Comprehensive annual financial report / Elected Officials' Retirement Plan fy 2010

              ELECTED OFFICIALS’
RETIREMENT PLAN
29th COMPREHENSIVE ANNUAL FINANCIAL REPORT
A PENSION TRUST FUND OF THE STATE OF ARIZONA
FOR THE FISCAL YEAR ENDED JUNE 30, 2010
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
Twenty-Ninth
Comprehensive Annual Financial Report
For the Fiscal Year Ended
June 30, 2010
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 36
Schedule of Employer Contributions 36
Notes to the Required Supplementary Information 38
Supporting Schedules Information
Schedule of Changes in Reserve Balances 39
Schedule of Receipts and Disbursements 40
Schedule of Administrative Expenses 41
Schedule of Consultant Expenses 41
Other Supplementary Information
Agency Fund Statement of Changes in Assets and Liabilities 42
Agency Fund Statement of Funding Progress 42
INVESTMENT SECTION
Chief Investment Officer’s Letter 44
Fund Investment Objectives 46
Investment Performance
Asset Allocation 46
Annualized Rates of Return, Benchmark and Indices 47
Top 10 Investment Holdings 48
Summary of Changes in Investment Portfolio 48
Schedule of Commissions Paid to Brokers 48
TABLE OF CONTENTS (continued)
Equity Portfolio 50
Fixed Income Portfolio 51
Alternative Investments Portfolio
Credit Opportunities Portfolio 56
Private Equity Portfolio 57
Real Assets Portfolio 58
Real Estate Portfolio 59
GTAA Securities Portfolio 59
ACTUARIAL SECTION
Actuary Certification Letter 62
Actuarial Balance Sheet 63
Summary of Valuation Assumptions 64
Solvency Test 66
Summary of Active Member Data 67
Summary of Retirees and Inactive Members 68
Schedule of Experience Gain/Loss 69
STATISTICAL SECTION
Statistical Summary 72
Changes in Plan Net Assets - Last Ten Fiscal Years 73
Schedule of Revenue by Source - Last Ten Fiscal Years 74
Schedule of Expenses by Type - Last Ten Fiscal Years 74
Deductions from Plan Net Assets for Benefits and Refunds by Type - Last Ten Fiscal Years 74
Valuation Assets vs. Pension Liabilities - Last Ten Fiscal Years 75
Contribution Rates - Last Ten Fiscal Years 77
Distribution of Benefit Recipients by Location 78
System Membership - Last Ten Fiscal Years 78
Principal Participating Employers 79
Summary of Benefit Increases - Last Ten Fiscal Years 79
Summary of Growth of the System - Last Ten Fiscal Years 80
Benefits Payable June 30, 2010 by Benefit Type 80
Average Monthly Benefits and Membership - Last Ten Fiscal Years 81
Participating Employers 82
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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
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EORP 29th Comprehensive Annual Financial Report
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EORP 29th Comprehensive Annual Financial Report
INTRODUCTORY SECTION
December 3, 2010
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 Twenty-ninth Comprehensive Annual Financial
Report (CAFR) for the Elected Officials Retirement Plan (EORP) for the fiscal year ended June 30, 2010 (FY’10), in accordance with the provisions of A.R.S.
Section 38-803.
The EORP’s Funding Ratio
As of fiscal year-end, the financial status of the EORP, as reflected in its funding ratio, decreased from 71.3% at June 30, 2009 to 66.7% at June 30, 2010.
This decrease continues the funding ratio erosion that resumed last year following a modest improvement in FY’08 that interrupted seven consecutive
years of funding status decline. This negative trend in the financial condition of the EORP is due in large part to the asset value losses and negative rates
of return that the Plan experienced in FY’01 and FY’02 and again in FY’08 and FY’09. Those losses were largely the result of a lack of diversification in the
deployment of the Plan’s assets for investment purposes.
The funding ratio decrease this fiscal year occurred despite the fact that the EORP had an FY’10 rate of return (13.47%) that was well in excess of its
actuarial assumed rate of return (8.5%). (For further information on the Plan’s net assets and changes in net assets, please refer to the subsequent Man-agement’s
Discussion and Analysis section of this Comprehensive Annual Financial Report (CAFR) which begins on page 20 .)
Because the EORP uses a seven-year averaging process (“smoothing”) to determine its fiscal year-end actuarial value of assets, only one-seventh of any
fiscal year’s investment gain or loss is reflected in that year’s results. The remaining six-sevenths are rolled forward and reflected in the results over the
next six fiscal years. That means that only one-seventh of the positive return that the Plan experienced in FY’10 is reflected in this fiscal year’s results.
That was more than offset by factoring into the FY’10 results, one-seventh portions of the -7.19% and -17.45% returns that the EORP experienced dur-ing
FY’08 and FY’09 respectively. Those negative returns were due to the collapse of the U.S. housing market and the intense recession that followed.
Because the remainder of the FY’08 and FY’09 investment losses will be factored into the EORP’s financial status results over the next several fiscal years,
the expectation is that the EORP’s funding ratio will continue to deteriorate unless this trend is offset by several consecutive years of much better-than-expected
rates of return or changes in the EORP’s employee contribution rate and benefit structure or both.
If the EORP’s funding ratio were calculated using fiscal year-end market value (rather than actuarial value) of assets, the Plan’s funded status would be
only 52%, rather than 66.7%. How to move the Plan, within a ten to twenty year time period, back to a state of financial soundness with an 80% fund-ing
ratio or better, calculated using market value, is clearly the principal challenge facing the PSPRS Board of Trustees.
Although the investment losses that the EORP sustained in FY’08 and FY’09 have taken, and will continue to take, their toll on the financial status of the
Plan, the principal structural impediment to restoring the EORP to a state of financial soundness in a reasonable period of time is the post retirement
adjustment structure. Current EORP statutes require that in any year in which the Plan generates an investment return in excess of 9%, one-half of the
excess return over 9% must be diverted into the EORP’s Reserve for Future Benefit Increases (“The Reserve”). These Reserve assets are used to finance
the cost of the post-retirement adjustments payable to eligible beneficiaries of the Plan. However, these Reserve assets are not taken into account for
funding ratio and employer contribution rate calculations. The Board of Trustees at their meeting on September 15, 2010 were told by the System’s
actuaries from Gabriel, Roeder, Smith & Co. (GRS) that this diversion of excess return in good investment return years makes the PSPRS-administered
Plans “unsustainable.”
PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM
Brian Tobin, Chairman CORRECTIONS OFFICER RETIREMENT PLAN
Lori Roediger, Vice Chairperson ELECTED OFFICIALS' RETIREMENT PLAN
Tim Dunne, Trustee 3010 East Camelback Road, Suite 200
Gregory Ferguson, Trustee Phoenix, Arizona 85016-4416 James M. Hacking
Alan Maguire, Trustee www.psprs.com Administrator
Jeff McHenry, Trustee TELEPHONE: (602) 255-5575 Ryan Parham Tracey D. Peterson
Randie Stein, Trustee FAX: (602) 255-5572 Chief Investment Officer Assistant Administrator-COO
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EORP 29th Comprehensive Annual Financial Report
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Employer Contribution Rates
Any change in the EORP’s fiscal year-end funding ratio impacts the employer contribution rate two fiscal years later. For example, a funding ratio change
in the Plan’s FY’10 will affect the employer contribution requirement during employer FY’12.
When times were good and the EORP was over-funded, the EORP employers’ contribution rates were abnormally low. For example, early in the current
decade the unsubsidized employer contribution rate that municipalities pay on behalf of their EORP participants was only 7.55% of payroll.
But as the EORP’s funding ratio eroded, the employer contribution requirement rose in large year-over-year increments until employer FY’09 when the
unsubsidized rate crested at 28.0% of payroll. Although this employer rate declined modestly in employer FY’10, it is currently at 29.79%. Based on the
EORP’s FY’10 results, the unsubsidized employer contribution rate is projected to increase to 32.99%, effective July 1, 2011 (i.e., the beginning of FY’12).
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 participants,
will increase from the current rate of 17.42% of payroll to 17.96%. With further erosion in the EORP’s funding status expected to occur over the next
several years, the forecast is that the employer rates will continue to increase unless significant Plan changes are made.
As we move further into this new fiscal year, the Board of Trustees and the System’s Administrator will consult with representatives of the System’s
constituency groups and the contributing employers in an attempt to create a consensus for a combination of legislative changes that will reverse the
present funding ratio/employer contribution rate trends and restore the EORP to a state of financial soundness within a reasonable period of time. But
even if our efforts to achieve a consensus fail or fall short, the PSPRS Board members, in our capacity as fiduciaries, will propose to the Legislature
changes designed to assure the sustainability to the Plan.
FY’10 Investment Results
The FY’10 net of fee rate of investment return for the EORP was 13.47%. The return was 1.37% higher than the Plan’s weighted composite rate of return
benchmark, which was 12.10%. In addition, on a “peer group” basis, the return was good enough to place the EORP in the second quartile (rank 32) of
the public funds included in the ICC Public Fund Universe of 100 public retirement systems.
Clearly, the FY’10 investment result was much higher than the Plan’s 8.5% actuarial assumed rate of return. However, because the return was in excess
of 9%, one-half of the return in excess of 9% -- a total of $15.3 million -- was diverted to the Plan’s Reserve and, therefore, will not be available to help
improve the Plan’s funding ratio/employer contribution rate situation described above.
Clearly, the FY’10 in-flow of new assets to the Plan’s Reserve was significant. It was greater than the $12.37 million that was withdrawn from the Re-serve
to fully fund the post-retirement increase that was paid at the statutory maximum of 4% to all of the Plan’s eligible benefit recipients on July 1,
2010. That excess of income over out-go left a Reserve balance of $7.1 million. However, absent an infusion of new assets at June 30, 2011, the Reserve
balance would only be sufficient to finance a partial post-retirement adjustment as of July 1, 2011. Moreover, as the number of eligible beneficiaries
increases and the average benefit payable rises, the out-go from the EORP’s Reserve will continue to increase. Therefore, it is expected that, at some
point, the Reserve’s balance will no longer be able to finance annual adjustments at the statutory 4% maximum.
The Strategy to Improve the Plan’s Funding Ratio and Decrease Employer Contribution Requirements
To help improve the EORP’s funded status and reduce employer contribution rates, the System must generate, on a consistent basis, annual rates of
return that meet or exceed the EORP’s return expectations. In pursuit of that goal, PSPRS has been, for the last four fiscal years, going through a com-plete
restructuring of the way in which the System manages and invests its Plans’ assets with a view to dramatically increasing asset allocation diversifi-cation
and diversification within asset classes. In the process, the EORP’s over-weight reliance on equities has declined considerably and so has the total
Fund’s volatility.
Unfortunately, according to our GRS actuaries, we have a five percent or less probability of our being able to invest our way back to an 80% or higher
funding status within ten to twenty years. Therefore, in advance of the 2011 legislative session, the PSPRS Board of Trustees intends to put forward a
variety of legislative changes that will, in the aggregate, give us a seventy-five percent or higher probability of achieving our stated funding goal within
our stated time-frame and we shall seek the support of our constituency groups and the System’s employers and their organizations in this effort.
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EORP 29th Comprehensive Annual Financial Report
INTRODUCTORY SECTION
Conclusion
As members of the PSPRS Board of Trustees, we intend to continue our efforts to assure the financial integrity of the System and its Plans and to faith-fully
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 its EORP stakeholders and we look forward to continu-ing
to serve as members of the Board of Trustees for this System.
Respectfully submitted,
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EORP 29th Comprehensive Annual Financial Report
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December 3, 2010
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 Twenty-ninth Comprehensive Annual Financial Report (CAFR) of the operations and financial condition of the Arizona Elected Officials Retire-ment
Plan (EORP). This report is for the fiscal year ended June 30, 2010. The Plan is a uniform statewide retirement system that provides retirement,
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, 2010 report of Heinfeld, Meech & Co. P.C., Certified Public Accountants and auditors for the System. Also included are the actuar-ial
certification statement and the actuarial balance sheet from the June 30, 2010 actuarial valuation prepared by the System's actuary, 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 Sys-tem.
The financial statements were prepared in conformity with generally accepted accounting principles appropriate for government-sponsored de-fined
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 information.
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 fi-nancing
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 re-turns
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 gain of $34.6 million this fiscal year. That was supplemented by revenue from member contributions of $4.6 million, direct employer
contributions of $8.8 million, judicial filing fees of $9.5 million and insurance premium taxes of $884.2 thousand. Please refer to the Statistical Section
for a ten-year history of revenues and expenses.
PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM
Brian Tobin, Chairman CORRECTIONS OFFICER RETIREMENT PLAN
Lori Roediger, Vice Chairperson ELECTED OFFICIALS' RETIREMENT PLAN
Tim Dunne, Trustee 3010 East Camelback Road, Suite 200
Gregory Ferguson, Trustee Phoenix, Arizona 85016-4416 James M. Hacking
Alan Maguire, Trustee www.psprs.com Administrator
Jeff McHenry, Trustee TELEPHONE: (602) 255-5575 Ryan Parham Tracey D. Peterson
Randie Stein, Trustee FAX: (602) 255-5572 Chief Investment Officer Assistant Administrator-COO
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EORP 29th Comprehensive Annual Financial Report
INTRODUCTORY SECTION
Administrative and Investment Expenses
The EORP’s FY’10 administrative and investment-related expenses totaled $1.3 million, down from $1.6 million the year before. Administrative and
investment expenses were approximately 49 basis points of the total assets managed. This is reasonable when compared with other public retirement
systems. A dedicated staff and constantly improving internal expertise has enabled management to keep costs relatively low even though assets are
being outsourced to external portfolio managers and service needs have escalated due to increasing numbers of participants and beneficiaries.
Investments
The total rate of return on the EORP assets for the fiscal year was 13.47% on a net of fees basis. This return was well in excess of the System’s 8.5% actu-arial
assumed rate of return and also well in excess of the 9% statutory “threshold” that causes a new in-flow of assets ($15.3 million) to the Plan’s Re-serve
for Future Benefit Increases. The Investment Section of this Report contains, among other things, graphs depicting the Plan’s performance, a de-tailed
summary of the investment portfolio, and commissions paid to investment professionals who provide services to PSPRS. All Plan investments
were held in trust by BNY Mellon, the System’s custodian bank.
Enacted Legislation
During FY’10, the State Legislature approved, and the Governor signed, two bills that were of significance. The first was HB2068 which made many ad-ministrative,
technical and clarifying changes to the EORP statutes. The second bill, SB1006, changed the name of the Fund Manager to Board of Trus-tees,
added two new Governor-appointed members to the Board (bringing the total to seven) and extended the terms of office for newly appointed
Board members from three to five years.
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 contribution require-ment
to meet the calculated level cost of the Plan.
The EORP is funded through a statutory participant contribution rate of 7.0% of gross payroll, an employer contribution that is expressed as a level per-cent
of gross payroll and is reset annually, depending on the Plan’s actuarial valuation results, judicial filing fees and the realized and unrealized returns
on the invested assets of the Plan.
The current unsubsidized contribution rate that is paid by participating cities and towns on behalf of their EORP participants is 29.79%. That unsubsi-dized
rate is projected to increase to 32.99% as of July 1, 2011.
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 17.42% of payroll. That rate is expected to increase to 17.96% 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. At that point in
time, the Plan’s funding ratio was 74.6%. Following modest improvement in FY’08, the funding ratio started to deteriorate again in FY’09; this trend
continued during FY’10 with the ratio falling to 66.7%. Given the System’s seven year averaging of investment results (actuarial “smoothing”), much of
the effect of the FY’08 and FY’09 negative rates of return are 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. Further decline in the Plan’s funding ratio will cause employer rates to rise even further.
Post Retirement Benefit Increases
State law provides for an annual benefit increase for EORP 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 a maximum of four percent. A benefit increase schedule can be
found in the Statistical Section of this CAFR.
These benefit adjustments are fully funded on a present value basis from the assets that are accumulated in the EORP’s Reserve for Future Benefit In-creases.
In any year in which the Plan generates a return in excess of 9%, one-half of the return in excess of 9% is diverted to the Reserve. (The Plan’s
FY’10 13.47% return resulted in a $15.3 million flow of new assets into the Reserve.) These reserve assets are invested along with all other assets of the
Plan.
The current Reserve balance, after subtracting the $12.37 million needed to fund the present value of the July 1, 2010 post retirement increase, is $7.1
million. Absent an infusion of new assets into the EORP Reserve during FY’11, the Reserve’s balance would only be sufficient to finance a partial post-retirement
adjustment as of July 1, 2011.
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EORP 29th Comprehensive Annual Financial Report
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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, 2009. This was the fifteenth consecutive year that the Plan has
achieved this prestigious award. In order to be awarded a Certificate of Achievement, 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.
A Certificate of Achievement is valid for a period of one year only. We believe our FY’10 Comprehensive Annual Financial Report continues to meet the
Certificate of Achievement Program’s requirements and we are 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 man-aged
and invested. (See the Board of Trustees’ transmittal letter to the Governor that begins on page 7). In addition, there were other developments
and initiatives that are worthy of note. These included the following:
• The FY’10 actual level of administrative spending was kept significantly below the budgeted amount and the FY’11 budget that was approved by the
Board came in at less than 95% of the FY’10 actual level of spending.
• The Internal Auditor/Compliance Officer developed and received approval for her annual audit plan and continued her monthly investments compli-ance
review. In addition, the Auditor took over responsibility for approving capital calls made with respect to investment commitments approved by
the Board.
• The System’s multi-year document imaging (i.e., scanning) project continued to progress. Once the project is completed, a new “Work Flow” project
will be initiated in accordance with the System’s Strategic Plan.
• The System’s IT Program Development staff created and implemented a new Members Only web site that enables members to view their account
information, including their monthly bank deposit information.
• The Program Development staff also implemented a one thousand concurrent user “GoToMeeting.com” capability for Board of Trustee meetings and
other meetings.
• A new once-a-day online database backup capability through Ibackup.com was implemented; this is in addition to our hourly backup to our secon-dary
Denver site.
• The System’s Disaster Recovery/Business Continuity capability was augmented by creating Disaster Recovery plans for the database application, the
timing of the pension payroll process and key employee availability following a disaster.
• The T1 line connection between the Phoenix headquarters and the PSPRS Denver backup facility was replaced with a microwave connection and the
bandwidth to the Denver facility was substantially increased to better accommodate our file transfer needs.
New Initiatives for System FY’11
As we have moved through the first four months of the new fiscal year (FY’11), some new initiatives are underway and still others are planned. These
include:
• Completing the RFP process for legal services that the Board requested and conducting an RFP process for external audit services after completion of
the current audit cycle;
• Keeping administrative expenses significantly under the FY’11 budgeted levels and holding the recommended FY’12 administrative budget to a level
not to exceed 95% of FY’11 actual expenditures;
• Discontinuing the practice of mailing monthly bank deposit notices to beneficiaries following our educating them as to how to access their monthly
payment information on-line via the Members Only website;
• Continuing to reduce the number of payment checks PSPRS issues monthly by converting more of them to ACH transfers and initiating the use of “pay
cards;” and
• Securing the enactment of legislative proposals to restructure and redesign provisions of the PSPRS Plans, including EORP, to restore them to a state
of financial soundness within a reasonable period of time and reduce employer contribution requirements in the process.
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EORP 29th Comprehensive Annual Financial Report
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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 complete
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 worked so diligently to assure the continued successful operation 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 EORP to a path of improving fi-nancial
status.
Respectfully submitted,
James M. Hacking
Administrator
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EORP 29th Comprehensive Annual Financial Report
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BOARD OF TRUSTEES
(AS OF JUNE 30, 2010)
Brian Tobin
Interim Chairman
Trustee
Gregory Ferguson
Trustee
Tim Dunne
Trustee
Lori Roediger
Vice Chairperson
Alan Maguire
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EORP 29th Comprehensive Annual Financial Report
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EXECUTIVE STAFF AND ORGANIZATIONAL CHART
Administrator
Tracey D. Peterson
Assistant Administrator
Chief Operations Officer
James M. Hacking
Ryan Parham
Chief Investment Officer
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EORP 29th Comprehensive Annual Financial Report
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PROFESSIONAL ADVISORS
Albourne America, LLC International Alternative Investment Consultant
Bank of New York Mellon Custodian
Gabriel, Roeder, Smith & Company Actuary
Heinfeld Meech & Co., P.C. Independent Auditors
HighGround, Inc. Legislative Liaison
Kutak Rock, LLP General Counsel
McLagan Partners, Inc. Human Resource Consultant
NEPC, LLC Independent Investment Advisor
Public Policy Partners Legislative Liaison
ORG Portfolio Management, LLC Real Estate Consultant
Step Stone Group, LLC Alternative Investment Consultant
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.
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 36
Schedule of Employer Contributions 36
Notes to the Required Supplementary Information 38
Supporting Schedules Information
Schedule of Changes in Reserve Balances 39
Schedule of Receipts and Disbursements 40
Schedule of Administrative Expenses 41
Schedule of Consultant Expenses 41
Other Supplementary Information
Agency Fund Statement of Changes in Assets and Liabilities 42
Agency Fund Statement of Funding Progress 42
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EORP 29th Comprehensive Annual Financial Report
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EORP 29th Comprehensive Annual Financial Report
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EORP 29th Comprehensive Annual Financial Report
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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 2010 are as follows:
• The Elected Officials’ Retirement Plan (EORP) had a total net of fees rate of return of 13.47% this year. Our total portfolio outperformed the target fund benchmark
by 137 basis points. This is a significant improvement over the prior year that had a total rate of return of -17.75%.
• As of the close of the fiscal year 2010, the Future Benefit Increase Reserve was $7.1 million. The infusion of new assets into the Reserve was sufficient to finance a
full 4% post-retirement adjustment as of July 1, 2010. However, payment of a post-retirement adjustment for July 1, 2011 will again depend on an additional
infusion of new assets into the Reserve.
• Retirement benefits paid totaled $36.9 million for the current year, compared to $34.2 for the previous year. This represents an 7.9% increase from the prior year.
The majority of this increase is the result of the cost of post-retirement adjustments paid to the retirees or their survivors of the Plan.
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 FY10 and FY09. Following each schedule is a brief summary of the signifi-cant
changes noted in these schedules.
21
EORP 29th 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, 2010 were $279.5 million, a 8.21% increase from $258.3 million at June 30, 2009. The increase in net
assets is primarily due to favorable 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 06/30/2010 As of 06/30/2009 Change % Change
Cash and Short-Term Investments $ 3,234,584 $ 4,535,563 $ (1,300,979) (28.68)%
Total Receivables 5,146,288 1,807,867 3,338,421 184.66
Total Investments 273,888,768 252,903,599 20,985,169 8.30
Securities Lending Collateral 30,153,285 39,597,501 (9,444,216) (23.85)
Net Capital Assets 255,964 263,115 (7,151) (2.72)
Total Plan Assets 312,678,890 299,107,645 13,571,245 4.54
Accrued Accounts Payable 486,070 630,433 (144,363) (22.90)
Investment Purchases Payable 2,495,718 546,607 1,949,111 356.58
Securities Lending Collateral 30,153,285 39,597,501 (9,444,216) (23.85)
Total Plan Liabilities 33,135,072 40,774,540 (7,639,468) (18.74)
Net Assets $279,543,818 $258,333,105 $21,210,713 8.21 %
SUMMARY COMPARATIVE STATEMENTS OF PLAN NET ASSETS
2010 2009 Change % Change
ADDITIONS
Total Contributions $ 23,842,557 $ 22,343,167 $ 1,499,390 6.71%
Net Investment Income (Loss) 34,583,592 (61,526,963) 96,110,555 156.21
Transfers and Service Purchases 40,961 283,226 (242,265) (85.54)
Total Additions (Reductions) 58,467,110 (38,900,569) 97,367,679 250.30
DEDUCTIONS
Benefits 36,884,844 34,178,410 2,706,434 7.92
Service Transfers and Refunds 126,426 131,663 (5,237) (3.98)
Administrative Expenses 245,127 521,507 (276,380) (53.00)
Total Deductions 37,256,397 34,831,579 2,424,818 6.96
Net Increase (Decrease) 21,210,713 (73,732,148) 94,942,861 128.77
Balance Beginning of Year - July 1 258,333,105 332,065,253 (73,732,148) (22.20)
Balance End of Year - June 30 $279,543,818 $258,333,105 $21,210,713 8.21%
SUMMARY COMPARATIVE STATEMENTS OF CHANGES IN PLAN NET ASSETS
Summary Comparative Statements of Changes in Plan Net Assets Analysis
Employer and employee contributions increased $1.5 million due almost entirely to additional court fees credited to the Elected Officials’ Retirement Plan during the
fiscal year 2010. Additionally, there was a $512 thousand increase in members’ service purchases.
For FY 2010, EORP recognized a net investment gain of $34.6 million which compares to a $61.5 million loss in the previous year. This 156.2% increase in income was
due to the more positive 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 2010, these deductions totaled $37.3 million, an increase of 6.96% from the $34.8 million paid during FY 2009. The total benefit payments increase is due to a
net increase in the number of benefit recipients plus post-retirement adjustments provided to existing benefit recipients. Details of these changes can be found on
pages 65 and 66 of the Actuarial Section of this report. Refunds decreased slightly by 4.0% ($5.0 thousand). Refunds represent a return of contributions held on ac-count
when a member leaves office without qualifying for retirement. Administrative expenses decreased substantially from the prior year mainly due to a decrease in
professional services expenses.
FINANCIAL SECTION
EORP 29th 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 three years. As illustration, at the end of FY07, 72.8% of the entire investment portfolio was invested in equities versus 41.2% at the end of FY10. Fixed income
has remained about 19% of the entire portfolio. However, alternative investments have increased from 3.4% in FY 07 to 39.8% in FY10.
At June 30, 2010, EORP held $114.0 million in equities. The FY 2010 rate of return for EORP total equities was 13.73% versus a benchmark rate of return of 13.66%. At
June 30, 2010, EORP held $52.7 million in fixed income securities. The FY 2010 rate of return for EORP fixed income securities was 13.84% versus a benchmark rate of
return of 9.50%. 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
71.3% 66.7%
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
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Valuation Assets Accrued Liabilities
1.07%
6.88%
9.89%
4.31%
7.87%
9.60%
18.95%
16.97%
23.98%
U S Equity Non-U S Equity Fixed Income
Credit Opportunities Private Equity Real Assets
Real Estate GTAA Short Term Investments
23
EORP 29th 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, 2010.
At June 30, 2010, the total funded status of the EORP decreased to 66.7% from 71.3% at FYE 2009. Although EORP had positive investment returns during the past
fiscal year, this decrease in funded status is related primarily to investment losses in investment losses from prior years being fully reflected. The market value smooth-ing
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 29th Comprehensive Annual Financial Report
24
STATEMENT OF PLAN NET ASSETS
JUNE 30, 2010 WITH COMPARATIVE TOTALS FOR 2009
JUNE 30, 2010 JUNE 30, 2009
ASSETS
Cash and Short-Term Investments $ 3,234,584 $ 4,535,563
RECEIVABLES
Member Contributions 133,829 161,060
Employer Contributions 282,420 334,034
Court Fees 871,735 832,747
Interest and Dividends 319,325 445,121
Investment Sales 3,518,712 -
Other 20,267 34,905
Total Receivables 5,146,288 1,807,867
INVESTMENTS AT FAIR VALUE (NOTES 2 AND 3)
U.S. Equity 66,708,288 89,332,496
Non U.S. Equity 47,199,392 49,436,152
GTAA 19,135,513 -
Fixed Income 52,728,837 48,814,352
Total Investments 273,888,768 252,903,599
Securities Lending Collateral 30,153,285 39,597,501
CAPITAL ASSETS (NOTE 4)
Land 33,145 33,145
Building 238,510 233,969
Furniture, Fixtures & Equipment 55,798 52,135
Total Capital Assets 327,453 319,249
Accumulated Depreciation (71,489) (56,134)
Net Capital Assets 255,964 263,114
TOTAL PLAN ASSETS 312,678,890 299,107,645
LIABILITIES
Accrued Accounts Payable 486,070 630,433
Investment Purchases Payable 2,495,718 546,607
Securities Lending Collateral 30,153,285 39,597,501
Total Plan Liabilities 33,135,072 40,774,540
NET ASSETS HELD IN TRUST FOR PENSION BENEFITS $279,543,818 $258,333,105
NET ASSET RESERVES
Refundable Members’ Reserve 42,942,264 42,072,605
Employers’ Reserve 229,538,201 212,622,829
Future Benefit Increase Reserve 7,063,353 3,637,670
Total Net Asset Reserves $279,543,818 $258,333,105
Credit Opportunities 26,740,325 19,463,055
Real Assets 11,983,011 10,601,475
Real Estate 27,500,577 26,014,322
Private Equity 21,892,825 9,241,747
The accompanying notes are an integral part of these financial statements.
25
EORP 29th Comprehensive Annual Financial Report
FINANCIAL SECTION
STATEMENT OF CHANGES IN PLAN NET ASSETS
FOR THE YEAR ENDED 2010 WITH COMPARATIVE TOTALS FOR 2009
2010 2009
ADDITIONS
Contributions
Members’ Contributions (NOTES 2,5) $ 4,611,179 $ 4,436,652
Employers’ Contributions (NOTES 2,5) 8,803,518 9,528,861
Court Fees 9,538,094 8,000,231
Members’ Service Purchase 889,766 377,424
Total Contributions 23,842,557 22,343,167
Investment Income
From Investing Income
Net Appreciation (Depreciation) in Fair Value of Investments (NOTES 2,3) 30,340,510 (67,630,322)
Interest 1,571,296 1,384,471
Dividends 3,383,248 5,271,959
Other Income 182,434 14
From Securities Lending Activities
Securities Lending Activities (NOTE 3)
155,213 748,175
70,526 (138,107)
(33,379) (91,508)
192,360 518,560
Total Investment Income (Loss) 35,669,848 (60,455,317)
Less Investment Expense (1,086,256) (1,071,646)
Net Investment Income (Loss) 34,583,592 (61,526,963)
Transfers Into System 40,961 283,226
Total Additions (Reductions) 58,467,110 (38,900,569)
DEDUCTIONS
Pension Benefits (NOTE 2) 36,884,844 34,178,410
Refunds To Terminated Members (NOTE 2) 126,426 131,663
Administrative Expenses 245,127 521,507
Transfers Out of System - -
Total Deductions 37,256,397 34,831,579
NET INCREASE (DECREASE) 21,210,713 (73,732,148)
NET ASSETS HELD IN TRUST FOR PENSION BENEFITS
Beginning of Year, July 1 258,333,105 332,065,253
End of Year, June 30 $279,543,818 $258,333,105
Securities Lending Income
Borrower Rebates
Agents Share of Income
Net Securities Lending Income
The accompanying notes are an integral part of these financial statements.
FINANCIAL SECTION
EORP 29th 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, 2010 and 2009, 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, 2010 and 2009, 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
GROUP 2010 2009
Cities and Towns 21 21
Counties 15 15
State Agencies 1 1
Total Employers 37 37
RETIREMENT PLAN
MEMBERSHIP TYPE 2010 2009 2010 2009
Retirees 921 905 525 505
Terminated Vested 146 119 0 0
Current Vested 539 512 0 0
Current Non-Vested 288 345 0 0
Total Members 1,894 1,881 525 505
INSURANCE SUBSIDY
27
EORP 29th Comprehensive Annual Financial Report
FINANCIAL SECTION
AVERAGE MONTHLY BENEFIT
An average of your highest 36 consecutive months within the last 10 completed years of credited service as an elected official that yield the highest average. If an
employee does not have three 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)
Contingent upon the excess investment earnings, effective July 1 of each year, eligible retired members or survivors may be entitled to a permanent benefit increase in
their base benefit. To be eligible for the increase, the retired member or survivor must be either age 55 or older on July 1 of the current year and receiving benefits on or
before July 31 of the previous year, or the retired member or survivor has been receiving benefits on or before July 31 of the previous two years. The maximum amount
of the increase is 4% of the average normal benefit being received on the preceding June 30. A.R.S. § 38-818.
CONTRIBUTIONS
Each member shall contribute 7.0% of salary to the Plan on a pre-tax basis. 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 salary). 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.
Members are eligible to receive credited service limited to 60 months if called to active duty while working for the current employer. A.R.S. § 38-907.
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(6).
DEATH BENEFIT
An automatic death benefit for an active, inactive or retired member will be paid as follows:
Spouse’s Pension. If the member or inactive member was married to the surviving spouse for at least two years, the surviving spouse will receive 75% of the members
pension benefit based on the calculation for a disability benefit. A.R.S. § 38-807, OR
Guardian Benefit. If there is no surviving spouse, or the pension of the surviving spouse is terminated, the benefit (75% of the members pension benefit based on the
calculation for a disability benefit) may be paid to the guardian of the surviving unmarried child(ren) until the child turns 18, or until the age of 23 if the attending full-time
school between the ages of 18 and 23. If a guardian benefit is paid to a disabled child (the child’s disability occurred prior to the age of 23) and remains a depend-ent
of the guardian, the benefit is payable for the lifetime of the child. A.R.S. § 38-807(D), OR
Balance of Contributions. If there is no surviving spouse or eligible child(ren), the member's named beneficiary on file will receive the balance of the member’s accumu-lated
contributions. A.R.S. § 38-807(E).
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.
The disability benefit is 20% of the member's average yearly salary with 4.99 or less years of credited 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 10 or more years of credited service. A.R.S. § 38-808(B)(2).
ELIGIBILITY
All elected officials are members of the Plan (except a state elected official who is subject to term limits may not participate in the Plan for that specific term of office).
A.R.S. §§ 38-801(14) and 38-804(A).
HEALTH INSURANCE
For EORP retirees, survivors and their eligible dependents with 8 or more years of credited service* that elect group health insurance and/or accident insurance cover-age
administered by EORP or another state recognized employer plan, the EORP will pay up to the following subsidy amount. A.R.S. §§ 38-817, 38-651.01 and 38-782.
* Members with 5 to 7.99 years of credited service will receive a proportionate share of the subsidy stated above.
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
FINANCIAL SECTION
EORP 29th Comprehensive Annual Financial Report
28
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 60 days after the employer’s effective
date. A.R.S. § 38-815.
REFUNDS
Pursuant to A.R.S. § 38-804(B), upon termination of employment (for any reason other than death or retirement) within 20 days after filing an application with the
EORP, a member shall receive a lump-sum payment of accumulated contributions (less any benefits paid or any amounts owed to the Plan). The member forfeits all
membership rights and credited service in the Plan upon receipt of refund of contributions. If the member has five or more years of credited service, an additional per-centage
of contributions will be refunded to the member according to the member’s years of service as stated below:
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.
RETIREMENT ELIGIBILITY AND CALCULATION
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. Maximum is 80% of
the member's average yearly salary. A.R.S. §§ 38-805 and 38-808.
Early Retirement (Reduction for Age). An elected official who has five or more years of credited service may retire before meeting the age or service requirement for
normal retirement. The amount of an early retirement pension is computed by determining the amount of accrued normal retirement pension and then reducing the
amount determined by three-twelfths of one percent for each month early retirement precedes the member's normal retirement age as noted above. The maximum
reduction is 30%. A.R.S. §§ 38-805(B) and 38-808(B)(1).
Normal Retirement. An elected official may retire with normal retirement based the following age and service requirements:
• Age 65 years, with 5 or more years of credited service.
• Age 62 years, with 10 or more years of credited service.
• Twenty or more years of credited service regardless of age.
RETURN TO WORK AFTER RETIREMENT
If a retired member subsequently becomes an elected official, contributions shall not be made to the Plan nor shall additional years of credited service accrue. However,
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 pension. A.R.S. § 38-804(G)(H).
If 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 offi-cial’s
pension was discontinued. A.R.S. § 38-804 does not prohibit a retired judge from receiving a retirement benefit if called by the supreme court to active duties.
A.R.S. §§ 38-804(H) and 38-813.
SERVICE PURCHASE
Purchase of Prior Active Military Service. Members may purchase up to 48 months of credited service for periods of active military service performed before employment
with their current employer (even if the member receives a military pension). A.R.S. § 38-820. Additionally, members can receive credited service limited to 60 months
if called to active duty while working for the current employer. For more information, contact your employer. A.R.S. § 38-820.
Purchase of Prior Service from an Out-of-State Agency. Active members that have previous service with an agency of the U.S. Government, a state of the U.S., or a politi-cal
subdivision of a state of the U.S. as may elect to redeem 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 90 days after re-employment
to reimburse the Plan within one 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(F).
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).
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 PSPRS or governing board. A.R.S. § 38-922.
29
EORP 29th Comprehensive Annual Financial Report
FINANCIAL SECTION
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.
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 $(83,746) for FYE 2010 and $(43,712,004) for FYE 2009. 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.
The Plan implemented Governmental Accounting Standards Board (GASB) Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, for the year
ended June 30, 2010. Statement No. 53 addresses the recognition, measurement, and disclosures regarding derivative instruments entered into by the Plan.
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, 2010. Actual results could differ from those
estimates.
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, 2010, as collateral:
Description CPN Maturity Market Value
FED NATL MTG ASSN POOL #257449 6.00 11/1/2038 $ 6,302,267
FED NATL MTG ASSN POOL #885515 6.00 7/1/2036 2,798,720
FED NATL MTG ASSN POOL #911370 6.00 2/1/2037 2,150,459
FED NATL MTG ASSN POOL #930769 6.00 3/1/2039 4,802,040
FED NATL MTG ASSN POOL #950981 6.00 10/1/2037 6,864,700
TOTAL $22,918,186
FINANCIAL SECTION
EORP 29th Comprehensive Annual Financial Report
30
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, 2010:
INVESTMENTS
EORP investments are reported at Fair Value. Fair Values are determined as follows: Short-term investments are reported at cost which approximates fair value. 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 market value as deter-mined
by fixed-income broker/dealers. Directed real estate and venture capital investments are reported at fair value using appraisals to estimate the fair value. Ap-praisals
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.
4) 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);
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, 2010, the fair market value of the PSPRS Trust and the allocation for each system and plan was as follows:
PLAN UNITIZED PERCENT
PSPRS $ 4,553,738,626 76.66%
CORP 1,108,804,113 18.67%
EORP 277,865,254 4.68%
TRUST TOTAL $5,940,407,993 100.00%
REPORTED AMOUNT BANK BALANCE
Pension Trust Fund $ 2,962,381 $ 2,962,381
Operating Fund 272,203 272,203
Total Deposits $3,234,584 $3,234,584
31
EORP 29th Comprehensive Annual Financial Report
FINANCIAL SECTION
FAIR VALUE
JUNE 30, 2010
% OF ALL FIXED
INCOME ASSETS
WEIGHTED
FIXED SECURITY TYPE AVG. CREDIT
Corporate Bonds $ 47,030,307 94.80% AA
Mortgages 522,724 1.10% Below BB
CBO 1,309,450 2.60% A
CDO 720,251 1.50% A
Total $49,582,732 100.00% AA
AVERAGE CREDIT QUALITY AND EXPOSURE LEVELS OF NON-GOVERNMENT
GUARANTEED SECURITIES
CREDIT RATING LEVEL CORPORATE BONDS MORTGAGES CBO CDO
AAA $ - $ 32,280 $ - $ -
AA 43,590,030 - - -
A 1,744,846 - 1,088,087 720,251
BBB 1,625,103 - - -
Below BBB 70,329 490,444 221,363 -
Total $47,030,308 $522,724 $1,309,450 $720,251
RATINGS DISPERSION DETAIL
A small portion of the assets (cash and real estate) remain outside the comingled funds, representing less than 2 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, 2010, 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, 2010, the Plan’s fixed income assets
that were not government guaranteed represented 94.0% 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.
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.
FINANCIAL SECTION
EORP 29th Comprehensive Annual Financial Report
32
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. According to Arizona state statutes, 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.
The following table shows the Plan’s exposure to foreign currency risk (U. S. dollars):
CURRENCY TYPE HOLDINGS FAIR VALUE
Australian Dollar 2,705 $ 2,285
Swiss Franc 1,865 1,730
Total Market Value $79,066
British Pound Sterling 6,723 10,058
Canadian Dollar 6,626 6,236
Danish Krone 5,576 917
Euro Currency Unit 3,859 4,727
Hong Kong Dollar 14,031 1,802
Israeli Shekel 13,867 3,573
Japanese Yen 3,815,519 43,118
New Zealand Dollar 471 324
Norwegian Krone 12,087 1,859
Singapore Dollar 1,628 1,166
Swedish Krona 9,892 1,271
FOREIGN CURRENCY RISK
FIXED INCOME SECURITY <1 1-5 6-10 11-15 16-20 >20
Corporate $- $ 235,389 $ 1,351,431 $ 541,943 $ 289,218 $ 45,135,051
Agencies - - 1,194,107 774,750 577,262 599,986
CBO - - 576,308 - - 733,141
CDO - - - - - 720,251
Total $- $235,389 $3,121,846 $1,316,693 $866,480 $47,188,429
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, 2010
Corporate $ 490,542 0.99%
Agencies - 0.00%
Total $490,542 0.99%
% OF ALL FIXED
INCOME ASSETS
33
EORP 29th Comprehensive Annual Financial Report
FINANCIAL SECTION
ASSET CLASS OUT ON LOAN
TOTAL AVAILABLE
TO LOAN
% OF AVAILABLE
TO LOAN
Equities $ 27,615,416 $ 113,907,681 24.24%
Agencies - 1,425,514 0.00%
Treasuries 245,498 1,720,591 14.27%
Exchange Traded 1,507,113 158,655,143 0.95%
Totals $29,368,027 $275,708,929 10.65%
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 losses for EORP was $805,617 at June 30, 2010 consisting of U.S. Equity (loss of $807,470) and Fixed Income (gain
of $1,853). Interest risk associated with these investments are included in the tables on page 31.
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, 2010 the fair value of securities on loan was $29,368,027 and the collateral was $30,153,285 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
security 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, 2009, the weighted
average maturity was 36 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 $527,453 has been recorded as the EORP’s share.
FINANCIAL SECTION
EORP 29th Comprehensive Annual Financial Report
34
LAND
BUILDING AND
IMPROVEMENTS
FURNITURE,
FIXTURES
AND EQUIPMENT
CAPITAL ASSETS
Additions - 4,541 3,663 8,204
Deletions - - - -
Balance June 30, 2010 33,145 238,510 55,798 327,453
ACCUMULATED DEPRECIATION
Balance June 30, 2009 - (27,845) (28,290) (56,134)
Additions - (6,359) (8,996) (15,355)
Deletions - - - -
Balance June 30, 2010 - (34,204) (37,286) (71,489)
Net Capital Assets $33,145 $204,307 $18,512 $255,964
TOTAL
CAPITAL ASSETS
Balance June 30, 2009 $ 33,145 $ 233,970 $ 52,135 $ 319,249
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, 2010 was $15,355.
The following table is a schedule of the capital asset account balances as of June 30, 2010, and June 30, 2009, and changes to those account balances during the year
ended June 30, 2010.
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 Projected Unit
Credit Cost 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, 2010, contributions totaling $23,837,016 ($9,687,743 employer [$8,431,988 pension and $1,255,755 health insurance subsidy contri-butions
in excess of benefits paid] $9,538,094 court fees and $4,611,179 member) were made in accordance with contribution requirements determined by an actuarial
valuation of the System as of June 30, 2008. The employer contributions, including court fees, consisted of approximately $12,700,039 for normal cost [$12,135,282
pension and $564,757 health insurance subsidy] plus $6,525,798 for amortization of the unfunded actuarial accrued liability in aggregate [$5,834,800 pension and
$690,998 health insurance subsidy]. Employer contributions including court fees represented 26.25% of covered payroll [17.34% for normal costs (16.49% pension and
0.85% health insurance) and 8.91% for amortization of the unfunded actuarial accrued liability in aggregate (7.87% pension and 1.04% health insurance subsidy)].
Member contributions represented 7.00% 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.
35
EORP 29th Comprehensive Annual Financial Report
FINANCIAL SECTION
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
available 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
employers are reported in the agency fund. For FY ’10, contributions collected for the health insurance subsidy amounted to $1,255,755 and the health benefit sub-sidy
payments were $884,225. The excess contributions of $371,530 were added to the retirement plan for reporting purposes. Effective FY ’08, each participating
employer 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
opinion, 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
11.3 million dollars 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
actuarial 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, 2010
Actuarial Cost Method Projected Unit Credit
Amortization Method: Level Percent of Payroll, Closed
Remaining Amortization Period: 26 years closed for unfunded accrued actuarial liability, 20 years open for excess
Asset Valuation Method: 7-Year Smoothed Market Value
Investment Rate of Return: 8.5%
Projected Salary Increases: 5.00% which includes inflation at 5.00%
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)
06/30/10 $357,342 $523,756 $166,414 68.2% $66,442 250.5%
ACTUARIAL
VALUATION
DATE
FINANCIAL SECTION
EORP 29th Comprehensive Annual Financial Report
36
REQUIRED SUPPLEMENTARY INFORMATION
* Entry Age Normal Cost method through 6-30-04. Projected Unit Credit method from 6-30-06 to the present.
* 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 and 66.7% for 6-30-10.
* See Notes to the Schedules of Required Supplementary Information.
* Total Employer Contributions received during FY'07 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 FY'08 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))
06-30-01 $355,768 $250,987 $(104,781) 141.7% $48,669 (215.3)%
06-30-02 351,349 279,947 (71,402) 125.5% 48,729 (146.5)%
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%
SCHEDULE OF FUNDING PROGRESS
(IN THOUSANDS)
FISCAL YEAR
ENDED
JUNE 30,
ANNUAL
REQUIRED
CONTRIBUTIONS
PERCENTAGE
CONTRIBUTED
2001 3,163,111 100.00%
2002 3,656,604 100.00%
2003 3,755,629 100.00%
2004 6,976,772 100.00%
2005 6,809,136 100.00%
2006 11,479,967 100.00%
2007 10,057,915 107.10% *
2008 11,431,128 104.30% *
2009 17,529,092 102.60% *
2010 18,341,612 102.03% *
EMPLOYER CONTRIBUTIONS
SCHEDULE OF EMPLOYER CONTRIBUTIONS
37
EORP 29th Comprehensive Annual Financial Report
FINANCIAL SECTION
* Total Employer Contributions received during FY'09 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 FY'10 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.
* See Notes to the Schedules of Required Supplementary Information.
FINANCIAL SECTION
EORP 29th Comprehensive Annual Financial Report
38
REQUIRED SUPPLEMENTARY INFORMATION
NOTES TO THE REQUIRED SUPPLEMENTARY INFORMATION
ACTUARIAL METHODS AND ASSUMPTIONS FOR VALUATIONS PERFORMED JUNE 30, 2010
The projected unit credit 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. An open 20-year amortization period for excess and a closed 26-year amortization period were
used for the June 30, 2010 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 8.5% per year, compounded annually (net of investment expenses). Projected
salary increase assumptions are based on 5.0% which include a price inflation assumption of 5.0% per year.
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
2010 were determined by actuarial valuations as of June 30, 2008.
39
EORP 29th Comprehensive Annual Financial Report
FINANCIAL SECTION
REFUNDABLE
MEMBERS’
RESERVE
EMPLOYERS’
RESERVE
FUTURE BENEFIT
INCREASE
RESERVE
BALANCE AS OF JUNE 30, 2008 $41,963,744 $271,917,091 $18,184,418
DISTRIBUTION OF REVENUES AND EXPENSES
Members' Contributions 4,436,652
Employers' Contributions 18,446,377
Earnings (Loss) on Investments Net of Investment Expenses (61,487,238)
Pension and Insurance Benefits (35,095,696)
Refunds to Terminated Members (119,830) (11,833)
Administrative Expenses (561,231)
DISTRIBUTION OF TRANSFERS
Excess Investment Earnings to be used for Future Benefit Increases
Earnings (Loss) on Excess Investment Earnings Account Assets 3,227,552 (3,227,552)
Amount Utilized by Benefit Increases Granted 11,319,196 (11,319,196)
Net Transfers In (Out) and Purchase of Service Credits 501,740 158,911
Balances Transferred to Employers' Reserve due to Retirement (4,709,700) 4,709,700
BALANCE AS OF JUNE 30, 2009 $42,072,606 $212,622,829 $3,637,670
DISTRIBUTION OF REVENUES AND EXPENSES
Members' Contributions 4,611,179
Employers' Contributions 19,225,839
Earnings (Loss) on Investments Net of Investment Expenses 34,583,592
Pension and Insurance Benefits (37,769,069)
Refunds to Terminated Members (123,176) (3,250)
Administrative Expenses (245,127)
DISTRIBUTION OF TRANSFERS
Excess Investment Earnings to be used for Future Benefit Increases (15,303,603) 15,303,603
Earnings (Loss) on Excess Investment Earnings Account Assets (489,994) 489,994
Amount Utilized by Benefit Increases Granted 12,367,914 (12,367,914)
Net Transfers In (Out) and Purchase of Service Credits 921,245 9,481
Balances Transferred to Employers' Reserve due to Retirement (4,539,589) 4,539,589
BALANCE AS OF JUNE 30, 2010 $42,942,265 $229,538,201 $7,063,353
SCHEDULE OF CHANGES IN RESERVE BALANCES
FOR THE YEARS ENDED JUNE 30, 2010 AND 2009
SUPPORTING SCHEDULES INFORMATION
FINANCIAL SECTION
EORP 29th Comprehensive Annual Financial Report
40
SUPPORTING SCHEDULES INFORMATION
SCHEDULE OF RECEIPTS AND DISBURSEMENTS
FOR THE YEARS ENDED JUNE 30, 2010 AND 2009
2010 2009
RECEIPTS
Members' Contributions $ 4,638,410 $ 4,428,949
Employers' Contributions 9,774,261 10,364,971
Court Fees 9,499,106 7,529,463
Interest 1,785,297 1,647,901
Dividends 3,295,043 5,794,696
Other Income 182,434 12,050
Securities Lending Income 192,360 518,560
Transfer In 40,960 283,226
Service Purchase 889,766 377,424
Maturities and Sales of:
Short-Term Investment - -
U S Equity 127,517,316 272,293,848
Non-U s Equity 97,959,605 95,157,644
GTAA 9,389,553 -
Fixed Income 16,916,736 173,275,064
Credit Opportunities 11,670,276 13,085,387
Private Equity 2,884,697 6,012,928
Real Assets 13,056,227 3,057,898
Real Estate 5,611,085 25,388,548
Total Receipts 315,303,132 619,228,557
DISBURSEMENTS
Pension Benefits 37,769,069 35,095,696
Refunds to Terminated Members 126,426 131,663
Investment and Administrative Expenses 1,453,957 520,070
Acquisitions of:
Short-Term Investment - -
U S Equity 93,922,385 240,533,303
Non-U s Equity 92,586,138 102,720,072
GTAA 28,083,869 -
Fixed Income 13,490,840 161,504,986
Credit Opportunities 12,918,188 24,910,038
Private Equity 12,021,582 11,528,625
Real Assets 13,944,857 11,684,659
Real Estate 10,286,801 32,037,396
Total Disbursements 316,604,111 620,666,508
INCREASE (DECREASE) IN CASH (1,300,979) (1,437,951)
BEGINNING CASH BALANCE - July 1 4,535,563 5,973,514
ENDING CASH BALANCE - June 30 $ 3,234,584 $ 4,535,563
41
EORP 29th Comprehensive Annual Financial Report
FINANCIAL SECTION
SCHEDULE OF ADMINISTRATIVE EXPENSES
FOR THE YEAR ENDED JUNE 30, 2010
EXPENSE CATEGORY ADMINISTRATIVE INVESTMENT TOTAL
Accounting and Auditing Services $ 5,500 $ - $ 5,500
Actuarial Services 12,708 - 12,708
Building Expense 7,153 - 7,153
Communications 670 - 670
Computer Related Expense 8,894 3,687 12,581
Contractual Services 2,752 - 2,752
Depreciation Expense 11,485 - 11,485
Fund Manager Initiatives 1,230 - 1,230
Furniture and Equipment 191 - 191
Investment Services - 902,336 902,336
Local Board Training 2,982 - 2,982
Payroll Taxes and Fringe Benefits 43,764 16,422 60,186
Postage Expenses 4,602 - 4,602
Printing and Publications 2,843 - 2,843
Professional Services 20,660 80,402 101,062
Salaries and Wages 88,834 33,197 122,031
Supplies and Services 1,207 - 1,207
Training Expenses 99 1,767 1,865
Travel Expense 722 2,582 3,304
TOTAL $245,127 $1,086,256 $1,331,383
Legal Services 28,832 45,863 74,695
SCHEDULE OF CONSULTANT EXPENSES
FOR THE YEAR ENDED JUNE 30, 2010
SUPPORTING SCHEDULES INFORMATION
CONSULTANT FEES PAID
Albourne America, LLC $ 31,008
Alliance Resource Consulting, LLC 610
BNY Mellon Asset Servicing 11,766
Brazen Technology, Inc. 7,751
CB Richard Ellis 2,264
Cortex Applied Research, Inc. 795
Kutak Rock LLP 74,695
Light Stone Solutions, LLC 17,249
NEPC, LLC 28,458
ORG Portfolio Management LLC 22,185
OSAM, Inc. 1,195
Page, Gerald 2,034
Public Policy Partners 7,346
Rodwan Consulting Company 682
Sherwood Systems 728
Smout, Jared 1,836
Stepstone Group LLC 21,420
TOTAL $257,502
SERVICE PROVIDED
International Alternative Investment Consultant
Executive Recruitment
Independent Investment Advisor
IT Consultant
Real Estate Consultant
Governance Advisor
General Counsel
Due Diligence
Independent Investment Advisor
Real Estate Consultant
IT Consultant
IT Consultant
Legislative Liaison
Actuary
Accounting Consultant
Accounting Consultant
Alternative Investment Consultant
Cushman & Wakefield Real Estate Consultant 2,448
Gabriel Roeder Smith & Company Actuary 12,026
Heinfeld, Meech & Co. Independent Auditors 5,500
Highground, Inc. Legislative Liaison 5,508
FINANCIAL SECTION
EORP 29th Comprehensive Annual Financial Report
42
OTHER SUPPLEMENTARY INFORMATION
* GASB reporting requires discreetly reporting the health insurance premium subsidy separately from the retirement plan. As a result, the funded ratio for the retirement plan does not include
this portion for the health insurance premium subsidy. If you include the actuarial accrued liabilities for the health insurance premium subsidy with the retirement plan, the funded ratio for
2007, 2008, 2009 and 2010 would be 74.6%, 76.6%, 71.3% and 66.7% respectively.
HEALTH INSURANCE
PREMIUM SUBSIDY
BEGINNING
BALANCE ADDITIONS DELETIONS
ENDING
BALANCE
ASSETS
Cash $ 0 $ 884,225 $ 884,225 $ 0
Total Assets $ 0 884,225 884,225 $ 0
LIABILITIES
Benefits Payable $ 0 884,225 884,225 $ 0
Total Liabilities $ 0 $884,225 $884,225 $ 0
HEALTH INSURANCE PREMIUM SUBSIDY
AGENCY FUND
STATEMENT OF FUNDING PROGRESS
(IN THOUSANDS)
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)
06/30/07 0 13,070 13,070 0.0% 61,308 21.3%
ACTUAR-IAL
VALUA-TION
DATE
06/30/08 0 12,454 12,454 0.0% 62,184 20.0%
06/30/09 0 11,754 11,754 0.0% 67,777 17.3%
06/30/10 0 12,015 12,015 0.0% 66,442 18.08%
HEALTH INSURANCE PREMIUM SUBSIDY
AGENCY FUND
STATEMENT OF CHANGES IN ASSETS & LIABILITIES
FOR YEAR ENDED JUNE 30, 2010
INVESTMENT SECTION
Chief Investment Officer’s Letter 44
Fund Investment Objectives 46
Investment Performance
Asset Allocation 46
Annualized Rates of Return, Benchmark and Indices 47
Top 10 Investment Holdings 48
Summary of Changes in Investment Portfolio 48
Schedule of Commissions Paid to Brokers 48
Equity Portfolio 50
Fixed Income Portfolio 51
Alternative Investments Portfolio
Credit Opportunities Portfolio 56
Private Equity Portfolio 57
Real Assets Portfolio 58
Real Estate Portfolio 59
GTAA Securities Portfolio 59
INVESTMENT SECTION
EORP 29th Comprehensive Annual Financial Report
44
December 3, 2010
Dear Members:
As the Chief Investment Officer of the Public Safety Personnel Retirement System (“PSPRS”) during the fiscal year beginning July 1, 2009 and ending
June 30, 2010, I submit the following comments and observations for your consideration and for the consideration of the respective parties in interest of
the plan:
HISTORY
Until recently the investment activities of PSPRS focused on internally managed domestic public securities (stocks and bonds), with some allocations to
Arizona real estate. As with “baskets and eggs” this created concentrations of risks, particularly a concentration in U.S. large cap growth stocks. When
U.S. domiciled equities did well, so did the Fund. When U.S. equities performed poorly, so did the Fund with a corresponding erosion in our funding
ratios. While each of the PSPRS plans has slightly different liabilities and slightly different funding ratios, the trend in funding ratios has been down
over the last several years. While it might be argued that going up high in good years offsets going down low in bad years; a simple illustration demon-strates
the continuing problems of this volatility.
Assume that a fund begins a year with $100.00 and during that year suffers a 20% loss, ending with a balance of $80.00. In the next
year assume that the markets recover and the fund increases in value 20%. This new return brings the fund back to only $96.00. Over
this two year period the fund’s net return is negative. In the case of retirement funds with demographics similar to ours, during this two
year period the liabilities of the fund would continue to grow unabated while the funding ratio would decline.
Our historic performance with large concentrations in U.S. equities has been extremely volatile, including the information technology “Dot Com” decline
early in the decade and the most recent economic calamities. This volatility over our last ten years corresponds precisely with the above illustration as
follows:
This return distribution has six positive years and four negative years. The average return per year is about 1.20% with an arithmetic return of +11.98%.
But that arithmetic return is deceiving. Due to the compounding effects of returns, the EORP 10 year cumulative return is really +0.28%. Our liabilities
compounded to an amount greater than that, thus reducing our funding ratios. During this period EORP investment managers consistently outper-formed
their respective benchmarks. That relative outperformance was outpaced by the negative effects of the volatility of the portfolio driven by its
extreme reliance on domestic equities. In the universe of public pension plans, manager outperformance generally cannot overcome asset allocation
deficiencies. Asset allocation usually accounts for more than 85% of total fund performance.
FY Return % FY Return%
2010 13.47 2005 9.56
2009 -17.75 2004 15.02
2008 -7.59 2003 6.69
2007 17.01 2002 -15.36
2006 7.89 2001 -16.96
PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM
Brian Tobin, Chairman CORRECTIONS OFFICER RETIREMENT PLAN
Lori Roediger, Vice Chairperson ELECTED OFFICIALS' RETIREMENT PLAN
Tim Dunne, Trustee 3010 East Camelback Road, Suite 200
Gregory Ferguson, Trustee Phoenix, Arizona 85016-4416 James M. Hacking
Alan Maguire, Trustee www.psprs.com Administrator
Jeff McHenry, Trustee TELEPHONE: (602) 255-5575 Ryan Parham Tracey D. Peterson
Randie Stein, Trustee FAX: (602) 255-5572 Chief Investment Officer Assistant Administrator-COO
45
EORP 29th Comprehensive Annual Financial Report
INVESTMENT SECTION
2008 TO THE PRESENT
Recognizing these problems the PSPRS Administrator and the PSPRS Board of Trustees began a program to broadly diversify the Fund’s asset allocation
and manager concentrations. There was significant progress to this end in 2008-2009 which has continued through fiscal year 2009-2010. U.S. equity
exposure has been reduced from about 65% in 2007 to about 24% in 2010. Total equities have been reduced from about 73% of the portfolio in 2007 to
about 41% in 2010. Within equities the Fund currently enjoys exposures to domestic, developed international, emerging and frontier market equities.
Current asset allocation targets will reduce our total equity exposures to about 35% of the total portfolio with true global diversity.
The large historic equities exposure has been replaced with allocations to Credit Opportunities, Real Assets (e.g. Timber, Commodities, Infrastructure),
Global Tactical Asset Allocation (“GTAA”) strategies, Private Equity, Real Estate and Absolute Return strategies. The specific purpose of this diversifica-tion
is to generate returns from multiple asset classes, geographies and strategies. This means that we will not “live or die” by one asset class, one ge-ography
nor by one strategy. Our eggs are distributed widely in different baskets many of which go up when others go down or are largely uninfluenced
by events which “spoil a basket” in another area.
In the fiscal year 2008-2009 the effect of this diversification proved immediately valuable. While the Fund was down more than 17% in that time frame,
we would have been down much more if we had maintained our historic equity allocation. Many of our peers were down significantly more than 20%.
In this fiscal year 2009-2010 equities mounted an epic recovery. We participated in that recovery and returned 13.47% net of fees. However, consistent
with our strategy our participation was not solely dependent upon equities. For example, our credit opportunities portfolio of approximately one half of
a billion dollars returned 33.85% during this time period. That return was generated in positions higher in the capital structure than equities, with sig-nificantly
more downside protection than equities.
The Fund’s fiduciary consultant New England Pension Consultants has recently confirmed investment staff’s assessment that our current asset allocation
delivers a higher probability of reaching our assumed earnings rate of return of 8.25% with significantly less volatility risk. In all likelihood, we will
continue to participate in most of the market’s upside but should have significantly less participation in the market’s downside.
CONCLUSION
The continued diversification of the Fund will continue to generate better risk adjusted returns than the PSPRS historic allocations and will help to pro-tect
funding ratios from the effects of exaggerated volatility. When combined with expected continued manager outperformance, this diversification
should in the mid and long term, improve PSPRS funding ratios and enhance the stability of our system.
Respectfully Submitted,
Ryan Parham
INVESTMENT SECTION
EORP 29th Comprehensive Annual Financial Report
46
FUND INVESTMENT OBJECTIVES
The objective of the Fund is to ensure the integrity of the Elected Officials’ Retirement Plan, Public Safety Personnel Retirement Plan and the Corrections Officer Retire-ment
Plan in order to adequately fund benefit levels for members as stated in Title 38, Chapter 5, Articles 3,4 and 6 of the Arizona Revised Statutes and as amended
from time to time by the Legislature. To achieve the objective, the Fund will do the following:
• Maintain a goal for the Fund’s assets to be equal to the Fund’s liabilities within a twenty year period.
• Annually adjust the employer contribution rates based on the recommendations made by the annual actuarial evaluations.
• Determine a reasonable contribution rate necessary to fund benefits approved by the legislature and then reduce the variation in the employer contribution rate
over time to the Fund.
• Preserve and enhance the capital of the Fund through effective management of the portfolio in order to take advantage of attractive opportunities various markets
and market sectors have to offer.
• Provide the opportunity for increased benefits for retirees as the legislature may from time to time enact through systematic growth of the investment fund.
Consistent with the Fund objectives, the primary investment objective of the Fund is to maximize long-term real (after inflation) investment returns recognizing estab-lished
risk (volatility) parameters and the need to preserve capital by:
• Deriving a reasonable asset allocation model that attempts to fully achieve the primary investment objective, over the long term,
• Consistent with these objectives and the direction of the Board of Trustees, strategically allocating within asset classes and investment styles in order to enhance
investment returns.
• Regularly reviewing the status of investments,
• Regularly assessing the need to adjust the mix, type and composition of the investment classes within the allocation ranges.
The possibility of short-term declines in the market value of the Fund or the Fund’s assets is a recognized consequence of achieving potentially higher long-term invest-ment
returns.
The time horizon for evaluating total Fund investment performance shall be long-term.
ASSET ALLOCATION
JUNE 30, 2010
1.07%
6.88%
9.89%
4.31%
7.87%
18.95% 9.60%
16.97%
23.98%
U S Equity Non-U S Equity Fixed Income
Credit Opportunities Private Equity Real Assets
Real Estate GTAA Short Term Investments
47
EORP 29th Comprehensive Annual Financial Report
INVESTMENT SECTION
Description 1 Year 3 Years 5 Years 10 Years
EORP - Total Fund 13.47% -4.81% 1.72% 0.28%
Target Fund Benchmark 12.10% -5.89% -0.13% 1.43%
Total Equity 13.73% -7.89% 0.09%
Target Equity Benchmark 13.66% -9.56% -0.73%
U.S. Equity 16.95% N/A N/A
Russell 3000 15.72% -9.47% -0.48%
Non-U.S. Equity 8.99% N/A N/A
MSCI ACWI Ex-US Net 10.43% -10.70% 3.38%
Fixed Income 13.84% 4.83% 4.08%
BC Aggregate 9.50% 7.55% 5.54%
Credit Opportunities 33.85% N/A N/A
ML US High Yield BB-B Constrained 21.65% 5.60% 6.11%
Private Equity 26.68% -5.50% N/A
Russell 3000 + 100 bps 16.72% -8.47% 0.52%
Real Assets 5.85% N/A N/A
CPI + 200 bps 2.92% 3.52% 4.27%
Real Estate -12.63% -1.38% N/A
NCREIF NPI -1.48% -4.71% 3.78%
Short Term Investments 0.28% 1.86% 3.08%
ML Treasury 91 day Actual 0.16% 1.57% 2.76%
ANNUALIZED RATES OF RETURN
JUNE 30, 2010
*Time weighted rate of return based on the market rate of return (net of fees).
Target Fund Benchmarks (Effective Dates)
April 1, 2009 - June 30, 2010: 30% Russell 3000, 20% MSCI World Ex-US Net, 20% BC Aggregate, 8% NCREIF NPI, 8% Russell 3000 + 100 bps, 8% ML US High Yield
BBB Constrained, 5% CPI + 200 bps and 1% 91-Day T-Bill
July 1, 2007 - March 31, 2009: 46% Wilshire 5000, 21% MSCI World Ex-US Net, 20% BC Gov/Cred, 6% NCREIF NPI, 6% Wilshire 5000 +300 bps and 1% 91-Day T-Bill
July 1, 2006 - June 30, 2007: 50% S&P 500, 10% S&P 400, 5% S&P 600, 20% BC Gov/Cred, 10% Expected Annual Return for Real Estate of 8.00% and 5% 91-Day T-Bill
July 1, 2002 - June 30, 2006: 45% S&P 500, 45% BC Gov/Cred and 10% 91-Day T-Bill
Target Equity Benchmarks (Effective Dates)
April 1, 2009 - June 30, 2010: 60% Russell 3000 and 40% MSCI World Ex-US Net
July 1, 2007 - March 31, 2009: 67.69% Wilshire 5000 and 32.31% MSCI World Ex-US Net
July 1, 2006 - June 30, 2007: 76.92% S&P 500, 15.39% S&P 400 and 7.69% S&P 600
July 1, 2002 - June 30, 2006: 100% S&P 500
INVESTMENT SECTION
EORP 29th Comprehensive Annual Financial Report
48
EQUITY PORTFOLIO TOP 10 HOLDINGS
JUNE 30, 2010
Description Shares Fair Value
BGI CORE ACTIVE BOND FUND 1,696,223 $34,863,709
VANGUARD BD INDEX FD INC TOTAL 100,013 8,139,037
SECURITY MUT LIFE INS CO 144A 701,632 732,624
U S TREASURY NOTE 608,081 636,393
CBO HLDGS III 04-3 CL A 144A 579,328 576,308
PREFERRED CPO A / B 144A 500,100 556,635
CBO HLDGS III 1A 04-1 C-2 144A 489,830 511,778
U S TREASURY NOTE 467,755 469,546
SPDR BARCLAYS CAPITAL INTL 7,807 419,637
U S TREASURY NOTE 374,204 375,843
FIXED INCOME PORTFOLIO TOP 10 HOLDINGS
JUNE 30, 2010
Description Fair Value
VANGUARD INSTL INDEX FD TOTAL $11,270,446
CRESTLINE CS 3000 FUND L.P. 6,211,972
ISHARES MSCI EMERGING MARKETS 5,667,991
FRONTPOINT MULTI-STRATEGY FUND 4,569,173
VANGUARD INTL EQUITY INDEX FD 4,436,102
GAM TRADING STRATEGY 3,508,159
VANGUARD EMERGING MARKETS ETF 2,766,443
VANGUARD STAR FD DEVELOPED MKT 2,027,465
BGI FRONTIER MARKETS FUND 1,764,939
ETF VANGUARD PACIFIC ETF 1,428,379
Shares
487,265
6,211,972
151,875
4,569,173
115,584
3,508,159
72,820
247,856
316,593
30,033
JUNE 30, 2009 BALANCE JUNE 30, 2010 BALANCE
DESCRIPTION
PERCENT AT
FAIR VALUE
FAIR
VALUE
BOOK
VALUE ACQUIRED
MATURED
AND SOLD
FAIR
VALUE
BOOK
VALUE
PERCENT AT
FAIR VALUE
U. S. Equity 35.32% $ 89,332 $ 107,212 $ 94,150 $ 134,591 $ 66,708 $ 66,771 24.82%
Non U. S. Equity 19.55% 49,436 47,461 92,630 92,477 47,199 47,614 17.70%
GTAA 0.00% - - 28,084 9,374 19,136 18,710 6.95%
Fixed Income 19.30% 48,814 52,135 15,286 18,804 52,729 48,617 18.07%
Credit Opportunities 7.70% 19,463 21,128 12,919 9,863 26,740 24,184 8.99%
Total Portfolio 100.00% $252,902 $278,326 $279,348 $288,618 $273,888 $269,056 100.00%
Private Equity 3.65% 9,242 10,902 12,022 1,520 21,892 21,404 7.96%
Real Assets 4.19% 10,601 10,374 13,970 12,726 11,983 11,618 4.32%
Real Estate 10.29% 26,014 29,114 10,287 9,263 27,501 30,138 11.20%
SUMMARY OF CHANGES IN INVESTMENT PORTFOLIO
JUNE 30, 2010
(IN THOUSANDS)
SCHEDULE OF COMMISSIONS PAID TO BROKERS
YEAR ENDED JUNE 30, 2010
BROKER
NUMBER OF
SHARES TRADED
AVERAGE
COMMISSION
TOTAL
COMMISSIONS
ABN AMRO BANK NV, LONDON 59,129 0.0004 $ 24
BARCLAYS CAPITAL LE, JERSEY CITY 87,250 0.0016 143
BLOOMBERG TRADEBOOK LLC, NEW YORK 6,659,795 0.0002 1,443
BNY BROKERAGE, NEW YORK 28,513 0.0009 25
BROCKHOUSE AND COOPER, MONTREAL 32,034 0.0004 13
CIBC WORLD MKTS INC, TORONTO 2,672 0.0003 1
CITATION GROUP/BCC CLRG, NEW YORK 426,308 0.0006 244
CITIGROUP GBL MKTS AUSTRALIA PTY, SYDNEY 3,786 0.0005 2
CITIGROUP GBL MKTS INC, NEW YORK 37,282 0.0009 34
CITIGROUP GBL MKTS SINGAPORE SEC PVT LTD 9,679 0.0005 5
CITIGROUP GBL MKTS/SALOMON, NEW YORK 55,036 0.0005 27
CITIGROUP GLOBAL MARKETS LTD, LONDON 771,303 0.0003 216
49
EORP 29th Comprehensive Annual Financial Report
INVESTMENT SECTION
SCHEDULE OF COMMISSIONS PAID TO BROKERS
YEAR ENDED JUNE 30, 2010
BROKER
NUMBER OF
SHARES TRADED
AVERAGE
COMMISSION
TOTAL
COMMISSIONS
CITIGROUP GLOBAL MARKETS U.K., LONDON 373,101 0.0003 $ 103
CREDIT SUISSE (EUROPE), LONDON 195,860 0.0003 54
CREDIT SUISSE, NEW YORK 33,721 0.0004 13
DEUTSCHE BK INTL EQ, LONDN 31,985 0.0003 11
DEUTSCHE BK SECS INC, NY 22,932 0.0005 11
GOLDMAN SACHS & CO, NY 78,568 0.0005 39
GOLDMAN SACHS INTL, LONDON 341,014 0.0003 118
INSTINET AUSTRALIA CLEARING SERV, SYDNEY 4,437 0.0005 2
INSTINET EUROPE LIMITED, LONDON 14,493 0.0004 6
INVESTMENT TECHNOLOGY GROUP, NEW YORK 531,108 0.0005 278
ITG (EUROPE) LTD, DUBLIN 114,219 0.0004 50
ITG CANADA CORP, TORONTO 101,713 0.0005 55
ITG HONG KONG LIMITED, HONG KONG 518,632 0.0004 209
ITG/POSIT, NEW YORK 4,967 0.0004 2
J P MORGAN SEC, SYDNEY 10,709 0.0005 5
JP MORGAN SECS ASIA PACIFIC, HONG KONG 21,313 0.0004 9
KNIGHT SEC BROADCORT, JERSEY CITY 327 0.0086 3
MERRILL LYNCH INTL LONDON EQUITIES 16,336 0.0003 6
MERRILL LYNCH PIERCE FENNER SMITH INC NY 28,984 0.0011 33
MERRILL LYNCH PIERCE FENNER, WILMINGTON 10,630 0.0009 9
MORGAN STANLEY & CO INC, NY 177,123 0.0004 70
NOMURA INTERNATIONAL LTD, HONG KONG 647 0.0005 0
NOMURA SECS INTL, LONDON 18,437 0.0004 8
PENSON FINANCIAL SERVICES INC, DALLAS 28,477,865 0.0001 2,160
RBC DOMINION SECS INC, TORONTO 178,009 0.0004 79
STATE STREET BANK ASSET MGMT DIV, BOSTON 135,255 0.0002 29
STATE STREET BK & TR CO (SEC), LONDON 1,843,814 0.0004 829
STATE STREET GLOBAL MARKETS LLC, BOSTON 38,607,053 0.0003 11,382
UBS EQUITIES, LONDON 16,683 0.0003 6
UBS FINANCIAL SERVICES INC, WEEHAWKEN 5,402,670 0.0001 650
UBS WARBURG ASIA LTD, HONG KONG 65,348 0.0005 33
TOTAL COMMISSIONS 85,550,742 0.0002 $18,436
INVESTMENT SECTION
EORP 29th Comprehensive Annual Financial Report
50
U.S. EQUITY PORTFOLIO
YEAR ENDED JUNE 30, 2010
SHARES DESCRIPTION COST FAIR VALUE
UNREALIZED
GAIN (LOSS)
1,636,687 RUSSELL 3000 SECURITIES $ 41,712,784 $ 41,956,017 $ 243,233
16 RUSSELL 2000 MINI IND FUTURES - (91,531) (91,531)
10 S & P MID 400 EMINI FUTURES - (68,587) (68,587)
157 S&P 500 EMINI INDEX FUTURES - (647,360) (647,360)
6,211,972 CRESTLINE CS 3000 FUND L.P. 6,221,135 6,211,971 (9,164)
4,569,173 FRONTPOINT MULTI-STRATEGY FUND 4,677,545 4,569,173 (108,372)
3,508,159 GAM TRADING STRATEGY 3,508,159 3,508,159 -
487,265 VANGUARD INSTL INDEX FD TOTAL 10,651,402 11,270,446 619,044
16,413,439 TOTAL U.S. EQUITY PORTFOLIO $66,771,025 $66,708,288 $(62,737)
NON-U.S. EQUITY PORTFOLIO
YEAR ENDED JUNE 30, 2010
SHARES DESCRIPTION COST FAIR VALUE
UNREALIZED
GAIN (LOSS)
3,380,797 MSCI WORLD EX-US INDEX $ 31,119,262 $ 28,666,017 $ (2,453,245)
247,856 VANGUARD STAR FD DEVELOPED MKT 2,408,456 2,027,465 (380,991)
17,775 ISHARES MSCI CDA INDEX FD 469,692 442,056 (27,636)
151,876 ISHARES MSCI EMERGING MARKETS 4,009,799 5,667,991 1,658,192
115,584 VANGUARD INTL EQUITY INDEX FD 4,632,076 4,436,102 (195,974)
72,820 VANGUARD EMERGING MARKETS ETF 1,985,775 2,766,443 780,668
30,033 ETF VANGUARD PACIFIC ETF 1,585,090 1,428,379 (156,711)
316,593 BGI FRONTIER MARKETS FUND 1,403,356 1,764,939 361,583
4,333,334 TOTAL NON-U.S. EQUITY PORTFOLIO $47,613,506 $47,199,392 $(414,114)
51
EORP 29th Comprehensive Annual Financial Report
INVESTMENT SECTION
PAR VALUE DESCRIPTION COUPON RATE MATURITY COST FAIR VALUE
133,118 FHLMC POOL #H1-0069 6.00% 11/01/2036 $ 133,266 $ 144,151
126,754 FHLMC POOL #H1-5010 6.00% 11/01/2036 126,895 137,259
2,598 GNMA POOL #0153415 9.00% 04/15/2016 2,709 2,875
692 GNMA POOL #0156462 9.00% 07/15/2016 723 767
1,521 GNMA POOL #0157733 9.00% 05/15/2016 1,587 1,683
1,114 GNMA POOL #0158992 9.00% 06/15/2016 1,151 1,234
1,302 GNMA POOL #0159801 9.00% 09/15/2019 1,377 1,488
807 GNMA POOL #0160350 9.00% 05/15/2016 835 894
2,762 GNMA POOL #0161684 9.00% 07/15/2016 2,886 3,057
2,416 GNMA POOL #0164501 9.00% 08/15/2016 2,523 2,674
4,745 GNMA POOL #0164681 9.00% 10/15/2016 4,960 5,253
1,806 GNMA POOL #0164924 9.00% 09/15/2016 1,883 1,999
2,010 GNMA POOL #0165172 9.00% 06/15/2016 2,098 2,225
956 GNMA POOL #0165863 9.00% 08/15/2016 998 1,058
1,718 GNMA POOL #0168283 9.00% 08/15/2016 1,795 1,902
592 GNMA POOL #0172800 9.00% 08/15/2016 618 656
1,352 GNMA POOL #0173847 9.00% 09/15/2016 1,410 1,497
2,087 GNMA POOL #0173878 9.00% 08/15/2016 2,176 2,310
912 GNMA POOL #0174829 9.00% 09/15/2016 951 1,010
2,634 GNMA POOL #0176431 9.00% 08/15/2016 2,753 2,916
1,036 GNMA POOL #0178234 9.00% 11/15/2016 1,084 1,147
630 GNMA POOL #0181945 9.00% 04/15/2020 668 723
105 GNMA POOL #0182127 9.00% 11/15/2016 110 117
684 GNMA POOL #0182491 9.00% 12/15/2016 716 757
318 GNMA POOL #0182914 9.00% 10/15/2016 332 352
1,801 GNMA POOL #0183553 9.00% 08/15/2017 1,889 2,008
1,105 GNMA POOL #0183715 9.00% 11/15/2016 1,156 1,223
6,794 GNMA POOL #0183733 9.00% 01/15/2017 7,115 7,575
336 GNMA POOL #0185639 9.00% 11/15/2016 350 372
2,087 GNMA POOL #0187705 9.00% 01/15/2017 2,183 2,327
2,438 GNMA POOL #0190921 9.00% 12/15/2016 2,549 2,699
1,538 GNMA POOL #0191648 9.00% 05/15/2017 1,612 1,714
1,030 GNMA POOL #0191943 9.00% 07/15/2018 1,085 1,174
2,148 GNMA POOL #0194468 9.00% 12/15/2016 2,244 2,377
141 GNMA POOL #0202505 9.00% 10/15/2019 147 146
1,774 GNMA POOL #0206683 9.00% 04/15/2020 1,878 2,035
1,674 GNMA POOL #0207671 9.00% 07/15/2018 1,762 1,907
254 GNMA POOL #0208705 9.00% 05/15/2020 269 286
1,879 GNMA POOL #0210798 9.00% 07/15/2018 1,978 2,141
1,372 GNMA POOL #0216520 9.00% 05/15/2017 1,439 1,530
689 GNMA POOL #0217956 10.00% 11/15/2017 735 774
2,484 GNMA POOL #0221509 9.00% 12/15/2016 2,592 2,749
2,310 GNMA POOL #0223282 9.00% 05/15/2018 2,433 2,632
798 GNMA POOL #0223307 9.00% 04/15/2018 840 909
U.S. GOVERNMENT SECURITIES
FIXED INCOME PORTFOLIO
YEAR ENDED JUNE 30, 2010
INVESTMENT SECTION
EORP 29th Comprehensive Annual Financial Report
52
PAR VALUE DESCRIPTION COUPON RATE MATURITY COST FAIR VALUE
2,201 GNMA POOL #0226529 9.00% 06/15/2018 $ 2,316 $ 2,507
677 GNMA POOL #0227210 9.00% 09/15/2017 710 755
662 GNMA POOL #0228184 9.00% 05/15/2018 697 754
891 GNMA POOL #0228233 9.00% 05/15/2018 933 1,015
1,719 GNMA POOL #0229731 9.00% 07/15/2017 1,803 1,917
1,473 GNMA POOL #0234450 9.00% 04/15/2018 1,549 1,679
70 GNMA POOL #0234695 10.00% 12/15/2017 76 79
1,324 GNMA POOL #0234937 9.00% 03/15/2018 1,393 1,509
956 GNMA POOL #0235280 9.00% 04/15/2018 1,006 1,089
1,842 GNMA POOL #0236041 10.00% 11/15/2017 1,953 2,064
951 GNMA POOL #0236835 10.00% 11/15/2017 1,009 1,068
152 GNMA POOL #0236939 9.00% 04/15/2018 160 173
4,249 GNMA POOL #0237138 10.00% 10/15/2017 4,564 4,772
613 GNMA POOL #0237195 9.00% 06/15/2018 643 680
149 GNMA POOL #0238133 9.00% 04/15/2018 156 166
1,464 GNMA POOL #0238600 10.00% 11/15/2017 1,550 1,644
698 GNMA POOL #0247506 9.00% 01/15/2020 739 801
420 GNMA POOL #0248951 9.00% 05/15/2018 442 478
4,511 GNMA POOL #0249621 9.00% 05/15/2018 4,748 5,140
705 GNMA POOL #0250933 9.00% 06/15/2018 742 803
1,624 GNMA POOL #0252052 9.00% 06/15/2018 1,690 1,851
4,386 GNMA POOL #0252055 9.00% 06/15/2018 4,620 4,997
353 GNMA POOL #0252306 9.00% 04/15/2018 371 402
466 GNMA POOL #0252538 9.00% 05/15/2018 490 531
461 GNMA POOL #0257869 9.00% 09/15/2019 488 527
185 GNMA POOL #0262845 9.00% 03/15/2020 195 212
2,921 GNMA POOL #0266545 9.00% 01/15/2019 3,080 3,338
2,84