2008 Elected Officials Summary

              ELECTED OFFICIALS’
SUMMARY ANNUAL FINANCIAL REPORT
FOR THE FISCAL YEAR ENDED JUNE 30, 2008
A PENSION TRUST FUND OF THE STATE OF ARIZONA
RETIREMENT PLAN
Fund Manager
Elected Officials’ Retirement Plan
Fund Manager Highlights
• Carter Olson, Esq., a board member since 2003, was first elected to the position of Chairman at the September
20, 2005, meeting of the Fund Manager and reelected to the position in September, 2006. Carter is the former
Pinal County Attorney and is currently a Superior Court Judge in Pinal County.
• Billy Shields, former President of the United Firefighters Association and a retired City of Phoenix Fire Captain,
was first elected to the position of Vice Chairman at the September 20, 2005 Fund Manager meeting and then
reelected in September, 2006. Billy has been a member of the Fund Manager for 4 years and is involved in nu-merous
nonprofit boards and organizations. He represents members of the System.
• Mike Galloway, who was appointed as a member of the Fund Manager in July of 2007, founded Galloway Asset
Management, LLC to serve the financial needs of Police Officers and Firefighters. Prior to becoming a financial
planner, he served in the United States Marine Corp and is a retired lieutenant from the Mesa AZ Police Depart-ment.
• Tim Dunne, a financial advisor with UBS Financial Services in Tucson, was appointed as a member of the Fund
Manager in December of 2007. He earned a BS degree in Psychology and taught the emotionally disturbed for
over two years in New York. He established a private counseling agency and later changed to the financial ser-vices
industry upon achieving a securities license.
• Lori Roediger, a graduate of the University of Arizona with a BS in Business Administration was appointed as a
member of the Fund Manager in February of 2008. She moved to San Francisco to pursue a career in finance.
She became the Senior Investment Officer for the Federal Home Loan Bank and was later hired by JP Morgan
where she was the first salesperson to be made a partner in the history of the firm.
• Brian Delfs, a City of Tucson Fire Captain and entrepreneur, is currently serving in an advisory capacity to the
Fund Manager. Brian is pursuing a Masters of Public Administration degree. He is a member of the Industrial
Commission and also sits on several government regulatory boards.
Fiscal Year 2008 Highlights
• The Elected Officials’ Retirement Plan (EORP) had a total rate of return of (7.59)% this year. Our equity portfo-lio
had a return of (12.11)%, which underperformed the equity benchmark by 153 basis points. Our fixed income
portfolio had a return of 3.08%, which underperformed the fixed income benchmark by 416 basis points.
• As of the close of the fiscal year 2008, the Future Benefit Increase Reserve was $18 million. This will enable
another post-retirement adjustment of 4% for qualifying retirees or their survivors beginning July 1, 2009.
• Retirement benefits paid totaled $32.5 million for the current year, compared to $28.7 for the previous year.
This represents a 13% increase from the prior year.
	
	
	
	
	
	
	
	
	
	
• During fiscal year 2008, the EORP Board continued its strategic initiative that will change the way in which
the Plan’s assets are managed and invested. In addition, there were other developments and initiatives that
strengthened Plan governance, increased administrative efficiency and productivity or improved controls.
	
	
	
	
	
	
	
	
	
	
	
• IT Assessment: An independent IT consulting firm, Torus Business Group, was retained to do a complete as-sessment
of the PSPRS IT systems environment and database development. The firm was also asked to set forth
options to address unmet needs, especially with respect to disaster recovery and business continuity capability.
The report was released in February 2008 and many of its recommendations were reflected in the strategic plan
and administrative budget for system FY’09.
• Investment Unitization Reporting: The accounting firm of Ernst & Young was retained to resolve any GAAP,
GASB, reporting or accounting issues that may be associated with the commingling of the assets of the PSPRS
System’s three Plans, which includes EORP, in a single trust vehicle for purposes of investment.
• Historical Asset Management: In December 2007, a spokesman from Cost Effective Measurement presented
to the Board a thorough evaluation of the System’s historical asset management cost effectiveness in relation to
the returns generated and relative to the System’s peer group. The CEM evaluation corroborated the findings
contained in an earlier FY’07 report from the investment firm of Ennis, Knupp & Associates.
Carter Olson
Chairman
Lori Roediger
Member
Tim Dunne
Member
Billy Shields
Vice Chairman
Brian Delfs
Advisor
Mike Galloway
Member
Plan Administrator
Elected Officials’ Retirement Plan
Dear Members,
I am pleased to present the EORP Summary Annual Financial Report for the fiscal year ended June 30, 2008. This
report provides financial information about the Plan’s financial status, investment performance, and highlights significant
changes that occurred during the year. The information in this report is derived from the Comprehensive Annual Finan-cial
Report (CAFR). To view the full CAFR, please refer to the last page of this report.
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 con-tribution
requirement to meet the calculated level cost of the Plan. The Plan is funded through a statutory member contribution of 7.00% of gross
payroll, an employer contribution that is expressed as a level percent of gross payroll and reset annually, depending on the results of the Plan’s
actuarial valuation, judicial filing fees and the realized and unrealized returns on the invested assets of the Plan.
The current contribution rate for participating employers is 28.00% of covered payroll. The rate that will take effect as of July 1, 2009 will be
26.25%. This new and lower aggregate rate is the result of an increase in the EORP’s FY’08 funding ratio. The judicial filing fees that the EORP
annually receives subsidize the contribution rate that the state and counties pay with respect to their EORP participants. The subsidized rate that
will take effect July 1, 2009 for state and counties will be 14.26% of payroll.
There is no single all-encompassing test to measure a retirement system’s funding progress and current status. A traditional measure 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 PSPRS Plan had
been declining for six consecutive years and was 74.6% as of June 30, 2007. However, as of June 30, 2008, the ratio improved slightly to 76.6%,
despite the fact that the System had a negative rate of return (7.59%) on its invested assets.
Although the 2000-2002 asset value losses have been by far the major cause of the Plan’s funding ratio erosion from FY’02 through FY’07, other
factors also contributed. These include, in descending order of importance: 1) actuarial demographic assumption and methodology changes,
made necessary by FY’07 actuarial audits, that increased the Plan’s unfunded liability and reduced its funding ratio; 2) a decrease in the actuarial
rate of return from 9.0% to 8.5%; and 3) the increased liability associated with certain legislated benefit increases.
POST RETIREMENT BENEFIT INCREASES
State law provides for an annual benefit increase for retirees or their survivors two years after retirement, regardless of age, or when the retiree
or survivor attains age 55 and has been retired for a year. These increases are limited to four percent per year by state law. These post retire-ment
increases are funded from a portion of the investment returns in excess of 9% that are accumulated in the Plan’s Reserve for Future Benefit
Increases. These reserves are invested along with all other assets of the Plan. The reserve balance, after subtracting the $10.3 million needed
to fund the July 1, 2008 post retirement increase, was $18.2 million. Because no new assets flowed into the Reserve in FY’08 due to the Plan’s
negative rate of investment return, the reserve balance is now only sufficient to fund one more year’s adjustment at the statuatory maximum of
4%.
FUTURE FINANCIAL STATUS EXPECTATIONS
At the conclusion of FY’09, the asset value loss that the Plan sustained in FY’02 will drop out of the actuarial value of assets. Given that, and if
FY’09 turns out to be a reasonably good year for the financial markets which admittedly seems remote at this time, and if the System is able to
achieve or exceed its actuarial assumed rate of return of 8.5%, the PSPRS Plan should continue to experience gradual improvement in its funding
ratio. As that happens, the aggregate PSPRS employer contribution rate should continue to decline. The further implementation, and ultimately
completion, of the System’s asset management restructuring process that began in FY’07 should serve to accelerate and magnify the expected
positive funding ratio and employer rate trends.
There are, however, risks, both realized and potential, that could delay or even reverse the expected improvement. These are: a sharp and
sustained downturn in the U.S. and global economies and financial markets that would cause the System to fall short of achieving rate of return
expectations; and having to reduce the actuarial rate of return assumption from 8.5% to 8.0% as was recommended by the actuarial auditing
firms that conducted the System’s actuarial audits in FY’07.
As we have moved into FY’09, and especially during September and October, the U.S. and global economies have weakened and the financial
markets, expecially the equity markets, have become sharply negative and volatile. Whether these trends will continue or whether economic and
financial trends will improve cannot be predicted with any certainty. But, at the moment, the prospect of our meeting or exceeding our rate of
return expectations appears remote. However, we shall simply have to wait and see how things turn out as of June 30, 2009.
Respectfully submitted,
James M. Hacking
Administrator
Jim Hacking
Administrator
Financial Statements
Net Assets are the resources avail-able
to pay pension benefits in
the future. Net assets decreased
$37,775,392 in fiscal year 2008 due
to negative market conditions.
Changes in Net Assets summa-rize
the income and expense
components of the plan. Net
Investment Income decreased
142.40% in fiscal year 2008 due
to negative market conditions.
Revenues By Source Expenses By Type
Elected Officials’ Retirement Plan
Summary Statement of Plan Net Assets
Year Ended
June 30, 2008
Year Ended
June 30, 2007
Amount
of Change
Percent
Change
Cash and Equivalents 5,973,514 285,869 5,687,645 1989.60
Total Receivables 8,727,518 3,257,498 5,470,020 167.92
Total Investments 320,660,224 370,388,553 (49,728,329) (13.43)
Securities on Loan 61,810,213 103,894,449 (42,084,236) (40.51)
Net Capital Assets 277,681 274,898 2,783 1.01
Total Assets 397,449,150 478,101,267 (80,652,119) (16.87)
Accrued Accounts Payable 481,965 359,857 122,108 33.93
Investment Purch Payable 3091,720 4,006,316 (914,596) (22.83)
Securities Lending Collateral 61,810,213 103,894,449 (42,084,236) (40.51)
Total Liabilities 65,383,898 108,260,622 (42,876,724) (39.61)
Net Assets 332,065,253 369,840,645 (37,775,392) (10.21)
Summary Statement of Change in Plan Net Assets
Year Ended
June 30, 2008
Year Ended
June 30, 2007
Amount
of Change
Percent
Change
Total Contributions 17,744,324 16,955,955 788,369 4.65
Net Investment Income (23,150,918) 54,598,524 (77,749,442) (142.40)
Transfer from Other Plans 573,261 1,190,489 (617,228) (51.85)
Total Additions (4,833,333) 72,744,968 (77,578,301) (106.64)
Benefits 32,518,978 29,568,462 2,950,516 9.98
Service Transfers and Refunds 67,792 147,906 (80,114) (54.17)
Administrative Expenses 355,290 339,875 15,415 4.54
Total Deductions 32,942,060 30,056,243 2,885,817 9.60
Net Increase (Decrease) (37,775,392) 42,688,724 (80,464,116) (188.49)
Beginning of Year Net Assets 369,840,645 327,151,921 42,688,724 13.05
End of Year Net Assets 332,065,253 369,840,645 (37,775,392) (10.21)
-$25
$0
$25
$50
$75
2008 2007 2006
Investments
Employers
Members
1.08%
95.95%
2.77%
0.21%
Pensions
Insurance
Refunds
Admin
Investment Performance
Elected Officials’ Retirement Plan
STRATEGY DIVERSIFICATION
After the devastating losses the fund suffered at the end of the “dot com” valuation bubble, the EORP Board, staff and consultants
began the process of expanding the EORP investment core strategy. That process has been ongoing and has involved the Fund Manager
members who have served at various times since then, a variety of external consultants and the professional investmen staff. The chief
objectives of the changing EORP investment strategy have been to:
• Diversify the portfolio away from extreme dependence upon publicly traded U.S. large and mid cap equities;
• Diversify the deployment of system assets to obtain global market exposures;
• Diversify the portfolio away from what had been an almost completely internally managed strategy;
• Diversify the portfolio into attractive alternative investments on an opportunistic basis; and
• Increase internal staff’s capabilities and expertise.
CUSTODY AND UNITIZATION
Two of the structural foundations for a more diversified asset allocation and financial market exposure are: 1) a custodian bank with truly
global reach in all custody services; and 2) a unitized structure. In FY’08, EORP completed the transfer of its Plans’ assets to BNY Mellon,
which was selected as the Plan’s new custodian bank.
In April 2008, the Plan secured the enactment of legislation that gives the System’s Fund Manager the explicit authority to use external
asset managers and to commingle the assets of the System’s three Plans so as to reduce investment related costs. The Plan’s assets
were pre-positioned to be moved into a unitized trust structure after fiscal year end.
EXPANDING CAPABILITIES
In addition to expanding the Investment Department staff, and enhancing internal “due dilligence” capabilities, the System added the
services of three specialist external consulting groups: ORG Real Property, Albourne America LLC, and StepStone Group LLC. These
consulting firms, which specialize in the sourcing and due dilligence review of domestic and international private equity, real estate,
and alternative investment opportunities, are an important complement to the System’s Investment Department staff and to the Fund
Manager’s generalist investment advisor.
Asset Management Restructuring
1 Year 3 Year 5 Year
Total Fund (7.59)% 5.27% 8.01%
Rank 1 85 75 65
Benchmark 2 (5.73)% 3.97% 5.31%
Median Public Fund (4.44)% 6.76% 8.94%
Peer Comparison
ASRS 3 (7.60)% 6.10% 5.50%
COPERS 4 (5.55)% 6.04% 8.69%
Investment Returns Asset Allocation
1 Rank and Median Fund returns are obtained from a
universe of public funds provided by Mellon Analytical
Services (Rank 1 = Best, Rank 100 = Worst)
2 Total Fund Benchmark consists of 50% S&P 500 Index,
10% S&P 400 Index, 5% S&P 600 Index, 20% Lehman
Govt/Credit Bond Index, 5% 90-Day T-Bill, 10% alternative
investments assumed to earn 8% annually.
3 Arizona State Retirement System
4 City Of Phoenix Employees Retirement System
44%
21%
20%
1%
6%
6%
2%
50%
16%
24%
5%
2%
3%
0%
0% 10% 20% 30% 40% 50% 60%
U.S. Equity
Non U.S. Equity
U.S. Bonds
Cash Equivalents
Real Estate
Private Equity
Hybrid Strategies
Current Allocation
Previous Allocation
Actuarial Summary
The Unfunded Actuarial
Accrued Liability decreased
by $11,294,924 during fis-cal
year 2008.
Funding Progress
Elected Officials’ Retirement Plan
Summary of Experience Gain (Loss)
2008 2007 2006 2005 2004
UAAL Start Of Year 114,582,583 39,702,483 16,153,749 (14,454,659) (55,571,906)
Normal Cost 11,317,429 13,546,764 12,834,061 15,525,435 14,848,962
Funding Method Contributions (17,744,324) 16,955,955 15,291,146 12,284,333 (10,966,971)
Interest Accrual 9,466,397 3,229,820 1,268,642 (1,122,984) (4,826,783)
Expected UAAL Before Changes 117,622,085 39,648,224 14,965,306 (12,336,541) (55,516,698)
Change From Amendments None None None None None
Change From Assumption Revision None 27,734,802 12,582,745 10,205,338 6,000,000
Expected UAAL After Changes 117,622,085 67,383,026 27,548,051 (2,131,203) (50,516,698)
Actual UAAL 106,327,161 114,582,583 39,702,483 16,153,749 (14,454,659)
Gain (Loss) 11,294,924 (47,199,557) (12,154,432) (18,284,952) (36,062,039)
Percent of Actuarial Accrued 2.5% (12.1%) (3.4%) (5.6%) (12.1%)
Liability at beginning of year
Historical Trends (+000)
Fiscal
Year
Ended
Actuarial
Asset
Value
Actuarial
Liabilities
Actuarial
Funded
Ratio
Market
Value *
Funded
Ratio
1999 $283,337 $227,100 124.8% $319,010 140.5%
2000 $329,777 $253,478 130.1% $355,335 140.2%
2001 $355,768 $250,987 141.7% $291,723 116.2%
2002 $351,349 $279,947 125.5% $242,723 86.5%
2003 $353,463 $297,892 118.7% $251,019 84.3%
2004 $343,376 $328,921 104.4% $268,214 81.5%
2005 $344,604 $373,340 92.3% $287,882 77.1%
2006 $351,701 $391,403 89.9% $310,629 79.4%
2007 $336,717 $451,299 74.6% $339,013 75.1%
2008 $348,013 $454,340 76.6% $363,880 80.1%
* Market Value does not include Future Benefit Increase Reserve assets.
As the funding ratio of the
plan has declined, the ag-gregate
employer contri-bution
rate has escalated.
The employer rate is set in
accordance with the results
of the annual actuarial val-uation.
The employee rate
is fixed by statute and is
currently 7.00%.
124.8%
130.1%
141.7% 125.5% 118.7% 104.4%
92.3%
89.9%
76.8% 78.8%
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
In Millions
Valuation
Assets
Accrued
Liabilities
Statistical Data
Active membership increased
by 1.4% during fiscal year
2008.
Tracey Peterson
Assistant Administrator
Chief Operations Officer
Retired members are eligible
for a post retirement adjust-ment
if they are at least 55
years of age on the effective
date and retired for one year.
Increases to pensions are
dependent upon an available
balance in the Plan’s excess
earnings reserve. Excess earn-ings
are accrued when the in-vestment
return is greater than
9.0%.
Elected Officials’ Retirement Plan
Summary Of Benefit Increases
Fiscal
Year
Ended
Excess
Yield Per
Statute
Excess
Earnings Utilized
Excess
Earnings
Available
Benefit
Increase
4% Cap
1999 8.52% 9,129,468 (3,623,737) 40,481,995 4.00%
2000 4.20% 5,216,866 (4,133,898) 46,908,586 4.00%
2001 - - (4,518,604) 34,436,162 4.00%
2002 - - (5,801,777) 23,400,088 4.00%
2003 - - (6,375,994) 18,591,900 4.00%
2004 6.02% 12,292,877 (5,958,472) 27,718,251 4.00%
2005 .56% 1,271,696 (8,027,464) 23,611,516 4.00%
2006 - - (8,946,622) 16,523,120 4.00%
2007 8.01% 20,868,734 (9,392,556) 30,827,881 4.00%
2008 - - (10,302,702) 18,184,418 4.00%
Retired Member & Survivor Data
Fiscal
Year
Ended Normal Disability Survivors Totals
Annual
Pensions
Average
Pension
Ratio Of
Active To
Retired
1999 408 16 123 547 $13,122,722 $23,990 1.3 to 1
2000 444 15 130 589 $15,096,774 $25,631 1.2 to 1
2001 495 16 136 647 $17,729,482 $27,403 1.1 to 1
2002 500 18 141 659 $19,606,416 $29,752 1.1 to 1
2003 546 19 144 709 $22,308,359 $31,465 1.1 to 1
2004 565 20 145 730 $23,854,186 $32,677 1.1 to 1
2005 600 18 151 769 $26,112,301 $33,956 1.0 to 1
2006 615 19 163 797 $28,044,340 $35,187 1.0 to 1
2007 651 20 155 826 $30,380,250 $36,780 1.0 to 1
2008 688 16 168 872 $32,850,340 $37,672 1.1 to 1
Fiscal
Year
Ended
Active
Members
Valuation
Payroll
(+000)
Average
Salary
Aggregate
Employer Rate
1999 709 $43,087 $60,711 8.90%
2000 720 $45,382 $63,030 10.22%
2001 737 $48,669 $66,037 8.94%
2002 738 $48,729 $66,029 6.97%
2003 751 $49,351 $65,714 7.55%
2004 767 $50,624 $66,003 13.49%
2005 781 $53,450 $68,436 14.54%
2006 800 $54,696 $68,370 20.54%
2007 813 $61,308 $75,409 18.55%
2008 824 $62,184 $75,474 20.21%
2009 - - - 28.00%
2010 - - - 26.25%
Active Members
PUBLIC SAFETY PERSONNEL
RETIREMENT SYSTEM
3010 EAST CAMELBACK ROAD, SUITE 200
PHOENIX, AZ 85016-4416
• To be a low cost, highly personalized
quality service provider of funds
management and benefit services.
• To manage long-term investments with
the goal of consistently outperforming
over time the composite weighted
market return benchmark net of
all investment-related costs so as to
assure the financial integrity of the
funds and the security of the benefits
these funds provide.
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.
• Do what’s best for our members
and financial health and
integrity of the System.
• Proactive
• Committed to high quality,
uniform, sustainable service.
• Innovative and cost effective
in Plan administration and
services.
• Use best practices in Human
Resource management.
Vision Values
This booklet provides a summary of the data contained in the EORP Comprehensive
Annual Financial Report (CAFR) for the fiscal year ended June 30, 2008. The booklet
doesn’t contain all the information and schedules necessary to be in conformance with
Generally Accepted Accounting Principles (GAAP). However, the CAFR is produced in
conformity with GAAP and can be obtained by visiting our WEB site at www.psprs.com.