry, Trustee TELEPHONE: (602) 255-5575 Ryan Parham Jared A. Smout
William C. Davis, Trustee FAX: (602) 255-5572 Chief Investment Officer Deputy Administrator
November 20, 2012
The Honorable Janice K. Brewer
Governor of the State of Arizona
Executive Tower
1700 W. Washington
Phoenix, Arizona 85007
Dear Governor Brewer:
The Board of Trustees of the Public Safety Personnel Retirement System (PSPRS) respectfully submits the Thirty-first Comprehensive Annual Fi-nancial
Report (CAFR) for the Elected Officials Retirement Plan (EORP) for the fiscal year ended June 30, 2012 (FY’12), in accordance with the pro-visions
of A.R.S. Section 38-803.
The EORP’s Funding Status
As of fiscal year-end, the financial status of the EORP, as reflected in its funding ratio, decreased from 62.1% at June 30, 2011 to 58.4% at June 30,
2012. This decrease continues the funding ratio erosion that resumed three years ago following a modest improvement in FY’08 that interrupted
seven consecutive years of funding status decline.
The continuing funding ratio decline that began in FY’02 is due primarily to the asset value losses and negative rates of return that the Plan ex-perienced
in FY’01 and FY’02 ($113.2 million) coupled with the additional losses and negative rates of return the Plan experienced in FY’08 and
FY’09 and now again in FY’12. The losses in FY’01 and FY’02 were largely the result of a lack of investment diversification and an over-concentration
in high technology and telecommunication stocks and bonds at a time when the “tech-telecom bubble” was deflating. The FY’08
and FY’09 losses were the result of the impact on the financial markets of the collapse of the U.S. housing market and the intense global recession
that followed.
The FY’12 actuarial loss due to investment return that reflects the Plan’s -0.79% return (net of fees) was the result of two factors: first, weakness
and volatility in the financial markets – especially the international equity markets – that resulted from weakness in the U.S. and global econo-mies;
and, second, an actual rate of return that was significantly less than the Plan’s benchmark return (2.89%) for the fiscal year.
A second factor that has also contributed significantly to the funding erosion was the downward revision in the Plan’s actuarial assumption for
investment return. (That assumption was reduced by one-half of 1% from 8.5% in FY’10 to 8.0% in FY’12 and will be reduced further to 7.8% for
FY’13.) Downward revision in this assumption reduces the projected rate of growth in Plan assets relative to the rate of growth in liability for
benefits and that, in turn, diminishes the Plan’s funding ratio (and adds to the employer contribution requirement).
It should be noted that the Plan’s funding ratio decreased during fiscal years 2010 and 2011 even though the Plan had strong rates of return in
those years (13.47% in FY’10 and 17.37% in FY’11). This is because the EORP Plan uses a seven year averaging process (“smoothing”) to deter-mine
the fiscal year-end actuarial value of assets. Under this methodology, only one-seventh of any fiscal year’s investment gain or loss is re-flected
in that year’s results. The remaining six-sevenths are rolled forward and reflected in the results over the next succeeding six fiscal years.
So, although only one-seventh of the -0.79% return that the EORP experienced in FY’12 is reflected in this fiscal year’s results, those results also
reflect one-seventh portions of the -7.59% and -17.75% returns that the Plan experienced during FY’08 and FY’09 respectively. Because the re-mainder
of the FY’08, FY’09 and FY’12 investment losses will be factored into the EORP’s funding ratios over the next several fiscal years, the fore-cast
is that the Plan’s funding ratio will continue to deteriorate, unless this trend is offset by several consecutive years of much better-than-expected
rates of return and/or a significant infusion of additional revenues from sources other than member and employer contributions.
INTRODUCTORY SECTION
EORP Comprehensive Annual Financial Report
8
How to move the Plan back to an annual pattern of steadily improving funding ratios remains the principal challenge facing the PSPRS System and
its Board of Trustees. Although the System has no control or influence over the performance of the U.S. and global financial markets and the world
economies, the Board has taken the initiative to fully diversify the System’s financial market exposures to reduce overall risk and volatility. Yet,
despite this, the EORP’s actual FY’12 investment return of -0.79% was 3.68% (368 basis points) less than the Plan’s FY’12 benchmark return of
2.89%. In response, and understanding that relative underperformance can and should be addressed, the Board, in conjunction with the System’s
staff and investment consultants, has taken steps to assure that this problem is remedied (See FY’12 Investment Results below) going forward.
The FY’08, FY’09 and FY’12 investment losses have taken, and will continue to take, their toll on the financial status of the EORP. However, it
should be noted that the legal challenges to the 2011 statutory changes relating to the formula for increasing benefits after retirement (i.e., the
Plan’s COLA formula), would, if successful, further undermine the Plan’s finding status. Currently, there are four legal challenges to the COLA
changes pending in the state courts. The Board, through its attorney, is defending the legislative changes and has directed the System’s staff to
approach the Governor’s Office, the State Attorney General and Legislative leadership regarding intervening directly in these lawsuits to resist
these challenges.
Before the changes made by SB 1609, the EORP statutes required that in any year in which the Plan generated an investment return in excess of
9%, one-half of any return over 9% had to be diverted into the EORP’s Reserve for Future Benefit Increases (“The Reserve”). These Reserve assets
were then used to finance life-time post-retirement adjustments payable to the Plan’s eligible beneficiaries. However, whenever assets were
allocated to the Reserve, those same assets were denied to the underfunded Plan and were not taken into account for funding ratio and employer
contribution rate calculations. If these statutory provisions had not been changed (i.e., SB 1609 specifically prohibited any new in-flows of invest-ment
return assets into the Plan’s Reserve, effective May 31, 2011), $31.1 million of FY’11 investment return would have been diverted to the
Plan’s Reserve. That would have worsened the underfunded status of the Plan as of June 30, 2011. If the Arizona courts overturn the pension
reform bill’s COLA changes, the System will have to revive and restore the old mechanism which will have adverse consequences for the financial
status of the Plan.
Employer Contribution Rates
Any change in the EORP’s June 30th fiscal year-end funding ratio impacts the employer contribution rate as of the following July 1st. For example,
the Plan’s funding ratio decline for the fiscal year ended June 30, 2012 (FY’12) will increase the EORP employers’ contribution rates as of July 1,
2013 (the start of employer FY’14).
As the Plan’s funding ratio has eroded, the employer contribution requirements have been rising in large year-over-year increments. The unsubsi-dized
employer rate crested in employer FY’09 at 28.0% of payroll. Although this employer rate declined modestly in employer FY’10, it is cur-rently
at 36.44%. Based on the EORP’s FY’12 results, the unsubsidized employer contribution rate is projected to increase to 39.62%, effective July
1, 2013 (i.e., the beginning of FY’14). This EORP unsubsidized employer contribution rate will consist of an 18.31% “normal cost” component (to
cover the cost of future service to be performed by the covered group) and a 21.3% component for the amortization of the unfunded actuarial
accrued liability (associated with service performed in the past).
The subsidized rate, which is a rate reduced by judicial filing fee revenue and which is paid by the state and counties on behalf of their EORP par-ticipants,
will increase from the current rate of 20.87% of payroll to 25.94%. That represents a 5.07% of payroll increase over the current FY’13
aggregate rate.
These increases in the employer rate reflect the same combination of factors that have contributed to the funding ratio erosion, including the
performance of the financial markets and the actuarial assumption revisions adopted by the Board, based on recommendations from the System’s
actuaries. With further erosion in the Plan’s funding status expected to occur over the next several years, the forecast is that the employer contri-bution
rates will continue to increase unless the Plan gains from several years of far better than expected investment returns and/or significant
infusions of additional revenue from sources other than member and employer contribution rates.
If the current legal challenges to the COLA changes made by SB 1609 are successful or if a successful legal challenge is made against the increases
in EORP member contribution rates (which were increased by the pension reform bill), the financial condition of the underfunded EORP will dete-riorate
significantly.
FY’12 Investment Results
As indicated above, the FY’12 EORP return of -0.79% was 368 basis points less than the 2.89% benchmark return for the Plan. The principal factors
contributing to the 368 basis points of underperformance were as follows: First, the FY’12 write down in the value of the legacy residential real
estate accounted for 161 basis points of the underperformance. Second, a market timing decision by staff to delay moving U.S. equity assets from
BNY Mellon Bank to State Street Global Advisors (at a time when the equity market was rising) cost an additional 66 basis points. Third, the use of
an inappropriate index for the Credit Opportunity asset class accounted for an additional 64 basis points. (The use of an index inappropriate for the
asset class had the effect of inflating the benchmark return and giving the appearance of underperformance.) Finally, the failure of the active
portfolio managers to add value in the U.S. equity asset class accounted for an additional 14 basis points of underperformance.
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EORP Comprehensive Annual Financial Report
INTRODUCTORY SECTION
Steps have been, and will continue to be, taken to address the causes of the FY’12 underperformance relative to the benchmark. First, barring some
new shock to the housing market in the U.S. Southwest, there should be no further write downs in the values of the legacy residential real estate;
indeed, property values have at last begun to rise, creating opportunities to liquidate some of those properties at a gain. Second, all the U.S. equity
indexed assets have been moved to State Street Global Advisors and are fully invested. Third, as part of the new asset allocation approved in June, the
Credit Opportunities asset class now has an appropriate benchmark assigned to it. Finally, the U.S. equity asset class active portfolio manager invest-ment
strategy is under review; recommendations will be made to the Board for consideration, most likely in November.
Because of the COLA changes made by the pension reform bill in 2011, there were no adjustments made to the benefits of EORP beneficiaries in July
of 2012, as used to be required by law. Having used the $8.3 million EORP Reserve asset balance as of June 30, 2011 to finance a 2.47% permanent
life-time increase in benefits for the Plan’s eligible beneficiaries that year, the Reserve balance thereafter has been zero. A new statutory post-retirement
adjustment formula will become effective on July 1, 2013; that new formula is expected to provide periodic (but not annual) adjustments
to post-retirement benefits in the future. If a robust rate of increase in the value of residential real estate in the U.S. southwest enables PSPRS to sell
the legacy real estate from the past at significant gains, that could result in some of those gains being used to fund post retirement adjustments for
eligible beneficiaries, rather than being used to offset some of the funding ratio deterioration that resulted from the write down in the values of those
same properties in past years.
A Short Term Strategy to Improve the Plan’s Funding Status and Reduce the Rate of Growth in Employer Contributions
To improve the Plan’s funded status and reduce the rate of increase in employer contribution rates, the System must generate, on a consistent basis,
annual rates of return that meet or exceed the Plan’s return expectations. In pursuit of that goal, PSPRS has gone through a complete restructuring of
the way in which the System manages and invests its Plans’ assets with a view to dramatically increasing asset allocation diversification and diversifi-cation
within asset classes. In the process, the Plans’ former over-weight reliance on equities has declined considerably and so has the risk level. Nev-ertheless,
because its assets must be invested, the Plan remains exposed to the consequences of poorly performing financial markets, as was evident
in FY’08 and FY’09 and again in FY’12.
In the short-term, and while awaiting final court decisions in the lawsuits challenging the changes made by the pension reform bill, the Board of
Trustees has directed the System’s staff to urge the EORP and other constituent organizations and the employer groups to come forward with legisla-tive
proposals to add additional sources of revenue to supplement the revenue derived from contributions and investment return. This seems to be
the only means available in the short term to improve the Plan’s funding status and reduce the rate of growth in employer contribution rates.
Conclusion
As members of the PSPRS Board of Trustees, we intend to continue our efforts to assure the long-term financial integrity of the System and its Plans
and to faithfully serve the interests of the Plan’s participants and beneficiaries.
We appreciate having the opportunity to serve the State of Arizona, its political subdivisions and the EORP’s members and we look forward to con-tinuing
to serve as Trustees for this System.
INTRODUCTORY SECTION
EORP Comprehensive Annual Financial Report
10
November 20, 2012
The Members of the Board of Trustees
Public Safety Personnel Retirement System (PSPRS)
3010 E. Camelback Road, Suite 200
Phoenix, Arizona 85016
Members:
Here is the Thirty-first Comprehensive Annual Financial Report (CAFR) of the operations and financial condition of the Arizona Elected Officials Re-tirement
Plan (EORP). This report is for the fiscal year ended June 30, 2012. The Plan is a uniform statewide retirement system that provides retire-ment,
disability and survivor benefits, post-retirement adjustments and health insurance subsidies for judges and state, county and local elected
officials of participating governmental employer units.
Arizona Revised Statutes Title 38 requires the Fund Manager to transmit to the Governor and the Legislature this annual report within six months of
the close of each fiscal year. Incorporated in this Report are the audited financial statements, management’s discussion and analysis, and other
financial data from the June 30, 2012 report of Heinfeld, Meech & Co. P.C., Certified Public Accountants and auditors for the System. Also included
are the actuarial certi­fication
statement and the actuarial balance sheet from the June 30, 2012 actuarial valuation prepared by the System's actu-ary,
Gabriel, Roeder, Smith & Co (GRS).
Financial Information Reporting
The primary responsibility for the integrity and objectivity of the financial statements and related financial data rests with the management of the
System. The financial statements were prepared in conformity with generally accepted accounting principles appropriate for government-sponsored
defined benefit pension plans. Management believes that all other financial information included in this annual report is consistent with
those financial statements.
It is the System's policy to have and maintain an effective system of accounting controls. We believe our controls are adequate to provide reasonable
assurance that assets are safeguarded against loss or unauthorized use and to produce the records necessary for the preparation of financial informa-tion.
There are limits inherent in all systems of internal controls based on the recognition that the costs of such systems should be related to the
benefits to be derived. Management believes the System's controls provide this appropriate balance.
The System uses the accrual basis of accounting for both revenues and expenses. Contributions to the System are based on principles of level-cost
financing with current service financed as a level percent of payroll on a current basis and prior service amortized as a level percent of payroll over a
period of at least twenty but not more than thirty years.
Revenues
Revenues for the Plan are derived from four sources: member contributions, employer contributions, judicial filing fees and realized and unrealized
returns on the invested assets of the Plan. As shown by the Schedule of Revenues by Source included in the Statistical Section later in this report, the
Plan had an investment loss of $2.6 million this fiscal year. That was offset by revenue from member contributions of $6.9 million, direct employer
contributions of $12.9 million, and judicial filing fees of $8.9 million. Please refer to the Statistical Section for a ten-year history of revenues and
expenses.
PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM
Brian P. Tobin, Chairman CORRECTIONS OFFICER RETIREMENT PLAN
Gregory Ferguson, Vice Chair ELECTED OFFICIALS' RETIREMENT PLAN
Jeff Allen McHenry, Trustee 3010 East Camelback Road, Suite 200
Richard J. Petrenka, Trustee Phoenix, Arizona 85016-4416 James M. Hacking
Randie A. Stein, Trustee www.psprs.com Administrator
Lauren Kingry, Trustee TELEPHONE: (602) 255-5575 Ryan Parham Jared A. Smout
William C. Davis, Trustee FAX: (602) 255-5572 Chief Investment Officer Deputy Administrator
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EORP Comprehensive Annual Financial Report
INTRODUCTORY SECTION
Administrative and Investment Expenses
The EORP’s FY’12 administrative and investment-related expenses totaled $1.7 million, up from $1.4 million the prior year. Administrative and
investment expenses were approximately 57 basis points of the total assets managed. This is reasonable when compared with other public retire-ment
systems. A dedicated staff and constantly improving internal technology and expertise has enabled management to keep costs reasonable
even though we are having to accommodate increased service needs due to increasing numbers of participants and beneficiaries.
Investments
The total rate of return on the EORP’s assets for the fiscal year was -0.79% on a net of fees basis. This return was well below the System’s 8.0% actu-arial
assumed rate of return; it was also below the Plan’s benchmark return of 2.89% for the fiscal year. The Investment Section of this Report con-tains,
among other things, graphs depicting the Plan’s performance, a detailed summary of the investment portfolio, and commissions paid to in-vestment
professionals who provide services to the System. All Plan investments were held in trust by BNY Mellon, the System’s custodian bank.
Enacted Legislation
During FY’12, the State Legislature approved, and the Governor signed, five bills that were of significance. The first was HB2409 which authorizes
service credit purchases via payroll deduction. The second was HB2571, which was the Governor’s Personnel Reform initiative and which will make
the System’s agency staff subject to the State’s Department of Administration; however, it will have little, if any, substantive effect on the staff. The
third bill was SB1115 which eliminated the investment relationship contract warranty requirements that related to illegal immigration and invest-ments
in terrorist-supporting nations. The final bill was SB1116 which made many administrative, technical and clarifying changes to the PSPRS,
CORP and EORP statutes. These changes included authorization for the use of “swaps” in investment transactions.
Actuarial and Funding Information
Funding a retirement system on a sound actuarial reserve basis involves the accumula­tion
of substantial reserves to guarantee the payment of
promised benefits. These reserves are invested and the rate of investment earnings, over time, is a major factor in determining the employer contri-bution
requirement to meet the calculated level cost of the Plan.
The EORP is funded by a statutorily specified member contribution rate (that was 10.0% of gross payroll in FY’12) The Plan’s additional funding
comes from judicial filing fees, the realized and unrealized returns on the invested assets of the Plan, and from the employer contribution (expressed
as a level percent of gross payroll) that is reset annually, depending on the results of the Plan’s actuarial valuation. The current unsubsidized contri-bution
rate that is paid by participating cities and towns on behalf of their EORP participants is 36.44%. That unsubsidized rate is projected to in-crease
to 39.62% as of July 1, 2013.
The judicial filing fees that the EORP annually receives subsidize the contribution rate that the state and the counties pay with respect to their EORP
participants. The current subsidized rate is 20.87% of payroll. That rate will increase to 25.94% next July 1st.
The most commonly used measure of a retirement system’s funding progress is the ratio of the actuarial value of assets to actuarial accrued liability,
often referred to as the "percent funded." The percent funded for the EORP had declined steadily for six consecutive years through FY’07. Following
modest improvement in FY’08, the funding ratio started to deteriorate again in FY’09; this trend continued right through FY’12. The primary factor
responsible for this negative trend has been the poor performance of the U.S. and global financial markets in FY’08, FY’09 and again in FY’12; that
poor performance yielded negative rates of return for the PSPRS-administered Plans. At June 30, 2012, the EORP’s funding ratio was only 58.4%.
Given the System’s seven year averaging of investment results (actuarial “smoothing”), much of the effect of the FY’08, FY’09 and FY’12 negative
rates of return is yet to be reflected in the funding ratio of the Plan; therefore, the expectation is that the funding ratio will deteriorate further in the
future and that, in turn, will cause the employer rates to rise even further.
Post Retirement Benefit Increases
State statutes long provided for an annual benefit increase for EORP retirees (or their survivors) two years after retirement, regardless of age, or
when the retiree (or survivor) attained age 55 and had been retired for a year. These increases were limited to four percent of the benefit being paid
at the end of the prior fiscal year. A benefit increase schedule demonstrating the effect of these provisions can be found in the Statistical Section of
this CAFR.
These benefit adjustments were fully funded on a present value basis from the assets contained in the EORP’s Reserve for Future Benefit Increases. In
any year in which the Plan generated a return in excess of 9%, one-half of the return in excess of 9% was diverted to the Reserve and withheld from
the underlying Fund. For example, the Plan’s FY’10 13.47% return resulted in a $15.3 million flow of new assets into the Reserve. However, SB 1609
has changed all this.
INTRODUCTORY SECTION
EORP Comprehensive Annual Financial Report
12
As of May 31, 2011, the new law prohibited any further transfers of assets to the EORP Reserve. The $8.3 million asset balance remaining in the Re-serve
as of June 30, 2011 was used to finance a 2.47% permanent life-time increase in benefits for all the Plan’s eligible beneficiaries. To offset the
liability associated with the benefit increase, the $8.3 million was withdrawn from the Reserve, leaving a remaining balance of zero. A new post-retirement
adjustment formula, that was included in SB 1609, will become effective on July 1, 2013; that new formula is expected to provide peri-odic
(but not annual) adjustments to post-retirement benefits in the future.
Certificate of Achievement
The Government Finance Officers Association (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the System for the
EORP’s Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, 2011. This was the seventeenth consecutive year that the
Plan has achieved this prestigious award. In order to be awarded a Certificate, a government unit must publish an easily readable and efficiently
organized CAFR. This report must satisfy both generally accepted accounting principles and applicable legal requirements.
We believe our FY’12 CAFR continues to meet the Certificate of Achievement Program’s requirements. We are, therefore, submitting it to the GFOA to
determine its eligibility for a certificate.
New Developments and Management Initiatives
During this past fiscal year, the PSPRS Board of Trustees continued its strategic initiative that has changed the way in which the Plan’s assets are
managed and invested. (See the Board of Trustees’ transmittal letter to the Governor that begins on page 7) In addition, there were other develop-ments
and initiatives that are worthy of note. These included the following:
 The quarterly, administrative budget tracking report was changed to a monthly report and revised to show not just fiscal-year-to-date budget
vs actual spending but also budget to fiscal year projected actual spending; the System’s Governance Manual was reviewed and amended and,
as part of that process, the Board of Trustees approved a revised Investment Policy.
 The administrative budget for FY’13, as approved by the Board, is 2.85% less than the FY’12 budget and 6.51% less than the actual level of
spending for FY’12.
 A search process was successfully completed to fill the position of Deputy Administrator, who reports to, and serves at the pleasure of, the Ad-ministrator;
a successful search process was also completed to fill the position of In-House Investment Counsel. The new counsel, who arrived
on staff in August, is expected to perform a significant portion of the investment-related legal work and will monitor and coordinate any in-vestment-
related legal work that is performed by external counsel.
 The new Call Center staff, who were hired during FY’11, were trained and are now functioning at such a level of proficiency that the call volume
to the processing units (i.e., the Retired and Active Member and Insurance Departments) was reduced by an estimated 60%.
 The System continued its comprehensive and multi-year effort to assure that the CORP and PSPRS local board networks are properly structured
and functioning so as to assure uniform administration of the statutory responsibilities delegated to them. Staff and other resources continue to
be dedicated to this initiative. Within the last twelve months, the System’s outreach efforts to provide training and education to local boards
were intensified through more on-site visits (22), group meetings/consultations via conference call, video conference and webinars (6), the
development of more training modules (including a Retirement Instruction Manual) and enhanced spreadsheets which were made accessible
through the PSPRS web site, continued publication of a monthly local board newsletter (6 issues), the implementation of a new “high three”
calculator for use by the local boards and the beginning of the development of a web site for use by the local boards so that they will be able to
send new beneficiary data electronically.
 The Internal Auditor/Compliance Officer developed and received approval for her annual audit plan and continued her monthly investments
compliance review. In addition, the Auditor has continued to approve capital calls made with respect to investment commitments approved
by the Board.
 At the IT back-up facility in Denver, all the servers were upgraded and are now all under warranty and a secondary Storage Area Network (SAN)
was set up to enable frequent replication of all System-critical servers; also, the Server Room at the Phoenix headquarters was upgraded, re-configured
and remodeled such that it now contains all servers, has a fire suppression system, and has redundant power and switching for all
critical systems and redundant cooling.
 The monthly beneficiary payroll process was successfully outsourced to Wells Fargo Bank and the Bank also assumed the responsibility for issu-ing
any printed benefit checks and the annual 1099’s.
 The IT Programming staff enhanced the Member’s Only web site to allow members to change demographic and other personal information on-line.
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EORP Comprehensive Annual Financial Report
INTRODUCTORY SECTION
New Initiatives for System FY’13
As we have moved through the first four months of the new fiscal year (FY’13), some new initiatives are underway and still others are planned.
These include:
 Keeping expenditures during the fiscal year in line with the FY’13 administrative budget that was approved by the Board and providing the
Board’s Operations, Governance and Audit Committee with monthly budget tracking reports;
 Completing the office renovation project for the purpose of adding more enclosed offices to accommodate our in-house Investment Depart-ment,
legal counsel, and management needs;
 Communicating with the Steptoe & Johnson attorneys to assure that they are successful in defending the interests of the Board and the System
in the legal actions that have been filed challenging the COLA changes contained in the 2011 pension reform bill, SB 1609;
 Assuring that the System’s GRS actuaries and staff maintain the detailed records that would be needed just in case any of SB 1609’s provisions
are successfully challenged in court and the System has to “undo” actions taken in conformance with the new law’s requirements;
 Continuing to add to the functionality (i.e., processing new retirements and new hire eligibility determinations online) of the CORP and PSPRS
local board web site to facilitate communication and allow direct data entry in a secured environment.
 IT initiatives include: 1) virtualizing the System’s Data Base server and setting up site-to-site replication for databases; 2) installing firewalls at
both the Phoenix Office and Denver facility; 3) creating a complete “test” environment that mirrors the System’s production environment; and
4) continuing to facilitate the development of electronic business processes and the phasing out of paper processes.
Summary
This EORP CAFR is a product of the collective efforts of the staff, under the direction of the System’s Board of Trustees. It is intended to provide com-plete
and reliable information that will facilitate the management decision process and it serves as a means for determining compliance with the
System’s governance and investment policies and legal requirements. Copies of this Report are provided to the Governor, State Auditor, Legislature
and all our member constituency groups. We hope all recipients of this Report find it informative and useful.
I would like to take this opportunity to express my gratitude to the members of the Board of Trustees, the staff, the System’s advisors, and all others
who have contributed to the administrative operations of the System. I look forward to the challenge of moving the System forward with a program
of constructive and comprehensive change that will maintain high quality customer service and restore the PSPRS Plan to a state of financial sound-ness.
Respectfully submitted,
James M. Hacking
Administrator
INTRODUCTORY SECTION
EORP Comprehensive Annual Financial Report
14
BOARD OF TRUSTEES
(AS OF JUNE 30, 2012)
Brian P. Tobin
Chairman Vice Chairman
Gregory Ferguson
Trustee Trustee
Randie A. Stein
Trustee
William C. Davis
Trustee
Jeff Allen McHenry Richard J. Petrenka
Trustee
Lauren Kingry
15
EORP Comprehensive Annual Financial Report
INTRODUCTORY SECTION
EXECUTIVE STAFF AND ORGANIZATIONAL CHART
Administrator
James M. Hacking
Ryan Parham
Chief Investment Officer
Jared A. Smout
Deputy Administrator
INTRODUCTORY SECTION
EORP Comprehensive Annual Financial Report
16
PROFESSIONAL ADVISORS
A schedule of Administrative Consultant fees may be found in the Financial Section. A schedule of Investment Consultant fees, Brokerage Commissions and Research
Expense may be found in the Investment Section.
Albourne America, LLC International Alternative Investment Consultant
Alliance Resource Consulting LLC Executive Recruitment
BNY Mellon Asset Servicing Independent Investment Advisor
Brazen Technology, Inc. IT Consultant
CB Richard Ellis Real Estate Consultant
Ernst & Young Real Estate Consultant
Fleetwood Technology Consulting IT Consultant
Gabriel Roeder Smith & Company Actuary
Heinfeld, Meech & Co. Independent Auditors
Highground, Inc Legislative Liaison
Kutak Rock LLP General Counsel
Light Stone Solutions, LLC Due Diligence
LRS Consulting LLC Local Board Training
NEPC, LLC Independent Investment Advisor
Org Portfolio Management LLC Real Estate Consultant
OSAM Inc. IT Consultant
Public Policy Partners Legislative Liaison
Stepstone Group LLC Alternative Investment Consultant
FINANCIAL SECTION
Independent Auditor Report 18
Management Discussion and Analysis 20
Basic Financial Statements
Statement of Plan Net Assets 24
Statement of Change in Plan Net Assets 25
Notes to the Financial Statements 26
Required Supplementary Information
Schedule of Funding Progress 37
Schedule of Employer Contributions 37
Notes to the Required Supplementary Information 39
Supporting Schedules Information
Schedule of Changes in Reserve Balances 40
Schedule of Receipts and Disbursements 41
Schedule of Administrative Expenses 42
Schedule of Consultant Expenses 43
Other Supplementary Information
Agency Fund Statement of Changes in Assets and Liabilities 44
Agency Fund Schedule of Funding Progress 44
FINANCIAL SECTION
EORP Comprehensive Annual Financial Report
18
INDEPENDENT AUDITORS’ REPORT
Board of Trustees
Public Safety Personnel Retirement System
We have audited the accompanying Statement of Plan Net Assets of the Elected Officials
Retirement Plan (EORP) as of and for the year ended June 30, 2012, and the related Statement
of Changes in Plan Net Assets for the year then ended. These basic financial statements are
the responsibility of EORP’s management. Our responsibility is to express an opinion on these
financial statements based on our audit. The comparative totals as of and for the year ended
June 30, 2011, presented in the basic financial statements are included for additional analysis
only. Our audit report dated December 10, 2011, expressed an unqualified opinion on those
financial statements; however, we have not performed any auditing procedures on this
information since the date of our report.
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 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 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 net assets of the Elected Officials Retirement Plan, as of June 30, 2012, and the changes in
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
November 20, 2012, on our consideration of the Elected Officials Retirement Plan’s internal
control over financial reporting and on 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 on 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.
TUCSON • PHOENIX • FLAGSTAFF • ALBUQUERQUE
www.heinfeldmeech.com
19
EORP Comprehensive Annual Financial Report
FINANCIAL SECTION
Accounting principles generally accepted in the United States of America require that the
management’s discussion and analysis on pages 20 through 23 and the Schedule of Funding
Progress and Schedule of Employer Contributions on pages 37 through 39 be presented to
supplement the basic financial statements. Such information, although not a part of the basic
financial statements, is required by Governmental Accounting Standards Board, who considers
it to be an essential part of financial reporting for placing the basic financial statements in an
appropriate operational, economic, or historical context. We have applied certain limited
procedures to the required supplementary information in accordance with auditing standards
generally accepted in the United States of America, which consisted of inquiries of management
about the methods of preparing the information and comparing the information for consistency
with management’s responses to our inquiries, the basic financial statements, and other
knowledge we obtained during our audit of the basic financial statements. We do not express
an opinion or provide any assurance on the information because the limited procedures do not
provide us with sufficient evidence to express an opinion or provide any assurance.
Our audit was conducted for the purpose of forming an opinion on the financial statements that
collectively comprise EORP’s financial statements. The Introductory Section, Supporting
Schedules Information, Other Supplementary Information, Investment Section, Actuarial Section
and Statistical Section are presented for purposes of additional analysis and are not a required
part of the financial statements. The Supporting Schedules Information and Other
Supplementary Information, as listed in the table of contents under the Financial Section, have
been subjected to the auditing procedures applied in the audit of the financial statements and
certain additional procedures, including comparing and reconciling such information directly to
the underlying accounting and other records used to prepare the financial statements or to the
financial statements themselves, and other additional procedures in accordance with auditing
standards generally accepted in the United States of America. In our opinion, the information is
fairly stated in all material respects in relation to the financial statements as a whole. The
Introductory Section, Investment Section, Actuarial Section and Statistical Section have not
been subjected to the auditing procedures applied in the audit of the basic financial statements
and, accordingly, we express no opinion on them.
HEINFELD, MEECH & CO., P.C.
CPAs and Business Consultants
November 20, 2012
FINANCIAL SECTION
EORP Comprehensive Annual Financial Report
20
EORP MANAGEMENT DISCUSSION & ANALYSIS
The Elected Officials’ Retirement Plan’s discussion and analysis is designed to assist the reader in focusing on significant financial issues, provide an overview of the
Plan’s financial activity, identify changes in the Plan’s financial position and identify any issues or concerns.
Since the Management’s Discussion and Analysis (MD&A) is designed to focus on the current year’s activities, resulting changes and currently known facts, it is intended
to be read in conjunction with the Transmittal Letter, Financial Statements and Notes to the Financial Statements.
FINANCIAL HIGHLIGHTS
Key financial highlights for 2012 are as follows:
 The Elected Officials’ Retirement Plan (EORP) had a total net of fees rate of return of –0.79% this year. Our total portfolio underperformed the target fund bench-mark
by 368 basis points. This is a decline from the prior year’s return of 17.37%.
 As of the close of the fiscal year 2012, the Future Benefit Increase Reserve had been depleted.
 Retirement benefits paid totaled $43.54 million for the current year, compared to $39.67 for the previous year. This represents an 9.76% increase from the prior
year. The majority of this increase is the result of the net increase in the number of benefit recipients.
OVERVIEW OF THE FINANCIAL STATEMENTS
Using this Comprehensive Annual Financial Report (CAFR)
This annual report consists of a series of financial statements and notes to those financial statements. These statements are organized so the reader can understand the
Plan as an operating entity. The statements and notes then proceed to provide an increasingly detailed look at specific financial activities.
The Statement of Net Assets and The Statement of Changes in Net Assets
These statements include all assets and liabilities of the Plan using the accrual basis of accounting, which is similar to the accounting used by most private-sector com-panies.
These two statements report the Plan’s net assets and changes in them. Net assets are the difference between assets and liabilities, one way to measure the
financial health, or financial position. Over time, increases or decreases in the net assets are one indicator of the financial health of the Plan.
Notes to the Financial Statements
The notes provide additional information that is essential to a full understanding of the data provided in the financial statements. The notes can be found immediately
following The Statement of Net Assets and The Statement of Changes in Net Assets.
Required Supplementary Information
The basic financial statements are followed by a section of required supplementary information. This section includes the Schedule of Funding Progress and the Sched-ule
of Employer Contributions.
The Schedule of Funding Progress
Shows the ratio of assets as a percentage of the actuarial accrued liability (funding ratio) and the ratio of unfunded actuarial accrued liabilities to member payroll. The
trend in these two ratios provides information about the financial strength of the Plan. Improvement is indicated when the funding ratio is increasing and the ratio of
the unfunded actuarial accrued liability to payroll is decreasing.
The Schedule of Employer Contributions
Shows the Annual Required Contributions by fiscal year. The purpose of this schedule is to provide information about the required contributions of the employers and
the extent to which those contributions are being made. The information should assist users in understanding the changes and possible reasons for the changes in the
Plan’s funding status over time.
Supporting Schedules and Supplementary Information
The Supporting Schedules and Supplementary Information Section include the Supporting Schedule of Changes in Fund Balance Reserves, Supporting Schedule of
Payments to Consultants, the Supplementary Schedule of Cash Receipts and Cash Disbursements and the Agency Fund Statement of Changes in Assets and Liabilities
(See Note 7). The total columns and information provided on these schedules carry forward to the applicable financial statement.
FINANCIAL ANALYSIS OF THE PLAN
The following schedules present comparative summary financial statements of the Plan for FY2012 and FY2011. Following each schedule is a brief summary of the
significant changes noted in these schedules.
21
EORP Comprehensive Annual Financial Report
FINANCIAL SECTION
Summary Comparative Statements of Plan Net Assets Analysis
The total plan net assets held in trust for benefits at June 30, 2012 were $296.95 million, a 5.73% decrease from $315.02 million at June 30, 2011. The decrease in net
assets is primarily due to unfavorable financial markets during the fiscal year. The decrease or increase in cash and receivables is attributable to normal fluctuations in
investment income receivables during the year. EORP is fully deploying cash in other investments vehicles like exchange traded funds, equities, fixed income and pri-vate
equity. Detailed information regarding the Plan’s investment portfolio is included in the investment section of this report. The decrease in security lending collat-eral
is due to normal fluctuations in the lending program as well as an increase in exposure to other alternative investments. The investment of the collateral fluctu-ated
in a similar manner.
As of 06/30/2012 As of 06/30/2011 Change % Change
Cash and Short-Term Investments $ 5,898,521 $ 7,252,660 $ (1,354,139) (18.67)%
Total Receivables 4,924,794 2,684,394 2,240,400 83.46%
Total Investments 287,005,321 307,373,912 (20,368,591) (6.63)%
Securities Lending Collateral 5,956,526 21,672,959 (15,716,433) (72.52)%
Net Capital Assets 277,749 289,819 (12,070) (4.16)%
Total Plan Assets 304,062,911 339,273,744 ($35,210,833) (10.38)%
Accrued Accounts Payable 468,304 535,195 (66,891) (12.50)%
Investment Purchases Payable 683,100 2,048,928 (1,365,828) (66.66)%
Securities Lending Collateral 5,956,526 21,672,959 (15,716,433) (72.52)%
Total Plan Liabilities 7,107,930 24,257,082 (17,149,152) (70.70)%
Net Assets $ 296,954,981 $ 315,016,662 $ (18,061,681) (5.73)%
SUMMARY COMPARATIVE STATEMENTS OF PLAN NET ASSETS
2012 2011 Change % Change
ADDITIONS
Total Contributions $ 28,345,134 $ 27,184,643 $ 1,160,491 4.27%
Net Investment Income (Loss) (2,641,096) 48,274,987 (50,916,083) (105.47)%
Transfers and Service Purchases 148,679 248,035 (99,356) (40.06)%
Total Additions (Reductions) 25,852,717 75,707,665 (49,854,948) (65.85)%
DEDUCTIONS
Benefits 43,536,995 39,665,718 3,871,277 9.76%
Service Transfers and Refunds 89,631 244,760 (155,129) (63.38)%
Administrative Expenses 287,772 324,343 (36,571) (11.28)%
Total Deductions 43,914,398 40,234,821 3,679,577 9.15%
Net Increase (Decrease) (18,061,681) 35,472,844 (53,534,525) (150.92)%
Balance Beginning of Year - July 1 315,016,662 279,543,818 35,472,844 12.69%
Balance End of Year - June 30 $ 296,954,981 $ 315,016,662 $ (18,061,681) (5.73)%
SUMMARY COMPARATIVE STATEMENTS OF CHANGES IN PLAN NET ASSETS
Summary Comparative Statements of Changes in Plan Net Assets Analysis
Employer and employee contributions increased $1.16 million due to increased employee and employer contribution rates during fiscal year 2012. Additionally, there
was a decrease in members’ service purchases.
For FY 2012, EORP recognized a net investment loss of $2.64 million which compares to a $48.27 million gain in the previous year. This 105.47% decrease in income
was due to negative returns in the financial markets during the fiscal year.
Deductions from the EORP net assets held in trust for benefits consist primarily of pension, disability, survivor benefits, member refunds and administrative expenses.
For FY 2012, these deductions totaled $43.91 million, an increase of 9.15% from the $40.23 million paid during FY2011. The total benefit payments increase is due to a
net increase in the number of benefit recipients. Details of these changes can be found on page 70 of the Actuarial Section of this report. Refunds decreased by 63.38%.
Service Transfers and refunds represent a return of contributions held on account when a member leaves office without qualifying for retirement. Administrative ex-penses
decreased substantially from the prior year mainly due to a decrease in professional services expenses.
FINANCIAL SECTION
EORP Comprehensive Annual Financial Report
22
INVESTMENT ACTIVITIES
During 2007 the Board of Trustees adopted a more diversified asset allocation policy and began an asset management restructuring that has been deployed over the
past four years. As illustration, at the end of FY2007, 72.8% of the entire investment portfolio was invested in equities versus 33.4% at the end of FY2012. Fixed in-come
had remained about 19% of the entire portfolio prior to being reduced to 13.8% in FY2012. However, alternative investments have increased from 3.4% in
FY2007 to 50.7% in FY2012.
At June 30, 2012, EORP held $98.02 million in equities. The FY 2012 rate of return for EORP total equities was –6.19% versus a benchmark rate of return of –4.36%. At
June 30, 2012, EORP held $39.77 million in fixed income securities. The FY 2012 rate of return for EORP fixed income securities was 6.39% versus a benchmark rate of
return of 7.47%. The benchmarks for both equities and fixed income securities are representative of the returns that could be expected in a similar investing environ-ment.
More detailed information regarding the Plan’s investment portfolio can be found in the investment section of this report. Additionally, a more thorough discus-sion
of the diversification of the asset allocation policy can be found in the Introductory Section of this report in the transmittal letter.
EORP earns additional income by lending investment securities to brokers. This is done on a pooled basis by our custodial bank, BNY Mellon. The brokers provide collat-eral
and generally use the borrowed securities to cover short trades and failed trades.
HISTORICAL TRENDS
19.23%
10.18% 14.13%
13.78%
8.60%
3.47%
9.43%
6.23%
12.75%
2.20%
U.S. Equity Non-U.S. Equity Private Equity
Fixed Income Credit Opportunities Absolute Return
GTAA Real Assets Real Estate
Short Term Inv
$0
$100
$200
$300
$400
$500
$600
$700
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
118.7% 104.4%
95.5%
89.9%
74.6% 76.6%
71.3%
66.7%
62.1%
58.4%
Assets Liabilities
23
EORP Comprehensive Annual Financial Report
FINANCIAL SECTION
Accounting standards require that the “Statement of Plan Assets” reflect investment asset values at fair market value and include only benefits and refunds due to plan
members and beneficiaries and accrued investment and administrative expenses as of the reporting date. Information regarding the actuarial funding status of the
plan is provided in the “Schedule of Funding Progress.” The asset value stated in the “Schedule of Funding Progress” is the actuarial value of assets as determined by
calculating the ratio of the market value to book value of assets and the actuarial gains/losses smoothed over a seven year period. Actuarial valuations of the EORP
assets and benefit obligations for the retirement plan are performed annually. The most recent actuarial valuation available is as of June 30, 2012.
At June 30, 2012, the total funded status of the EORP decreased to 58.4% from 62.1% at FYE 2011. This decrease in funded status is related primarily to investment
losses in investment losses from prior years being fully reflected. The market value smoothing techniques used in this valuation of the Plan recognize both past and
present investment gains and losses. A more detailed discussion of the funding status can be found in the Administrator’s Letter of Transmittal in the Introductory
Section of this report.
REQUEST FOR INFORMATION
This report is designed to provide a general overview of the Elected Officials’ Retirement Plan’s finances. Questions concerning any of the information provided in this
report or requests for additional financial information should be addressed to: Elected Officials’ Retirement Plan, 3010 E. Camelback Road, Suite 200, Phoenix, AZ
85016.
FINANCIAL SECTION
EORP Comprehensive Annual Financial Report
24
STATEMENT OF PLAN NET ASSETS
JUNE 30, 2012 WITH COMPARATIVE TOTALS FOR 2011
JUNE 30, 2012 JUNE 30, 2011
ASSETS
Cash and Short-Term Investments $ 5,898,521 $ 7,252,660
RECEIVABLES
Member Contributions 187,520 135,799
Employer Contributions 356,692 347,573
Court Fees 729,768 807,166
Interest and Dividends 272,263 355,378
Investment Sales 2,390,903 81,398
Other 987,648 957,080
Total Receivables 4,924,794 2,684,394
INVESTMENTS AT FAIR VALUE (NOTES 2 AND 3)
U.S. Equity 56,569,180 63,254,410
Non U.S. Equity 41,454,752 47,075,009
GTAA 27,770,204 28,269,152
Fixed Income 39,773,830 57,961,165
Total Investments 287,005,321 307,373,912
Securities Lending Collateral 5,956,526 21,672,959
CAPITAL ASSETS (NOTE 4)
Land 33,145 33,145
Building 247,964 243,368
Furniture, Fixtures & Equipment 107,526 101,904
Total Capital Assets 388,635 378,417
Accumulated Depreciation (110,886) (88,598)
Net Capital Assets 277,749 289,819
TOTAL PLAN ASSETS 304,062,911 339,273,744
LIABILITIES
Accrued Accounts Payable 468,304 535,195
Investment Purchases Payable 683,100 2,048,928
Securities Lending Collateral 5,956,526 21,672,959
Total Plan Liabilities 7,107,930 24,257,082
NET ASSETS HELD IN TRUST FOR PENSION BENEFITS 296,954,981 315,016,662
NET ASSET RESERVES
Refundable Members’ Reserve 46,953,365 43,461,488
Employers’ Reserve 250,001,616 271,555,174
Future Benefit Increase Reserve - -
Total Net Asset Reserves $ 296,954,981 $ 315,016,662
Credit Opportunities 25,332,581 27,857,883
Real Assets 18,323,953 16,809,091
Real Estate 37,561,159 33,320,170
Private Equity 29,991,918 24,805,297
Absolute Return 10,227,744 8,021,735
The accompanying notes are an integral part of these financial statements.
25
EORP Comprehensive Annual Financial Report
FINANCIAL SECTION
STATEMENT OF CHANGES IN PLAN NET ASSETS
FOR THE YEAR ENDED 2012 WITH COMPARATIVE TOTALS FOR 2011
2012 2011
ADDITIONS
Contributions
Members’ Contributions (NOTES 2,5) $ 6,858,675 $ 4,716,681
Employers’ Contributions (NOTES 2,5) 11,875,776 11,120,352
Court Fees 8,880,308 9,895,857
Members’ Service Purchase 660,795 1,451,753
Total Contributions 28,345,134 27,184,643
Investment Income
From Investing Income
Net Appreciation (Depreciation) in Fair Value of Investments (NOTES 2,3) (5,391,819) 43,885,469
Interest 659,693 700,809
Dividends 2,298,488 2,875,258
Other Income 1,131,998 1,699,918
From Securities Lending Activities
Securities Lending Activities (NOTE 3)
20,735 100,488
58,573 69,114
(11,831) (25,424)
67,477 144,178
Total Investment Income (Loss) (1,234,163) 49,305,632
Less Investment Expense (1,406,933) (1,030,645)
Net Investment Income (Loss) (2,641,096) 48,274,987
Transfers Into System 148,679 248,035
Total Additions (Reductions) 25,852,717 75,707,665
DEDUCTIONS
Pension Benefits (NOTE 2) 43,536,995 39,665,718
Refunds To Terminated Members (NOTE 2) 89,631 216,689
Administrative Expenses 287,772 324,343
Transfers Out of System - 28,071
Total Deductions 43,914,398 40,234,821
NET INCREASE (DECREASE) (18,061,681) 35,472,844
NET ASSETS HELD IN TRUST FOR PENSION BENEFITS
Beginning of Year, July 1 315,016,662 279,543,818
End of Year, June 30 $ 296,954,981 $ 315,016,662
Securities Lending Income
Borrower Rebates
Agents Share of Income
Net Securities Lending Income
Alternate Employer Contributions 69,580 -
The accompanying notes are an integral part of these financial statements.
FINANCIAL SECTION
EORP Comprehensive Annual Financial Report
26
EORP NOTES TO THE FINANCIAL STATEMENTS
NOTE 1: PLAN DESCRIPTION
ORGANIZATION
The Elected Officials’ Retirement Plan (EORP), a pension trust fund of the State of Arizona, is a cost sharing multiple-employer public employee retirement plan estab-lished
by Title 38, Chapter 5, Article 3 of the Arizona Revised Statutes, to provide benefits for elected officials and judges of certain state, county and local governments.
The Board of Trustees (formerly Fund Manager) of the Public Safety Personnel Retirement System (PSPRS) administers the EORP Plan.
Effective April 28, 2010 SB 1006 was passed that changed the name of the Fund Manager to Board of Trustees and expanded the size of the Board from five to seven.
Effective August 6, 1999, it became the Governor’s responsibility to appoint all members of the Board of Trustees. SB 1006 also increased the term from three to five
years. There will be a transitional period during which the terms of office may vary. The Board of Trustees is responsible for the investment of the Plan’s assets, setting
employer contribution rates in accordance with an actuarial study, adopting a budget, hiring personnel to administer the Plan, setting up records, setting up accounts
for each member, paying benefits and the general protection and administration of the System. Substantial investment experience is required for the member of the
Board that represents the state as an employer and the two public members of the Board.
The addition or deletion of eligible groups does not require the approval of the other participating employers. The Board of Trustees approves new eligible groups for
participation. The EORP is reported as a component unit of the State of Arizona.
The Board of Trustees of the EORP is also responsible for the investment and general administration of two other statewide retirement plans-the Corrections Officer
Retirement Plan and the Public Safety Personnel Retirement System. The investments and expenses of these plans were held and accounted for separately from those
of the EORP until September 1, 2008. Arizona Revised Statutes Section 38-848 was amended by Laws 2008, Ch. 286, § 22 to authorize the Board of Trustees to commin-gle
the assets of the fund and the assets of all other plans entrusted to its management. Accordingly, the assets of these plans have been unitized but all receipts and
earnings are credited and charges of payments are made to the appropriate employer, system or plan.
Since none of the plans have the authority to impose their will on any of the other plans, each plan is reported as its own stand-alone government.
At June 30, 2012 and 2011, the number of participating local government employer groups was:
All state and county elected officials and judges are members of the Plan. Any city or town in the state of Arizona may elect to have its’ elected officials covered by
EORP. At June 30, 2012 and 2011, statewide EORP membership consisted of:
EORP provides retirement benefits as well as death and disability benefits. Generally, all benefits vest after five years of credited service. A summary of benefit and
plan provisions follows:
SUMMARY OF BENEFITS
PURPOSE
To provide a uniform, consistent, and equitable statewide program for those eligible elected officials as defined by the Plan. A.R.S. §38-810.02.B
AVERAGE MONTHLY BENEFIT
Employees who became a member of the Plan on or before December 31, 2011: An average of your highest thirty-six (36) consecutive months within the last ten (10)
years of completed years of credited service as an elected official that yield the highest average. If an employee does not have three (3) consecutive years of credited
service as an elected official, the considered period is the employee's last consecutive period of employment with a Plan employer immediately before retirement.
A.R.S. § 38-801(5).
GROUP 2012 2011
Cities and Towns 21 21
Counties 15 15
State Agencies 2 2
Total Employers 38 38
RETIREMENT PLAN
MEMBERSHIP TYPE 2012 2011 2012 2011
Retirees 992 990 560 548
Terminated Vested 132 122 - -
Current Vested 539 509 - -
Current Non-Vested 306 336 - -
Total Members 1,969 1,957 560 548
INSURANCE SUBSIDY
27
EORP Comprehensive Annual Financial Report
FINANCIAL SECTION
Employees that will become a member of the Plan on or after January 1, 2012: An average of your highest sixty (60) consecutive months within the last ten (10) years
of completed years of credited service as an elected official that yield the highest average. If an employee does not have five (5) consecutive years of credited service as
an elected official, the considered period is the employee's last consecutive period of employment with a Plan employer immediately before retirement.
A.R.S. § 38-801(5).
BENEFIT INCREASE / COST OF LIVING ADJUSTMENT (COLA)
A retired member or survivor of a retired member may receive an increase (COLA) from the Plan if monies are available (See A.R.S. § 38-818 and Section 62). However,
effective July 1, 2013 (A.R.S. § 38-818.01) and each July 1 thereafter, a COLA will be issued as long as the following criteria have been met:
 Retired members who became members on or before December 31, 2011, or the survivor of a retired member, who was receiving benefits on or before July 31 of the
two previous years, OR was 55 or older on July 1 of the current year and receiving benefits on or before July 31 of the previous year.
 Employees who became a member on or after January 1, 2012, or the survivor of a retired member, was 55 or older on July 1 of the current year and is receiving
benefits.
The increase will be calculated based on (if there are insufficient earnings to cover the maximum increases, the percentage increase is limited to the earnings available):
 If the ratio of the actuarial value of assets to liabilities is 60-64% and the total return is more than 10.5% for the prior fiscal year, 2% maximum increase to all eligible
retirees and survivors.
 If the ratio of the actuarial value of assets to liabilities is 65-69% and the total return is more than 10.5% for the prior fiscal year, 2.5% maximum increase to all eligi-ble
retirees and survivors.
 If the ratio of the actuarial value of assets to liabilities is 70-74% and the total return is more than 10.5% for the prior fiscal year, 3% maximum increase to all eligible
retirees and survivors.
 If the ratio of the actuarial value of assets to liabilities is 75-79% and the total return is more than 10.5% for the prior fiscal year, 3.5% maximum increase to all eligi-ble
retirees and survivor.
 If the ratio of the actuarial value of assets to liabilities is 80% or more and the total return is more than 10.5% for the prior fiscal year, 4% maximum increase to all
eligible retirees and survivors.
From and after December 31, 2015, legislature may enact permanent one-time benefit increases after an analysis of the effect of the increase on the Plan by the Joint
Legislative Budget Committee (JLBC). A.R.S. § 38-818.02.
CONTRIBUTIONS
For fiscal year 2012-2013, each member shall contribute 11.5% of compensation to the Plan on a pre-tax basis by payroll deduction. The amount of the member’s
contribution that exceeds 7% of the member’s compensation shall not be used to reduce the employer’s contributions. A.R.S. § 38-810 (F and G).
The EORP employers shall contribute a level percent of salary as determined by actuarial valuation to ensure proper funding for the Plan (but not less than 10% of sal-ary).
In addition, the EORP will receive contributions from certain employers pursuant to A.R.S. §§ 12-119.01(B)(2), 12-120.31(D)(2), 12-284.03(A)(6), 22-281(C)(3)
and 41-178 as stated in A.R.S. § 38-810.
The contribution rate for members will change each fiscal year. A.R.S. § 38-810(F).
CREDITED SERVICE
Service for which contributions have been made, or transferred to the Plan from another retirement system for public employees of this state. A.R.S. § 38-801(7).
DEATH BENEFIT - ACTIVE OR INACTIVE MEMBER
Spouse’s Pension. Employees who became a member on or before December 31, 2011, the surviving spouse of an active or inactive member will receive a Spouse’s
Pension each month for lifetime. The Spouse’s Pension is 75% of the member’s pension benefit based on the calculation for a disability benefit. A.R.S. § 38-806.
Employees who became a member on or after January 1, 2012, the surviving spouse of an active or inactive member will receive a Spouse’s Pension each month for
lifetime. The Spouse’s Pension is 50% of the member’s pension benefit based on the calculation for a disability benefit. A.R.S. § 38-806. OR
Guardian Benefit. If there is no surviving spouse, or the pension of the surviving spouse is terminated, a Guardian Benefit (based on the calculation for the applicable
Spouse’s Pension) may be paid to the guardian of the surviving, eligible (unmarried) child(ren) until the child(ren) is adopted, turns 18 or until the age of 23 if the
attending full-time school between the ages of 18 and 23. If the Guardian Benefit is paid to a disabled child (the child’s disability occurred prior to the age of 23) and
remains a dependent of the guardian, the Guardian Benefit is payable to the disabled child for lifetime. A.R.S. § 38-807. OR
Balance of Contributions. If there is no eligible surviving spouse or eligible child(ren), the member's named beneficiary on file will receive the balance of the member’s
accumulated contributions. A.R.S. § 38-807.
DEATH BENEFIT - RETIRED MEMBER
Spouse’s Pension. Employees who became a member on or before December 31, 2011, If married for at least two (2) consecutive years at the time of the member’s
death, the surviving spouse will receive a Spouse’s Pension each month for lifetime based on 75% of the member's pension benefit. A.R.S. § 38-807.
Employees who became a member on or after January 1, 2012, If married for at least two (2) consecutive years at the time of the member’s death, the surviving spouse
will receive a Spouse’s Pension each month for lifetime based on 50% of the member's pension benefit – except that at the time of retirement, a member may elect an
optional form of retirement benefit, as determined by the board, that provides for an actuarially reduced pension and an increased surviving spouse’s benefit.
A.R.S. § 38-807. OR
FINANCIAL SECTION
EORP Comprehensive Annual Financial Report
28
Guardian Benefit. If there is no surviving spouse, or the pension of the surviving spouse is terminated, a Guardian Benefit (based on the calculation for the applicable
Spouse’s Pension) may be paid to the guardian of the surviving, eligible (unmarried) child(ren) until the child(ren) is adopted, turns 18 or until the age of 23 if the
attending full-time school between the ages of 18 and 23. If the Guardian Benefit is paid to a disabled child (the child’s disability occurred prior to the age of 23) and
remains a dependent of the guardian, the surviving spouse’s pension is payable to the disabled child for lifetime. A.R.S. § 38-807. OR
Balance of Contributions. If there is no eligible surviving spouse or eligible child(ren), the member's named beneficiary on file will receive the balance of the member’s
accumulated contributions. A.R.S. § 38-807.
DISABILITY
A member who becomes permanently mentally or physically incapacitated for the purpose of performing the duties of the member’s office if the majority of the board
of physicians certifies that the member is mentally or physically incapacitated and is expected to be for an indefinite duration. A.R.S. § 38-806.
Employees who became a member on or before December 31, 2011, the disability benefit is 20% of the member's average yearly salary with 4.99 or less years of cred-ited
service, or 40% of the member's average yearly salary with 5 but less than 9.99 years of credited service, or 80% of member's average yearly salary with ten (10) or
more years of credited service. A.R.S. § 38-808(B)(2).
Pursuant to A.R.S. § 38-808(C), employees who became a member on or after January 1, 2012, the disability benefit is:
3% of the average yearly salary multiplied by 25 years of credited service if the member had 10 or more years of credited service.
3% of the average yearly salary multiplied by 12.5 years of credited service if the member had 5.0 to 9.99 years of credited service.
3% of the average yearly salary multiplied by 6.25 years of credited service if the member had 4.99 or less years of credited service.
DIVORCE / DOMESTIC RELATIONS ORDER (DRO)
If the member has been involved in a divorce(s), please provide the EORP with a complete copy of the Divorce Decree(s) and any attachments or exhibits if referenced in
the Decree(s). Upon receipt, additional correspondence will be provided to the parties. If the retirement account is required to be split, a Domestic Relations Order
(DRO) will need to be prepared. To ensure that the language in the DRO is acceptable, it is recommended to provide the EORP with a draft copy of the DRO for review
and approval prior to submitting it to the court. A.R.S. § 38-822.
ELIGIBILITY
Every elected official is a member of the Plan, except full-time superior court commissioners who are members before July 1 of the first fiscal year after the Social Secu-rity
Administration approves the inclusion of superior court commissioners on the state’s Section 218 Agreement. A state elected official who is subject to term limits
may elect not to participate in the Plan. A.R.S. §§ 38-801(15) and 38-804(A).
HEALTH INSURANCE
Pursuant to A.R.S. §§ 38-817, 38-651.01 and 38-782, retirees and survivors with 8 or more years of credited service* that elect group health insurance and/or
accident insurance coverage through the Arizona State Retirement System group plan (ASRS), the Arizona Department of Administration (ADOA) group plan, or
a group plan through an employer of the PSPRS or EORP plans, the Plan will pay up to the following amount (i.e., Premium Benefit):
* Members with 5 to 7.99 years of credited service will receive a proportionate share of the subsidy stated above.
JOINDERS
Elected officials of an incorporated city or town may participate in the EORP if the governing body enters into a joinder agreement in accordance with the provisions of
the Plan. Assets under any existing public employee defined benefit retirement program shall be transferred to the EORP within sixty (60) days after the employer’s
effective date. A.R.S. § 38-815.
REFUNDS
Employees who became a member on or before December 31, 2011, pursuant to A.R.S. § 38-804(B), upon termination of employment (for any reason other than death
or retirement) within twenty (20) days after filing an application with the EORP, the member will receive a lump-sum payment of accumulated contributions (less any
benefits paid or any amounts owed to the Plan) - thus, forfeiting all membership rights and credited service in the Plan upon receipt of refund of contributions. If the
member has five (5) or more years of credited service, an additional percentage of contributions will be refunded to the member according to the member’s years of
service as stated below:
SINGLE
Not Medicare Eligible Medicare Eligible All Not Medicare Eligible All Medicare Eligible One With Medicare
$150.00 $100.00 $260.00 $170.00 $215.00
FAMILY
29
EORP Comprehensive Annual Financial Report
FINANCIAL SECTION
5 to 5.9 years of service = 25% of member contributions.
6 to 6.9 years of service = 40% of member contributions.
7 to 7.9 years of service = 55% of member contributions.
8 to 8.9 years of service = 70% of member contributions.
9 to 9.9 years of service = 85% of member contributions.
10 or more years of service = 100% of member contributions plus 3% interest if left on deposit after 30 days.
For an elected official who becomes a member on or after January 1, 2012, pursuant to A.R.S. § 38-804(D), upon termination of employment (for any reason other than
death or retirement) within twenty (20) days after filing an application with EORP, shall receive a lump-sum payment of ONLY their accumulated contributions (less any
benefits paid or any amounts owed to the Plan) - thus, forfeiting all membership rights and credited service in the Plan upon receipt of refund of contributions. The
member will NOT receive the additional percentage of contributions as stated above.
Note: Arizona Revised Statutes do not allow an EORP member to borrow against your retirement account. A refund of your contributions can only be paid to you upon
termination of your employment with the EORP employer.
RETIREMENT ELIGIBILITY AND CALCULATION
Employees who became a member on or before December 31, 2011:
Early Retirement (Reduction for Age). Pursuant to A.R.S. §§ 38-801(5, 7 and 15), 38-805(C) and 38-808, early retirement benefits will commence the first day of month
following termination of employment to an elected official who has at least five (5) years of credited service and who ceases to serve as an elected official may retire
before meeting the age or service requirement for normal retirement The amount of an early retirement pension is 4% of the member's average yearly salary multi-plied
by the years of the member's credited service, not to exceed 80% of the member's average yearly salary then reducing that amount by three-twelfths of one
percent for each month early retirement precedes the member's normal retirement age. The maximum reduction is 30%.
Normal Retirement. Pursuant to A.R.S. §§ 38-801(5, 7 and 15), 38-805(A) and 38-808, normal retirement will commence the first day of month following termination
of employment to an elected official who ceases to hold office based the following age and service requirements:
 Age 65 years, with 5 or more years of credited service, or
 Age 62 years, with 10 or more years of credited service, or
 Twenty or more years of credited service (regardless of age)
The amount of a normal retirement pension is 4% of the member's average yearly salary multiplied by the years of the member's credited service, not to exceed 80% of
the member's average yearly salary.
Employees who became a member on or after January 1, 2012:
Early Retirement. Early Retirement is not available.
Normal Retirement. Pursuant to A.R.S. §§ 38-801(5, 7 and 15), 38-805(B) and 38-808, normal retirement benefits will commence the first day of month following
termination of employment and based upon the following:
 Age 65 years, with 5 or more years of credited service, or
 Age 62 years, with 10 or more years of credited service.
The amount of a normal retirement pension is 3% of the member’s average yearly salary multiplied by the member’s credited service, not to exceed 75% of the mem-ber’s
average yearly salary.
RETURN TO WORK AFTER RETIREMENT
If a retired member subsequently becomes an elected official, contributions shall not be made by the retired member and credited service shall not accrue while the
retired member is holding office. § 38-804(I). If a retired member subsequently becomes, by reason of election or reelection, an elected official of the same office from
which the member retired, within a time period following the member's retirement that is less than one full term for that office, the member shall not receive a pen-sion.
If/when the elected official ceases to hold the same office, the elected official is entitled to receive the same pension the elected official was receiving when the
elected official's pension was discontinued. Nothing in this section prohibits a retired judge called by the supreme court to active duties of a judge pursuant to § 38‑-
813 from receiving retirement benefits. § 38-804(J).
Every judge retired under this plan may, if physically and mentally able, be subject to call by the supreme court or the chief justice of the supreme court to assist the
supreme court, court of appeals or superior court under such directions as the supreme court may give, including the examination of the facts in cases before the court,
the examination of authorities cited and the preparation of opinions for and on behalf of the court. The court may order these opinions, to the extent approved by the
court, to constitute the opinion of the court. The retired judge may, subject to any rule which the supreme court adopts, perform any duties preliminary to the final
disposition of cases insofar as they are not inconsistent with the constitution of this state. § 38-813.
Notwithstanding any provision of law to the contrary, a retired judge who is temporarily called back to the active duties of a judge is entitled to receive the same com-pensation
and expenses as other like active judges less any amount received for that period in retirement benefits. § 38-813.
Effective July 20, 2011, the employer is required to pay an alternate contribution rate on behalf of a retired member who returns to work in any capacity in a position
ordinarily filled by an elected official. The current alternate contribution rate is 14.47%. A.R.S. § 38-810.04.
Effective July 20, 2011, the premium benefit (subsidy) will not apply if the retired member or survivor is reemployed and participates in health care coverage provided
by the member's or survivor’s new employer. A.R.S. § 38-817(E).
FINANCIAL SECTION
EORP Comprehensive Annual Financial Report
30
SERVICE PURCHASE
Purchase of Prior Active Military Service. Members who have at least ten (10) years of credited service may purchase up to sixty (60) months of credited service for peri-ods
of active military service performed before employment with their current employer. A.R.S. § 38-820. Active members may also receive credited service limited to
sixty (60) months if ordered/volunteered to active military service while working for the current employer if the criteria is met pursuant to A.R.S. § 38-820. The mem-ber
shall pay the members contributions, upon which the employer shall make employer contributions. If member performs military service due to presidential call-up,
the employer shall make the employer and employee contributions not to exceed forty-eight (48) months pursuant to A.R.S.38-820(G). For more information, contact
your employer.
Purchase of Prior Service from an Out-of-State Agency. Active members who have at least five (5) years of credited service with the Plan that have previous service with
an agency of the U.S. Government, a state of the U.S., or a political subdivision of a state of the U.S. as may elect to redeem up to sixty (60) months of any part of the
prior service if the prior service is not on account with any other retirement system. A.R.S. § 38-816.
Purchase of Prior Forfeited Service as an Elected Official. If a former elected official terminates membership in the Plan and takes a refund of contributions and is later re-employed
as an elected official may elect to purchase all of the previously forfeited credited service if the elected official signs a written election within ninety (90) days
after re-employment to reimburse the Plan within one (1) year after the date of re-employment. The amount required to reinstate the credited service is the amount
previously withdrawn plus interest at the rate of 9% compounded annually from the date of withdrawal to the date of repayment. A.R.S. § 38-804(H). (Form E1B) OR
If the statutory requirements above are not met, the elected official may still purchase some or all of the previously forfeited credited service or of elected official service
not covered by the Plan. The calculation is based on an amount computed by the Plan’s actuary to equal the actuarial present value. A.R.S. § 38-816(B). (Form E2) .
Purchase of Service Between the Arizona Retirement Plans/Systems. Members of any of the four Arizona state retirement System/Plans that have credited service under
another Arizona state retirement System/Plan may redeem the credited service to their current Arizona state retirement System/Plan by paying the full actuarial pre-sent
value of the credited service into the current Arizona retirement System/Plan with the approval of the EORP or governing board. A.R.S. § 38-922.
TAXATION OF RETIREMENT BENEFITS
Effective tax year commencing January 1, 1989, all EORP retirement benefits in excess of $2500 annually will be subject to Arizona state tax. A.R.S. §§ 38-811 and 43-
1022.
TRANSFERS
Transfer of Service Between the Arizona Retirement Plans/Systems. Members of any of the four Arizona state retirement System/Plans that have credited service under
another Arizona state retirement System/Plan may transfer the credited service to their current Arizona state retirement System/Plan by transferring the full actuarial
present value of the credited service into the current Arizona retirement System/Plan with the approval of the EORP or governing board. A reduced credited service
amount may be transferred based on the transfer of the actuarial present value of the credited service under the prior Arizona state System/Plan. A.R.S. §§ 38-921 and
38-922.
Transfer of Service Between City Retirement Plans. A member of a charter city retirement system who is an elected official may apply for a transfer of service credits from
the charter city retirement system to the EORP based on the actuarial present value of the service (with the member paying the difference), or the member may elect a
reduced service amount to be transferred based on the actuarial present value. A.R.S. § 38-821.
CONTINGENT LIABILITIES
The System is a party in various litigation matters. While the final outcome cannot be determined at this time, management is of the opinion that the final outcome
will be favorable or the final obligation, if any, for these legal actions will not have a material adverse effect on the System’s financial position or results of operations.
This is not an official version of the Arizona Revised Statutes. If there are any differences or discrepancies, the official version will prevail.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PLAN ASSET MATTERS
BASIS OF ACCOUNTING
EORP financial statements are prepared using the accrual basis of accounting. Member and employer contributions are recognized when due, pursuant to formal com-mitments,
as well as statutory or contractual requirements. Pension and Health Insurance subsidy benefits are recognized when due and payable in accordance with
the terms of the Plan. Refunds are due and payable by state law within 20 days of receipt of a written application for a refund. Refunds are recorded when paid.
Furniture, fixtures and equipment purchases costing $10,000 or more, when acquired, are capitalized at cost. Improvements, which increase the useful life of the prop-erty,
are also capitalized. Investment income net of administrative and investment expenses are allocated to each employer group based on the average relative fund
size for each employer group for that year.
By state statute, the Plan is required to provide information in the financial statements used to calculate Net Effective Yield. Net Effective Yield includes only realized
gains and losses. The Net Realized Gains (Losses) used in this calculation totaled $9,054,084 for FYE 2012 and $13,833,726 for FYE 2011. This calculation is independ-ent
of the calculation of the change in the fair value of investments and may include unrealized amounts from prior periods.
ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of net assets held in trust for pension benefits at June 30, 2012. Actual results could differ from those
estimates.
31
EORP Comprehensive Annual Financial Report
FINANCIAL SECTION
NOTE 3: CASH AND INVESTMENTS
CASH
Custodial credit risk for deposits is the risk that in the event of a bank failure, the Plan’s deposits may not be returned. The deposits are held in two financial institutions
with a balance of up to $250,000 (permanently guaranteed as of July 21, 2010) insured by the Federal Deposit Insurance Corporation (FDIC). The Plan mitigates custo-dial
credit risk for deposits by requiring the financial institutions to pledge securities from an acceptable list in an amount at least equal to 102% of the aggregate
amount of the deposits on a daily basis.
In addition to the FDIC insurance coverage on the operating and money market accounts of EORP, Wells Fargo pledged the following securities to EORP, Public Safety
Personnel Retirement System, and the Corrections Officer Retirement Plan on June 30, 2012, as collateral:
All monies shall be secured by the depository in which they are deposited and held to the same extent and in the same manner as required by the general depository
law of the state. Cash balances represent both operating and cash accounts held by the bank and investment cash on deposit with the investment custodian. All de-posits
are carried at cost plus accrued interest. The following table is a schedule of the aggregate book and bank balances of all cash accounts as of June 30, 2012:
INVESTMENTS
EORP investments are reported at Fair Value. Fair Values are determined as follows: Short-term investments are reported at cost plus accrued interest. Equity securities
are valued at the last reported sales price. Fixed-income securities are valued using the last reported sales price or the estimated fair value as determined by fixed-income
broker/dealers plus accrued interest. Investments in hedge funds are valued monthly at the last reported valuations. Limited partnership investments in credit
opportunities, private equity, real assets and real estate are valued on a quarterly or monthly basis at last reported valuations adjusted by any subsequent cash flows.
Joint venture real estate investments are reported at fair value using either appraisals or manager assessment to estimate the fair value. Appraisals will be performed
every three years on a rolling schedule unless circumstances warrant otherwise. Investment income is recognized as earned.
Statutes enacted by the Arizona Legislature authorize the Board of Trustees to make investments in accordance with the "Prudent Man" rule. The Board of Trustees is
not limited to so-called "Legal Investments for Trustees." In making every investment, the board shall exercise the judgment and care under the circumstances then
prevailing which men of ordinary prudence, discretion and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to
the permanent disposition of their funds, considering the probable income from their funds as well as the probable safety of their capital, provided:
1) That not more than eighty percent of the combined assets of the system or other plans that the board manages shall be invested at any given time in corporate
stocks, based on cost value of such stocks irrespective of capital appreciation.
2) That not more than five percent of the combined assets of the system or other plans that the board manages shall be invested in corporate stock issued by any one
corporation, other than corporate stock issued by corporations chartered by the United States government or corporate stock issued by a bank or insurance company.
3) That not more than five percent of the voting stock of any one corporation shall be owned by the system and other plans that the board administers, except that this
limitation does not apply to membership interests in limited liability companies.
5) That corporate stocks and exchange traded funds eligible for purchase shall be restricted to stocks and exchange traded funds that, except for bank stocks, insurance
stocks and membership interests in limited liability companies, are either:
a) Listed or approved on issuance for listing on an exchange registered under the Securities Exchange Act of 1934, as amended (15 United States Code §78a through
§78ll);
REPORTED AMOUNT BANK BALANCE
Pension Trust Fund $ 5,513,727 $ 5,513,727
Operating Fund 384,794 384,794
Total Deposits $ 5,898,521 $ 5,898,521
Description CPN Maturity Market Value
FNMA Pool AH0006 4.00 12-1-2040 1,655,452
FNMA Pool AH0007 4.00 12-1-2040 2,069,431
FNMA Pool AH0125 3.50 1-1-2041 1,303,689
FNMA Pool AH0946 4.00 12-1-2040 5,899,210
FNMA Pool AH0969 3.50 12-1-2025 36,105
FNMA Pool AH1264 4.00 1-1-2041 183,058
FNMA Pool AH1516 3.00 12-1-2025 4,541,065
FNMA Pool AH3394 4.00 1-1-2041 109,321
FNMA Pool AH6783 4.00 3-1-2041 5,858,140
Description CPN Maturity Market Value
FNMA Pool AH6993 4.50 2-1-2041 5,034,974
FNMA Pool AH7905 4.00 7-1-2041 1,126,561
FNMA Pool AH9937 4.50 5-1-2041 2,260,959
FNMA Pool AI1186 4.00 4-1-2041 212,081
FNMA Pool AI1163 4.50 4-1-2041 1,117,916
FNMA Pool AI6900 3.00 10-1-2026 3,007,744
FNMA Pool AI6897 3.00 10-1-2026 1,238,083
FNMA Pool AJ1625 3.00 10-1-2026 10,543,022
TOTAL 46,196,811
FINANCIAL SECTION
EORP Comprehensive Annual Financial Report
32
FIXED SECURITY TYPE
FAIR VALUE
JUNE 30, 2012
% OF ALL FIXED
INCOME ASSETS
WEIGHTED
AVG. CREDIT
Corporate Bonds 36,287,541 96.0% A
Mortgages 493,655 1.3% BBB
CBO 1,032,759 2.7% Below BBB
Total 37,813,955 100.0%
AVERAGE CREDIT QUALITY AND EXPOSURE LEVELS OF
NON-GOVERNMENT GUARANTEED SECURITIES
b) Designated or approved on notice of issuance for designation on the national market system of a national securities association registered under the Securities
Exchange A, Act of 1934, as amended (15 United States Code §78a through §78ll).
c) Listed or approved on issuance for listing on an exchange registered under the laws of this [Arizona] state or any other state.
d) Listed or approved on issuance for listing on an exchange of a foreign country with which the United States is maintaining diplomatic relations at the time of
purchase, except that no more than twenty per cent of the combined assets of the system and other plans that the board manages shall be invested in foreign
securities, based on the cost value of the stocks irrespective of capital appreciation.
e) An exchange traded fund that is recommended by the chief investment officer of the system, that is registered under the investment company act of 1940 (15
United States Code Section 80a-1 through 80a-64) and that is both traded on a public exchange and based on a publicly recognized index.
A.R.S. § 38-848.B as amended in 2008 authorized the Board of Trustees to commingle the assets of all the plans entrusted to its management, subject to the crediting
of receipts and earnings and charging of payments to the appropriate employer, system or plan. As a result, the various assets of the Public Safety Retirement System,
Elected Officials’ Retirement Plan, and the Corrections Officer Retirement Plan were unitized beginning September 1, 2008 into the PSPRS Trust. Investments for each
fund are allocated daily via a constant dollar unitization methodology. Realized and unrealized gains are allocated monthly using the same methodology.
At June 30, 2012, the fair value of the PSPRS Trust and the allocation for each system and plan was as follows:
A small portion of the assets (real estate) remain outside the comingled funds, representing approximately 11 basis points of the total.
CUSTODIAL CREDIT RISK
Custodial Credit Risk is the risk that EORP will not be able (a) to recover deposits if the depository financial institution fails or (b) to recover the value of the investment
or collateral securities that are in the possession of an outside party if the counterpart to the investment or deposit transaction fails. As of June 30, 2012, EORP has no
fund or deposits that were not covered by depository insurance or collateralized with securities held by our banks’ trust department or agent. Nor does EORP have any
investments that are not registered in the name of EORP, or the PSPRS Trust and are either held by the counterpart or the counterpart’s trust department or agent.
CREDIT RISK
Credit Risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligation to the Plan. As of June 30, 2012, the Plan’s fixed income assets
that were not government guaranteed represented 95.1% of the fixed income portfolio.
Each portfolio is managed in accordance with investment guidelines that are specific as to permissible credit quality ranges, exposure levels within individual quality
tiers, and the average credit quality of the overall portfolios. According to those guidelines, the fixed income portfolio must have a minimum weighted average quality
rating of A3/A-. Fixed income securities must have a minimum quality rating of Baa3/BBB– at the time of purchase. The portion of the bond portfolio in securities
rated Baa3/BBB– through Baa1/BBB+ must be 20% or less of the fair value of the fixed income portfolio.
Included in the fixed income portfolio are cash equivalents or commercial paper. Commercial Paper must have a minimum quality rating of A-1/P-1 at the time of
purchase. Investments in derivatives are limited to collateralized mortgage obligations (CMO), collateralized bond obligations (CBO), collateralized debt obligations
(CDO), and asset-backed securities (ABS).
In preparing this report, collateral for securities lending has been excluded because it is invested in a securities lending collateral investment pool.
The following tables summarize the Plan’s fixed income portfolio exposure levels and credit qualities.
PLAN UNITIZED PERCENT
PSPRS 5,042,941,294 76.17%
CORP 1,283,259,612 19.38%
EORP 294,171,509 4.45%
TRUST TOTAL 6,620,372,415 100.00%
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EORP Comprehensive Annual Financial Report
FINANCIAL SECTION
CREDIT RATING LEVEL CORPORATE BONDS MORTGAGES CBO
AAA - - -
AA 930,473 - -
A 3,284,207 - 484,652
BBB 991,425 15,612 -
Below BBB 134,651 478,043 548,107
Not Rated 30,946,785 - -
Total 36,287,541 493,655 1,032,759
RATINGS DISPERSION DETAIL
CONCENTRATION OF CREDIT RISK
Concentration of credit risk is the risk of loss that may be attributed to the magnitude of a government’s investment in a single issue. Other than bonds used as direct
obligations of and fully guaranteed by the U.S. Government, not more than 5% of the Fund or its fixed income portfolio at fair value shall be invested in bonds issued by
any one institution, agency or corporation.
INTEREST RATE RISK
Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. This risk is managed within the portfolio using segmented
time distributions. It is widely used in the management of fixed income portfolios in that it quantifies the risk of interest rate changes. The Plan does invest in fixed
income securities with floating rates that contain coupon adjustment mechanisms in a rising interest rate environment.
The following tables quantify, to the fullest extent possible, the interest rate risk of the Plan’s fixed income assets.
FOREIGN CURRENCY RISK
Foreign currency risk is the risk that changes in the foreign exchange rate will adversely impact the fair value of an investment. The PSPRS is allowed to invest part of its
assets in foreign investments.
The following table shows the Plan’s exposure to foreign currency risk (U. S. dollars):
FIXED INCOME SECURITY <1 1-5 6-10 11-15 16-20 >20
Corporate - 1,921,575 1,951,698 344,294 263,500 31,806,474
Agencies - - - - 1,019,221 940,654
CBO - - 548,107 - - 484,652
CDO - - - - - -
Total - 1,921,575 2,499,805 359,906 1,442,991 33,549,553
Mortgages - - - 15,612 160,270 317,773
SEGMENTED TIME DISTRIBUTION BY SECURITY TYPE
(INCLUDING GOVERNMENT GUARANTEED SECURITIES)
CALLABLE BONDS BY SECURITY TYPE
(INCLUDING GOVERNMENT GUARANTEED SECURITIES)
FIXED INCOME
SECURITY TYPE
FAIR VALUE
JUNE 30, 2012
Corporate 461,446 1.16%
Agencies - 0.00%
Total 461,446 1.16%
% OF ALL FIXED
INCOME ASSETS
FINANCIAL SECTION
EORP Comprehensive Annual Financial Report
34
ASSET CLASS OUT ON LOAN
TOTAL AVAILABLE
TO LOAN
% OF AVAILABLE
TO LOAN
Equities $ 3,114,464 $ 5,546,954 56.15%
Agencies - - -
Treasuries 752,333 754,916 99.66%
Exchange Traded 1,861,482 2,696,261 69.04%
Totals $ 5,728,279 $ 8,998,131 63.66%
DERIVATIVES
Derivative instruments are financial contracts whose values depend on the values of one or more underlying assets, reference rates, or financial indexes. They include
futures contracts, options contracts, and forward foreign currency exchange. The Board of Trustees has adopted a derivative policy that specifically authorizes external
investment managers to enter into certain derivative contracts based on an analysis that the use of such derivatives will have a positive impact on the Trust’s ability to
manage its underlying assets and liabilities. The PSPRS Trust investment program, indirectly through its external managers, holds investments in futures contracts. The
external money managers enter into these certain derivative instruments primarily to enhance the performance and reduce the volatility of the PSPRS portfolio, to gain
or hedge exposure to certain markets, and to manage interest rate risk. The external managers are required to follow certain controls, documentation and risk man-agement
procedures when employing these financial instruments.
The fair value exposure associated with these derivative instruments was recorded on the financial statements as a portion of the unrealized gains and losses related to
U.S. Equity and Fixed Income. The total of unrealized gains for EORP was $177,874 at June 30, 2012 consisting of U.S. Equity (gain of $176,834) and Real Assets (gain of
$1,040). Interest risk associated with these investments are included in the tables on page 32.
SECURITY LENDING PROGRAM
The Plan is party to a securities lending agreement with a bank. The bank, on behalf of the Plan, enters into agreements with brokers to loan securities and have the
same securities returned at a later date. The loans are fully collateralized primarily by cash. Collateral is marked-to-market on a daily basis. Non-cash collateral can be
sold only upon borrower default. The Plan requires collateral of at least 102% of the fair value of the loaned U.S. Government or corporate security. Securities on loan
are carried at fair value.
As of June 30, 2012 the fair value of securities on loan was $5,728,279 and the collateral was $5,956,525 for the Elected Officials Retirement Plan. The Plan receives a
negotiated fee for its loan activities and is indemnified for broker default by the securities lending agent. The Plan participates in a collateral investment pool. All secu-rity
loans may be terminated on demand by either the lender or the borrower. All matched loans shall have matched collateral investments.
The total cash collateral investments received for unmatched loans (any loan for which the cash collateral has not been invested for a specific maturity) will have a
maximum effective duration of 233 days. And, at least 20% of total collateral investments shall be invested on an overnight basis. At June 30, 2012, the weighted
average maturity was 113 days for all investments purchased with cash collateral from unmatched loans. The Plan has no credit risk because the amounts owed to the
borrowers exceed the amounts the borrowers owe to the Plan.
Prior to the current fiscal year, under this program, the Plan has not experienced any defaults or losses on these loans. However, in November 2008 EORP was informed
that due to recent market events one or more securities lending collateral vehicles that held assets have been impaired. This potential liability will be realized upon
settlement of the recovery process or if there becomes a liquidity issue with the collateral pool. A liability of $475,972 has been recorded as the EORP’s share.
CURRENCY SHORT TERM FIXED INCOME
AUSTRALIAN DOLLAR 2,379 -
SWISS FRANC 13,954 -
TOTAL MARKET VALUE 107,111 3,051,784
CANADIAN DOLLAR 4,116 -
DANISH KRONE 2,948 -
EURO CURRENCY UNIT 13,586 3,051,784
HONG KONG DOLLAR 5,198 -
ISRAELI SHEKEL 626 -
JAPANESE YEN 51,962 -
NEW ZEALAND DOLLAR 275 -
NORWEGIAN KRONE 1,505 -
POUND STERLING 8,630 -
SINGAPORE DOLLAR 439 -
SWEDISH KRONA 1,493 -
EQUITY
2,061,563
2,769,867
269,423
6,316,707
712,634
135,170
5,078,366
30,268
215,944
5,442,544
426,672
727,304
1,979,465
26,165,927
OTHER
-
-
-
2,718,782
-
-
-
-
-
1,329,048
-
-
-
4,047,830
TOTAL
2,063,942
2,773,983
272,371
12,100,859
717,832
135,796
5,130,328
30,543
217,449
6,780,222
427,111
728,797
1,993,419
33,372,652
FOREIGN CURRENCY RISK
35
EORP Comprehensive Annual Financial Report
FINANCIAL SECTION
LAND
BUILDING AND
IMPROVEMENTS
FURNITURE,
FIXTURES
AND EQUIPMENT
CAPITAL ASSETS
Additions - 4,595 5,622 10,217
Deletions - - - -
Balance June 30, 2012 33,145 247,964 107,526 388,635
ACCUMULATED DEPRECIATION
Balance June 30, 2011 - (41,229) (47,369) (88,598)
Additions - (7,211) (15,077) (22,288)
Deletions - - - -
Balance June 30, 2012 - (48,440) (62,446) (110,886)
Net Capital Assets $ 33,145 $ 199,524 $ 45,080 $ 277,749
TOTAL
CAPITAL ASSETS
Balance June 30, 2011 $ 33,145 $ 243,369 $ 101,904 $ 378,418
SCHEDULE OF CAPITAL ASSET ACCOUNT BALANCES
NOTE 4: CAPITAL ASSETS
These assets are stated at cost, and depreciable assets are depreciated using the straight-line method over the estimated life of the asset. Repairs and maintenance are
charged to expense as incurred. Depreciation expense for June 30, 2012 was $22,288.
The following table is a schedule of the capital asset account balances as of June 30, 2012, and June 30, 2011, and changes to those account balances during the year
ended June 30, 2012.
NOTE 5: CONTRIBUTIONS REQUIRED AND CONTRIBUTIONS MADE
The Retirement System's funding policy provides for periodic employer contributions at actuarially determined rates that, expressed as percentages of annual covered
payroll, are designed to accumulate sufficient assets to pay benefits when due. The normal cost and actuarial accrued liability are determined using the Entry Age Nor-mal
method. Unfunded actuarial accrued liabilities and assets in excess of actuarial accrued liabilities are being amortized as a level percent of payroll over a closed
period 30 year period. Beginning July 1, 2006, the minimum employer contribution rate increased from 5% to 10%.
During the year ended June 30, 2012, contributions totaling $28,529,727 ($12,790,744 employer [$11,479,526 pension and $1,311,218 health insurance subsidy con-tributions
in excess of benefits paid] $8,880,308 court fees and $6,858,675 member) were made in accordance with contribution requirements determined by an actu-arial
valuation of the System as of June 30, 2010. The employer contributions, including court fees, consisted of approximately $12,165,744 for normal cost
[$11,620,519 pension and $545,225 health insurance subsidy] plus $9,505,308 for amortization of the unfunded actuarial accrued liability in aggregate [$8,874,686
pension and $630,622 health insurance subsidy]. Employer contributions including court fees represented 32.99% of covered payroll [18.52% for normal costs (17.69%
pension and 0.83% health insurance) and 14.47% for amortization of the unfunded actuarial accrued liability in aggregate (13.51% pension and .96% health insurance
subsidy)]. Member contributions represented 10.00% of covered payroll and are attributable to normal costs.
NOTE 6: OTHER BENEFITS
The PSPRS adopted a supplemental defined contribution plan for all contributing members of an eligible group. An eligible group is defined as the employees of the
Board of Trustees, PSPRS, the EORP and the Corrections Officer Retirement Plan. The employees of any of these eligible groups must make an election to participate
within two years after the employee first meets the eligibility requirements to participate in the plan. The election to participate is irrevocable and continues for the
remainder of the employee’s employment with the employer. If an employee elects to participate, the employee must contribute at least 1% of the employee’s gross
compensation. The IRS maintains that the Employers designate the amounts contributed by each employee. All amounts contributed are subject to the discretion and
control of the Employer. Employee contributions and earnings to the plan are immediately vested. Employer contributions, if any, are vested based on the following
schedule:
Less than one year of service 0%
One year but less than two 20%
Two years but less than three 40%
Three years but less than four 60%
Four years but less than five 80%
Five years or more 100%
PSPRS administers the supplemental defined contribution plan through Nationwide Retirement Solutions. All contributions are sent directly to the third party adminis-trator
from the participating employer groups.
FINANCIAL SECTION
EORP Comprehensive Annual Financial Report
36
NOTE 7: HEALTH INSURANCE PREMIUM SUBSIDY-AGENCY FUND
The plan description, summary of significant accounting policies, investment policies and contributions required for the health insurance subsidy are the same as the
retirement plan and can be found under Notes 1, 2 and 5. The health insurance premium subsidy provided by A.R.S. §38-817 consists of a fixed dollar amount set by
statute and paid by the Plan on behalf of eligible retired members. The subsidized health benefits are provided and administered by the Arizona State Retirement
System, Arizona Department of Administration or the participating employer of the retired member. According to Governmental Accounting Standards Board (GASB)
Statement No. 43, the health insurance subsidy paid by the Plan represents other post employment benefits. The Plan does not administer a separate healthcare plan
as defined under IRC §401(h) or an equivalent arrangement. In addition, the Plan is not statutorily authorized to maintain a separate account for the health insurance
subsidy assets and benefit payments. Therefore, in accordance with GASB No. 43, the healthcare subsidy is reported as an agency fund. All assets of the Plan are avail-able
to pay both pension benefits and health insurance subsidy. The pension benefits and health insurance subsidy are funded through employer contributions based
on an annual actuarial valuation. Contributions are separately accounted for by employer but are not segregated by contribution type.
Contributions in excess of the health benefit subsidy payments are reported in the retirement plan. Therefore, no accumulated assets or liabilities to participating em-ployers
are reported in the agency fund. For FY2012, contributions collected for the health insurance subsidy amounted to $1,311,218 and the health benefit subsidy
payments were $914,968. The excess contributions of $396,250 were added to the retirement plan for reporting purposes. Effective FY2009, each participating em-ployer
is required by GASB Statement No. 45 to disclose additional information with regard to funding policy, the employer’s annual OPEB cost and contributions made,
the funded status and funding progress of the employer’s individual plan and actuarial methods and assumptions used.
NOTE 8: PLAN TERMINATION
EORP and its related plans are administered in accordance with Arizona statutes. These statutes do provide for termination of the plans under A.R.S. 41-3016.18. The
plans are scheduled to terminate on July 1, 2016.
NOTE 9: CONTINGENCIES
Some of our real estate partners in the investments categorized as “other investments” have obtained third party financing, which is secured by real property. The Plan
has entered into Capital Call Agreements with regards to these third party financing arrangements. The Capital Call Agreements, in the unlikely event of default, limit
the Plan to the amount of the defaulted payment or the original terms of the investment approved by the Board of Trustees, whichever is less. In management’s opin-ion,
any realized loss due to current economic conditions will not have a material effect on the financial statements.
As stated in Note 3 – Cash and Investments (under the Security Lending Program Heading), the System was notified in November 2008 of a situation involving one or
more security lending collateral vehicles that held assets which have been impaired as a result of recent market events. An estimate of the unrealized loss is approxi-mately
$10.7 million for all three plans and has been recorded as a liability. Management is still pursuing options regarding recoveries, if any, of the liability.
NOTE 10: FUNDING STATUS AND PROGRESS
The Plan’s funded status (not including health insurance subsidy) as of the most recent valuation data is as follows (in thousands):
The required schedule of funding progress immediately following the notes to the financial statements presents multi-year trend information about whether the actu-arial
value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits.
The actuarial methods and assumptions used for the pension benefits are as follows:
Valuation Date: June 30, 2012
Actuarial Cost Method Entry Age Normal
Amortization Method: Level Percent of Payroll, Closed
Remaining Amortization Period: 24 years closed for unfunded accrued actuarial liability
Asset Valuation Method: 7-Year Smoothed Market Value, 80%/120% Market
Investment Rate of Return: 8.00%
Projected Salary Increases: 4.75% which includes inflation at 4.50%
Actuarial valuations involve estimates of the value of reported amounts and assumptions about the probability of events far into the future, and the actuarially deter-mined
amounts are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future.
Actuarial calculations reflect a long-term perspective. Consistent with this perspective, actuarial methods and assumptions used include techniques that are designed
to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets. The actuarial calculations are based on the benefits provided under the
terms of the Plan in effect at the time of each valuation. These benefits are described in Note 1 under “Summary of Benefits”.
NOTE 11: REQUIRED SCHEDULES
The Schedule of Funding Progress and the Schedule of Employer Contributions are presented immediately following the notes to the financial statements.
ACTUARIAL
VALUE OF
ASSETS
ACTUARIAL
ACCRUED
LIABILITY
UNFUNDED
AAL(UAAL)
FUNDED
RATIO
ANNUAL
COVERED
PAYROLL
UAAL AS A %
OF COVERED
PAYROLL
(A) (B) (B-A) (A/B) (C) ((B-A)/C)
06/30/12 356,346 598,329 241,983 59.6% 67,934 356.2%
ACTUARIAL
VALUATION
DATE
37
EORP Comprehensive Annual Financial Report
FINANCIAL SECTION
REQUIRED SUPPLEMENTARY INFORMATION
* Entry Age Normal Cost method through 6-30-04. Projected Unit Credit method from 6-30-06 to 6-30-2010. Entry Age Normal since 6-30-2011.
* Beginning 6-30-07, funded ratio calculation does not include AAL for the health insurance premium subsidy. If the AAL for the health insurance premium subsidy were included, the funded
ratio would be 74.6% for 6-30-07, 76.6% for 6-30-08, 71.3% for 6-30-09, 66.7% for 6-30-10, 62.1% for 6-30-11 and 58.4% for 6-30-12.
* See Notes to the Schedules of Required Supplementary Information.
* Total Employer Contributions received during FY2007 were $10,908,830. GASB reporting requires discretely reporting the health insurance subsidy separately from the retirement plan. As a
result, the annual required contributions for the health insurance subsidy were calculated to be $1,523,119. The benefits paid for the health insurance subsidy were $850,915. The difference
between the calculated annual required contributions and the benefits paid of $672,204 were then added back to the annual required contributions for the retirement plan. This required
calculation resulted in a percent contributed of 107.1%for the retirement plan.
* Total Employer Contributions received during FY2008 were $12,343,051. GASB reporting requires discretely reporting the health insurance subsidy separately from the retirement plan. As a
result, the annual required contributions for the health insurance subsidy were calculated to be $1,380,478. The benefits paid for the health insurance subsidy were $911,923. The difference
between the calculated annual required contributions and the benefits paid of $468,555 were then added back to the annual required contributions for the retirement plan. This required
calculation resulted in a percent contributed of 104.3% for the retirement plan.
ACTUARIAL
VALUATION
DATE
ACTUARIAL
VALUE OF
ASSETS
(A) *
ACTUARIAL
ACCRUED
LIABILITY
(AAL) AT
ENTRY AGE
(B) *
UNFUNDED
AAL
(EXCESS)
(UAAL)
(B-A) *
FUNDED
RATIO
(A/B)
COVERED
PAYROLL
(C)
UAAL AS A
PERCENTAGE
OF COVERED
PAYROLL
((B-A)/C))
06-30-03 353,463 297,891 (55,572) 118.7% 49,351 (112.6)%
06-30-04 343,376 328,921 (14,455) 104.4% 50,624 (28.6)%
06-30-05 344,604 373,341 28,737 92.3% 53,449 53.8%
06-30-06 351,701 391,403 39,702 89.9% 54,696 72.6%
06-30-07 336,717 438,229 101,512 76.8% 61,308 165.6%
06-30-08 348,013 441,886 93,873 78.8% 62,184 151.0%
06-30-09 360,950 494,437 133,486 73.0% 67,777 196.9%
06-30-10 357,342 523,756 166,414 68.2% 66,442 250.5%
06-30-11 366,429 577,827 211,397 63.4% 66,637 317.2%
06-30-12 356,346 598,329 241,983 59.6% 67,934 356.2%
SCHEDULE OF FUNDING PROGRESS
(IN THOUSANDS)
FISCAL YEAR
ENDED
JUNE 30,
ANNUAL
REQUIRED
CONTRIBUTIONS
PERCENTAGE
CONTRIBUTED
2003 3,755,629 100.0%
2004 6,976,772 100.0%
2005 6,809,136 100.0%
2006 11,479,967 100.0%
2007 10,057,915 107.1% *
2008 11,431,128 104.3% *
2009 17,529,092 102.6% *
2010 18,341,612 102.0% *
2011 21,016,209 101.8% *
2012 20,756,084 101.8% *
EMPLOYER CONTRIBUTIONS
SCHEDULE OF EMPLOYER CONTRIBUTIONS
FINANCIAL SECTION
EORP Comprehensive Annual Financial Report
38
* Total Employer Contributions received during FY2009 were $18,446,377. GASB reporting requires discretely reporting the health insurance subsidy separately from the retirement plan. As a
result, the annual required contributions for the health insurance subsidy were calculated to be $1,355,533. The benefits paid for the health insurance subsidy were $917,286. The difference
between the calculated annual required contributions and the benefits paid of $438,247 were then added back to the annual required contributions for the retirement plan. This required
calculation resulted in a percent contributed of 102.6% for the retirement plan.
* Total Employer Contributions received during FY2010 were $19,225,839. GASB reporting requires discretely reporting the health insurance subsidy separately from the retirement plan. As a
result, the annual required contributions for the health insurance subsidy were calculated to be $1,255,755. The benefits paid for the health insurance subsidy were $884,225. The difference
between the calculated annual required contributions and the benefits paid of $371,530 were then added back to the annual required contributions for the retirement plan. This required
calculation resulted in a percent contributed of 102.0% for the retirement plan.
* Total Employer Contributions received during FY2011 were $21,942,587. GASB reporting requires discretely reporting the health insurance subsidy separately from the retirement plan. As a
result, the annual required contributions for the health insurance subsidy were calculated to be $1,322,611. The benefits paid for the health insurance subsidy were $926,378. The difference
between the calculated annual required contributions and the benefits paid of $396,233 were then added back to the annual required contributions for the retirement plan. This required
calculation resulted in a percent contributed of 101.8% for the retirement plan.
* Total Employer Contributions received during FY2012 were $21,671,052. GASB reporting requires discretely reporting the health insurance subsidy separately from the retirement plan. As a
result, the annual required contributions for the health insurance subsidy were calculated to be $1,311,218. The benefits paid for the health insurance subsidy were $914,968. The difference
between the calculated annual required contributions and the benefits paid of $396,250 were then added back to the annual required contributions for the retirement plan. This required
calculation resulted in a percent contributed of 101.8% for the retirement plan.
* See Notes to the Schedules of Required Supplementary Information.
39
EORP Comprehensive Annual Financial Report
FINANCIAL SECTION
REQUIRED SUPPLEMENTARY INFORMATION
NOTES TO THE REQUIRED SUPPLEMENTARY INFORMATION
ACTUARIAL METHODS AND ASSUMPTIONS FOR VALUATIONS PERFORMED JUNE 30, 2012
The entry age normal actuarial cost method of valuation is used in determining liabilities and normal cost. Differences in the past between assumed experience and
actual experience (actuarial gains and losses) become part of actuarial accrued liabilities. Unfunded actuarial accrued liabilities are amortized to produce payments
(principal and interest), which are expressed as a percent of payroll. A closed 24-year amortization period were used for the June 30, 2012 valuations. The actuarial
value of assets is based on a method that fully recognizes expected investment returns and averages unanticipated market return over a 7-year period. The investment
return rate assumption used is 8.00% per year, compounded annually (net of investment expenses). Projected salary increase assumptions are based on 4.75% which
include a price inflation assumption of 4.50% per year.
The Actuarial Standards of Practice require that the Funding Value of Assets fall within a reasonable range around the Market Value. Although some actuarial judgment
is used to determine what is deemed ‘reasonable’, a ratio approaching 140% is on the high end. We recommend that consideration be given to establishing an asset
corridor for the June 30, 2012 actuarial valuation. An asset corridor, sometimes called a “Collar”, is a limitation on the amount by which the Funding Value is permitted
to differ from Market Value. A corridor of 20% to 25% is a common standard, although many systems have relaxed their standards in response to the extraordinary
events of late 2008 and early 2009. It is not anticipated that this change would have any immediate impact on the contribution rate as the Funding Value of Assets was
within 15% of the Market Value. However, implementing this now would protect the System from having the Funding Value of assets stray too far away (either below
or above) from the true value of assets in the fund. The actuary recommends that a 20% corridor be added to the Funding Value of Assets Calculation.
Actuarial valuations are prepared annually as of June 30 for each participating employer. To facilitate budgetary planning needs, employer contribution requirements
are provided for each participating employer’s fiscal year that commences after the following fiscal year end. For example, the contribution requirements for fiscal year
2012 were determined by actuarial valuations as of June 30, 2010.
FINANCIAL SECTION
EORP Comprehensive Annual Financial Report
40
REFUNDABLE
MEMBERS’
RESERVE
EMPLOYERS’
RESERVE
FUTURE BENEFIT
INCREASE
RESERVE
BALANCE AS OF JUNE 30, 2010 $ 42,942,265 $ 229,538,201 $ 7,063,353
DISTRIBUTION OF REVENUES AND EXPENSES
Members' Contributions 4,716,681
Employers' Contributions 21,942,587
Earnings (Loss) on Investments Net of Investment Expenses 48,274,987
Pension and Insurance Benefits (40,592,096)
Refunds to Terminated Members (165,293) (51,396)
Administrative Expenses (324,343)
DISTRIBUTION OF TRANSFERS
Excess Investment Earnings to be used for Future Benefit Increases
Earnings (Loss) on Excess Investment Earnings Account Assets (1,226,904) 1,226,904
Amount Utilized by Benefit Increases Granted 8,290,257 (8,290,257)
Net Transfers In (Out) and Purchase of Service Credits 1,636,592 35,124
Balances Transferred to Employers' Reserve due to Retirement (5,668,757) 5,668,757
BALANCE AS OF JUNE 30, 2011 $ 43,461,488 $ 271,555,174 $ -
DISTRIBUTION OF REVENUES AND EXPENSES
Members' Contributions 6,858,675
Employers' Contributions 21,740,632
Earnings (Loss) on Investments Net of Investment Expenses (2,641,096)
Pension and Insurance Benefits (44,451,963)
Refunds to Terminated Members (71,665) (17,966)
Administrative Expenses (287,772)
DISTRIBUTION OF TRANSFERS
Excess Investment Earnings to be used for Future Benefit Increases
Earnings (Loss) on Excess Investment Earnings Account Assets
Amount Utilized by Benefit Increases Granted
Net Transfers In (Out) and Purchase of Service Credits 766,253 43,221
Balances Transferred to Employers' Reserve due to Retirement (4,061,386) 4,061,386
BALANCE AS OF JUNE 30, 2012 $ 46,953,365 $ 250,001,616 $ -
SCHEDULE OF CHANGES IN RESERVE BALANCES
FOR THE YEARS ENDED JUNE 30, 2012 AND 2011
SUPPORTING SCHEDULES INFORMATION
41
EORP Comprehensive Annual Financial Report
FINANCIAL SECTION
SUPPORTING SCHEDULES INFORMATION
SCHEDULE OF RECEIPTS AND DISBURSEMENTS
FOR THE YEARS ENDED JUNE 30, 2012 AND 2011
2012 2011
RECEIPTS
Members' Contributions $ 6,806,954 $ 4,714,711
Employers' Contributions 11,936,237 11,055,199
Court Fees 8,957,706 9,960,426
Interest 702,893 700,889
Dividends 2,338,403 2,839,125
Other Income 1,101,430 763,105
Securities Lending Income 73,760 146,863
Transfer In 148,679 248,035
Service Purchase 660,795 1,451,753
Maturities and Sales of:
U S Equity 37,400,371 29,668,560
Non-U s Equity 4,831,937 18,932,150
GTAA 3,290,080 1,644,039
Fixed Income 33,896,515 23,361,847
Absolute Return 206,824 1,884,207
Credit Opportunities 68,689,877 23,259,998
Private Equity 8,220,766 8,526,336
Real Assets 12,485,040 16,588,465
Real Estate 2,001,325 10,263,581
Total Receipts 203,749,592 166,009,289
DISBURSEMENTS
Pension Benefits 43,536,995 39,665,718
Refunds to Terminated Members 89,631 216,689
Investment and Administrative Expenses 1,761,596 1,305,863
Acquisitions of:
U S Equity 34,417,532 7,113,191
Non-U s Equity 7,778,217 7,026,271
GTAA 1,930,668 5,949,785
Fixed Income 13,780,703 27,191,058
Credit Opportunities 66,557,034 20,524,337
Private Equity 11,605,359 5,398,933
Real Assets 13,936,870 20,630,063
Real Estate 7,626,919 17,501,525
Total Disbursements 205,103,731 161,991,213
INCREASE (DECREASE)