Comprehensive annual financial report / Elected Officials' Retirement Plan fy 2009

              ELECTED OFFICIALS’
RETIREMENT PLAN
28th COMPREHENSIVE ANNUAL FINANCIAL REPORT
A PENSION TRUST FUND OF THE STATE OF ARIZONA
FOR THE FISCAL YEAR ENDED JUNE 30, 2009
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-Eighth
Comprehensive Annual Financial Report
For the Fiscal Year Ended
June 30, 2009
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
Fund Manager Report 7
Letter of Transmittal 9
Fund Manager 12
Executive Staff and Organizational Chart 13
Professional Advisors 14
FINANCIAL SECTION
Independent Auditor Report 16
Management Discussion and Analysis 18
Basic Financial Statements
Statement of Plan Net Assets 22
Statement of Change in Plan Net Assets 23
Notes to the Financial Statements 24
Required Supplemental Information
Schedule of Funding Progress 34
Schedule of Employer Contributions 34
Notes to the Required Supplemental Information 35
Supporting Schedules Information
Schedule of Changes in Reserve Balances 36
Schedule of Receipts and Disbursements 37
Schedule of Administrative Expenses 38
Schedule of Consultant Expenses 38
Other Supplemental Information
39
39
INVESTMENT SECTION
Chief Investment Officer’s Letter 42
Fund Investment Objectives 44
Investment Performance
Investment Returns 44
Asset Allocation 44
Ten Year Cumulative Return, Benchmark and Indicies 45
Top 10 Investment Holdings 46
Summary of Change to Investment Portfolios 46
Schedule of Commissions and Investment Management Costs 46
Agency Fund Statement of Changes in Assets and Liabilities
Agency Fund Statement of Funding Progress
TABLE OF CONTENTS (continued)
Equity Portfolio 47
Equity Acquired 52
Equity Sold 58
Fixed Income Portfolio 63
Fixed Income Acquired 70
Fixed Income Sold 78
Alternative Investments Portfolio 86
Alternative Investments Acquired 87
Alternative Investments Sold 88
ACTUARIAL SECTION
Actuary Certification Letter 90
Actuarial Balance Sheet 91
Summary of Valuation Assumptions 92
Solvency Test 94
Summary of Active Member Data 95
Summary of Retirees and Inactive Members 96
Schedule of Experience Gain/Loss 97
STATISTICAL SECTION
Statistical Summary 100
Changes in Plan Net Assets - Last Ten Fiscal Years 101
Schedule of Revenue by Source - Last Ten Fiscal Years 102
Schedule of Expenses by Type - Last Ten Fiscal Years 102
Deductions from Plan Net Assets for Benefits and Refunds by Type - Last Ten Fiscal Years 102
Valuation Assets vs. Pension Liabilities - Last Ten Fiscal Years 103
Contribution Rates - Last Ten Fiscal Years 105
Distribution of Benefit Recipients by Location 106
System Membership - Last Ten Fiscal Years 106
Principal Participating Employers 107
Summary of Benefit Increases - Last Ten Fiscal Years 107
Summary of Growth of the System - Last Ten Fiscal Years 108
Benefits Payable June 30, 2009 by Benefit Type 108
Average Monthly Benefits and Membership - Last Ten Fiscal Years 109
Participating Employers 109
THIS PAGE INTENTIONALLY BLANK
INTRODUCTORY SECTION
Certificate of Achievement 6
Fund Manager Report 7
Letter of Transmittal 9
Fund Manager 12
Executive Staff and Organizational Chart 13
Professional Advisors 14
INTRODUCTORY SECTION
EORP 28th Comprehensive Annual Financial Report
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EORP 28th Comprehensive Annual Financial Report
INTRODUCTORY SECTION
December 1, 2009
The Honorable Janice K Brewer
Governor of the State of Arizona
Executive Tower
1700 W. Washington
Phoenix, Arizona 85007
Dear Governor Brewer:
The Fund Manager (i.e., the Plan’s governing Board) of the Public Safety Personnel Retirement System (PSPRS) respectfully submits the Twenty-eighth Comprehensive
Annual Financial Report (CAFR) for the Elected Officials Retirement Plan (EORP) for the fiscal year ended June 30, 2009 (FY’09), in accordance with the provisions of
A.R.S. Section 38-803.
THE EORP PLAN’S FUNDING RATIO
As of fiscal year-end, the financial status of the EORP, as reflected in its funding ratio, decreased from 76.6% at June 30, 2008 to 71.3% at June 30, 2009. This reverses
the modest increase in the Plan’s financial status that occurred last year and resumes the funding ratio erosion that EORP had been experiencing due to asset value
losses and negative rates of return in FY’01 and FY’02.
The Plan’s FY’09 experience was unfavorable, primarily because the Plan had negative rates of return on its invested assets both this year and the year before. (For
further information on the Plan’s net assets and changes in net assets, please refer to the subsequent Management’s Discussion and Analysis section of this Compre-hensive
Annual Financial Report (CAFR) which begins on page 18.)
Because 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 invest-ment
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 negative returns that the Plan experienced in FY’08 (-7.59%) and FY’09 (-17.75%) are reflected in the FY’09 results. The remainder of
those investment losses will gradually and adversely affect the funding status of EORP over the next several years.
If 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 50.0%, rather
than 71.3%. Moving the funding ratio in a steadily upward direction over the next several years is clearly the principal challenge facing the Fund Manager and it is a
challenge made all the more difficult because of the Plan’s structural design which includes a “Reserve for Future Benefit Increases” that holds the assets that are used
to fund the annual post-retirement benefit adjustment for eligible beneficiaries. Under the current statutory design, whenever the System generates an investment
return in excess of 9%, one-half of that excess return is allocated to the Reserve; unfortunately, the assets of the Reserve are not counted in the calculation of EORP’s
funding ratio, nor in the calculation of the employer contribution requirement.
EMPLOYER CONTRIBUTION RATES
When times were good and the Plan was over-funded, the EORP employers’ contribution rate was reasonable. For example, early in the current decade the unsubsi-dized
employer contribution rate that municipalities pay on behalf of their EORP participants was only 7.55% of payroll.
But as the Plan’s funding ratio eroded, the employer contribution requirement rose in large year-over-year increments until FY’10 when the rate declined from 28.0%
to 26.25%. Based on the Plan’s FY’09 results, the unsubsidized employer contribution rate is projected to increase to 29.79%, effective July 1, 2010 (i.e., the beginning
of FY’11). 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 14.25% of payroll to 17.42%.
As we move further into the new fiscal year, the Fund Manager and the System’s Administrator will consult with representatives of the Plans’ constituency groups and
the contributing employers to determine whether a consensus exists with respect to any of a variety of options that could be employed to reduce what otherwise will
be the subsidized and unsubsidized employer contribution rates scheduled for next July 1st.
PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM
CORRECTIONS OFFICER RETIREMENT PLAN
Mike Galloway ELECTED OFFICIALS' RETIREMENT PLAN
Fund Manager, Chairman 3010 East Camelback Road, Suite 200
Brian Tobin Phoenix, Arizona 85016-4416
Fund Manager, Vice Chairman www.psprs.com
Timothy J. Dunne Lori Roediger TELEPHONE: (602) 255-5575 James M. Hacking
Fund Manager, Member Fund Manager, Member FAX: (602) 255-5572 Administrator
Gregory Ferguson Ryan Parham Tracey D. Peterson
Fund Manager, Member Chief Investment Officer Assistant Administrator-COO
INTRODUCTORY SECTION
EORP 28th Comprehensive Annual Financial Report
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FISCAL YEAR 2009 INVESTMENT RESULTS
The FY’09 rate of investment return for EORP was -17.75%. As bad as that may be in an absolute sense, it was over 300 basis points better than the weighted composite
rate of return benchmark for the Plan (-21.13%). In addition, on a “peer group” basis, the return was good enough to place EORP in the second quartile of the public
funds included in the BNY Mellon universe of public funds.
Clearly, the FY’09 investment result was (and will be as that result is factored into the funding ratio/employer contribution rates over the next several years) very dam-aging
to the financial status of the Plan. That the result might have been worse is some comfort. Nevertheless, it must be recognized that the investment result was
solely attributable to the downturn in the financial markets, especially the equity and residential real estate markets. It was not the result of active decisions made by
those responsible for the management of the Plan’s assets.
Because EORP’s actual rate of return was less than 9%, no new assets flowed into the Plan’s Reserve for Future Benefit Increases. The Reserve’s balance, after subtract-ing
the $11.3 million cost of the post-retirement adjustment that took effect July 1, 2009, was down to $3.6 million. Absent a major infusion of new assets, the Reserve
balance would only be sufficient to finance a partial post-retirement adjustment as of July 1, 2010, if any.
THE STRATEGY TO IMPROVE THE PLAN’S FUNDING RATIO AND DECREASE EMPLOYER CONTRIBUTION REQUIREMENTS
To improve 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 Plan’s return expectations. In pursuit of that goal, PSPRS has been, for the last three fiscal years, going through a complete restructuring of the way in which the
System manages and invests its assets with a view to dramatically increasing asset allocation diversification and diversification within asset classes.
To increase diversification, the Fund Manager has continued to reduce the Plan’s exposure to, and over-weight reliance upon, equity investments while increasing its
exposure to domestic and international real estate, private equity and other types of alternative investments such as Infrastructure, Commodities, Timber, and other
types of Real Assets, as well as Credit Opportunity and Absolute Return strategies. Simultaneously, the Fund Manager has required that internally-managed, publicly
traded securities be outsourced to external portfolio managers and index accounts.
As of the end of FY’09, the System has in place all of the structural elements necessary (i.e., investment staff, policies, consultant expertise, etc.) to attain the desired
degree of diversification and thereby, in turn, attain with consistency the System’s rate of return expectations.
Looking ahead, Fund Manager expects that:
• the investment staff and consultants will continue to source potential investment opportunities that will further the objective of diversification and better position
the System for achieving with consistency its rate of return expectations;
• the effort to diversify the System’s domestic and international Real Estate exposure will continue and good opportunities to reduce the System’s excessive South-west
U.S. residential and commercial real estate concentration will be pursued;
• the process of shifting internally-managed securities to external management will continue, concomitant with the effort to reduce the System’s allocation to
equities while increasing its exposure to Alternatives (that have low or negative correlations to equities) and bring the System’s actual asset allocation in line with
its asset class targets.
CONCLUSION
As members of the Fund Manager, we intend to continue our commitment to make the changes that are necessary to improve the financial status of EORP, moderate
the required contribution of the Plan’s participating employers and faithfully serve the interests of the Plan’s participants and beneficiaries.
We appreciate having the opportunity to serve the State of Arizona, its political subdivisions and its EORP stakeholders and we look forward to continuing to serve as
members of the Fund Manager for this System.
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EORP 28th Comprehensive Annual Financial Report
INTRODUCTORY SECTION
December 1, 2009
The Fund Manager
Public Safety Personnel Retirement System (PSPRS)
3010 E. Camelback Road, Suite 200
Phoenix, Arizona 85016
Fund Manager Members:
Here is the Twenty-eighth Comprehensive Annual Financial Report (CAFR) of the operations and financial condition of the Arizona Elected Officials Retirement Plan
(EORP). This report is for the fiscal year ended June 30, 2009. The Plan is a uniform statewide retirement system that provides retirement, disability and survivor bene-fits,
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, other financial data from the year ended June 30,
2009, and the independent auditor’s report of Heinfeld, Meech & Co. P.C., Certified Public Accountants and auditors for the System. Also included are the actuarial
certification statement and the actuarial balance sheet from the June 30, 2009 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 System. The finan-cial
statements were prepared in conformity with generally accepted accounting principles appropriate for government-sponsored defined benefit pension plans.
Management believes that all other financial information included in this annual report is consistent with those financial statements.
It is the System's policy to have and maintain an effective system of accounting controls. We believe our controls are adequate to provide reasonable assurance that
assets are safeguarded against loss or unauthorized use and to produce the records necessary for the preparation of financial information. There are limits inherent in
all systems of internal control based on the recognition that the costs of such systems should be related to the benefits to be derived. Management believes the Sys-tem's
controls provide this appropriate balance.
The System uses the accrual basis of accounting for both revenues and expenses. Contributions to the System are based on principles of level-cost financing with current
service financed as a level percent of payroll on a current basis and prior service amortized as a level percent of payroll over a period of at least twenty but not more
than thirty years.
REVENUES
Revenues for the Plan are derived from four sources: member contributions, employer contributions, judicial filing fees and realized and unrealized returns on the in-vested
assets of the Plan. As shown by the Schedule of Revenues by Source included in the Statistical Section later in this report, the Plan had an investment loss of
$61.5 million this fiscal year. That more than offset the positive flow of revenue from member contributions of $4.4 million, direct employer contributions of $9.5 mil-lion
and judicial filing fees of $8.0 million. Please refer to the Statistical Section for a ten-year history of revenues and expenses.
ADMINISTRATIVE AND INVESTMENT EXPENSES
The EORP’s FY’09 administrative and investment-related expenses totaled $1.6 million, up from $723.3 thousand the year before. Administrative and investment ex-penses
were approximately 63 basis points of the total assets managed. The increase in costs was the result of the unitizing of assets and changing the structure of our
investments from internally managed to externally managed assets. This is still 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 man-agers
and service needs have escalated due to increasing numbers of participants and beneficiaries.
PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM
CORRECTIONS OFFICER RETIREMENT PLAN
Mike Galloway ELECTED OFFICIALS' RETIREMENT PLAN
Fund Manager, Chairman 3010 East Camelback Road, Suite 200
Brian Tobin Phoenix, Arizona 85016-4416
Fund Manager, Vice Chairman www.psprs.com
Timothy J. Dunne Lori Roediger TELEPHONE: (602) 255-5575 James M. Hacking
Fund Manager, Member Fund Manager, Member FAX: (602) 255-5572 Administrator
Gregory Ferguson Ryan Parham Tracey D. Peterson
Fund Manager, Member Chief Investment Officer Assistant Administrator-COO
INTRODUCTORY SECTION
EORP 28th Comprehensive Annual Financial Report
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INVESTMENTS
The total rate of return on the EORP assets for the fiscal year was -17.47% on a gross of fees basis (-17.75% on a net of fees basis). This negative return was the result of
the sharp decline and volatility in the domestic and international equity and real estate markets. The Investment Section of this Report contains, among other things,
graphs depicting the Plan’s performance, a detailed summary of the investment portfolio, and commissions paid to investment professionals who provide services to
EORP. All Plan investments were held in trust by BNY Mellon, the System’s custodian bank.
ENACTED LEGISLATION
During FY’09 the State Legislature approved, and the Governor signed, an administrative bill that amends the statutes that govern EORP in order to bring the Plan’s
provisions into compliance with the requirements of the Internal Revenue Code and Regulations and with other relevant federal laws such as the Uniformed Services
Employment and Reemployment Rights Act (USERRA) and the Heroes Earnings Assistance and Relief Tax Act (the “HEART Act”).
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 requirement to meet the calcu-lated
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 percent of gross
payroll and is reset annually, depending on the results of the Plan’s actuarial valuation, judicial filing fees and the realized and unrealized returns on the invested assets
of the Plan.
The current unsubsidized contribution rate that is paid by participating cities and towns on behalf of their EORP participants is 26.25%. That unsubsidized rate is pro-jected
to increase to 29.79% as of July 1, 2010.
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 14.25% of payroll. That rate is expected to increase to 17.42% next July 1st.
While there is no single all-encompassing test to measure a retirement system's funding progress and current status, the most commonly used measure is the ratio of
the actuarial value of assets to actuarial accrued liability, often referred to as the "percent funded." The percent funded for the EORP had been declining for six consecu-tive
fiscal years through FY’07. At that point in time, the Plan’s funding ratio was 74.6%. At June 30, 2008, the ratio improved slightly to 76.8%. Now as of June 30,
2009, the EORP funding ratio is down to 71.3%.
If the EORP funding ratio were calculated using FY’09 year-end market value of assets, rather than the actuarial value of assets, its funding ratio would only be 50.0%.
This means that the effects of the FY’09 -17.75% return will remain with us for the next several years and will adversely affect the Plan’s financial status going forward.
Hopefully, the System will experience better-than-expected rates of return in future years that will more than offset the negative FY’09 return.
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 post retirement increases are funded from a portion of the investment returns in excess of 9% that are accumulated in the EORP’s Reserve for Future Benefit
Increases. These Reserve assets are invested along with all other assets of the Plan. The Reserve balance, after subtracting the $11.3 million needed to fund the present
value of the July 1, 2009 post retirement increase, was only $3.64 million. Absent a large infusion of new assets into the EORP Reserve, the Reserve’s balance would
only be sufficient to finance a partial post-retirement adjustment as of July 1, 2010.
CERTIFICATE OF ACHIEVEMENT
The Government Finance Officers Association of the United States and Canada (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, 2008. This was the fourteenth 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’09 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.
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EORP 28th Comprehensive Annual Financial Report
INTRODUCTORY SECTION
NEW DEVELOPMENTS AND MANAGEMENT INITIATIVES
During this past fiscal year, the PSPRS Fund Manager continued its strategic initiative that will change the way in which the EORP’s assets are managed and invested.
(See the Fund Manager’s transmittal letter to the Governor that begins on page 7). In addition, there were other developments and initiatives that strengthened Sys-tem
governance, increased administrative efficiency and productivity or improved internal controls.
With respect to initiatives that strengthened System governance, the following are noteworthy:
• The System retained CORTEX Applied Research to conduct a complete review of the PSPRS Governance Policies; the Fund Manager approved the CORTEX recom-mended
modifications. The System’s normal practice is to have its Governance Policies reviewed in their entirety every three years.
• The System’s staff, with the assistance of a consultant acting in the role of facilitator, undertook and completed before fiscal year-end a project designed to docu-ment
all of the policies and procedures in use within the organization. There were well over 300 policies and procedures documented; these will now be subject to
systematic audit by the System’s new internal auditor and compliance officer in order to identify any deficiencies or weaknesses in our controls environment.
• The System conducted an RFP process to secure a new Investment Consultant and Retained Actuary to serve as advisors to the Fund Manager. New England Pension
Consultants (NEPC) was retained for the Investment Consultant role; Gabriel, Roeder, Smith & Co. (GRS) was retained as the new actuary.
• Finally, the System’s staff provided legal counsel with the inputs for the filing with the Internal Revenue Service of the documents necessary to begin the compli-ance
review process for assuring the continuation of the tax qualified status of the EORP. To the extent that “qualification defects” were identified in the process,
legal counsel expects that these will be remedied through the IRS “Employee Plans Compliance Resolution System (EPCRS).
With respect to initiatives that increased administrative efficiency and productivity or improved internal controls, the following were noteworthy:
• The System hired two new key staff personnel -- a new internal auditor and compliance officer to add to the overall internal controls environment and a new Chief
Investment Officer, who will provide the staff leadership to further diversify the System’s asset deployments, shift internally managed portfolios of publicly traded
securities to external investment management firms and reduce the System’s allocations to equities while increasing its exposure to various types of “Alternative
Investments.”
• The System’s multi-year document imaging (i.e., scanning) project moved forward with the expectation that it will be completed during the first half of System
FY’10 at which time a new “Work Flow” project will be initiated in accordance with the current Strategic Plan. The new Work Flow project is expected to increase
efficiency and productivity by eliminating redundancy and duplication of effort and by making documents and records readily available to staff.
• The PSPRS IT Departments initiated a business continuity and disaster recovery project that is expected to provide the System with comprehensive and redundant
data base and network back-up and data storage capacities. PSPRS now has an off-site Data Back-up and Disaster Recovery facility located in Denver, Colorado.
• Finally, the System’s IT Program Development Unit implemented an “online” system for the receipt of contributions from participating employers and the IT Net-work
and Communications Unit deployed several new network servers and migrated others to the System’s VMWare virtual environment.
NEW INITIATIVES FOR SYSTEM FISCAL YEAR 2010
As we have moved through the first four months of the new fiscal year (FY’09), some new initiatives have been completed; others are underway; and still others are
planned.
• The System’s IT Program Development Department plans to create the capability for participants to apply for benefits electronically through their local board. The
Department will also continue its efforts to automate all forms of benefit payments via ACH transfers and bank-issued Debit Cards.
• The Disaster Recovery/Business Continuity Plan will be finalized and a full disaster recovery test will be conducted.
• Finally, internal audits of all essential processes will be undertaken in order to identify and remedy any deficiencies in the System’s controls environment.
SUMMARY
This EORP CAFR is a product of the collective efforts of the staff, under the direction of the System’s Fund Manager. It is intended to provide complete and reliable infor-mation
that will facilitate the management decision process and it serves as a means for determining compliance with the System’s governance and investment poli-cies
and legal requirements. Copies of this report are provided to the Governor, State Auditor, Legislature and all our member constituency groups. We hope all recipi-ents
of this report find it informative and useful.
I would like to take this opportunity to express my gratitude to the members of the Fund Manager, 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 financial status.
Respectfully submitted,
James M. Hacking
Administrator
INTRODUCTORY SECTION
EORP 28th Comprehensive Annual Financial Report
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FUND MANAGER
(AS OF JUNE 30, 2009)
Carter Olson
Chairman
Vice Chairman
Mike Galloway
Member
Tim Dunne
Member
Lori Roediger
Member
Brian Tobin
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EORP 28th Comprehensive Annual Financial Report
INTRODUCTORY SECTION
EXECUTIVE STAFF AND ORGANIZATIONAL CHART
Administrator
Tracey D. Peterson
Assistant Administrator
Chief Operations Officer
James M. Hacking
Ryan Parham
Chief Investment Officer
INTRODUCTORY SECTION
EORP 28th Comprehensive Annual Financial Report
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PROFESSIONAL ADVISORS
Albourne America, LLC International Alternative Investment Consultant
Bank of New York Mellon Custodian
Cortex Applied Research, Inc. Governance Advisor
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
Public Policy Partners Legislative Liaison
ORG Portfolio Management, LLC Real Estate Consultant
Step Stone Group, LLC Alternative Investment Consultant
NEPC, LLC Independent Investment Advisor
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 16
Management Discussion and Analysis 18
Basic Financial Statements
Statement of Plan Net Assets 22
Statement of Change in Plan Net Assets 23
Notes to the Financial Statements 24
Required Supplemental Information
Schedule of Funding Progress 34
Schedule of Employer Contributions 34
Notes to the Required Supplemental Information 35
Supporting Schedules Information
Schedule of Changes in Fund Balance Reserves 36
Schedule of Receipts and Disbursements 37
Schedule of Administrative Expenses 38
Schedule of Consultant Expenses 38
Other Supplemental Information
Agency Fund Statement of Changes in Assets and Liabilities 39
Agency Fund Statement of Funding Progress 39
FINANCIAL SECTION
EORP 28th Comprehensive Annual Financial Report
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EORP 28th Comprehensive Annual Financial Report
FINANCIAL SECTION
FINANCIAL SECTION
EORP 28th 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 2009 are as follows:
• The Elected Officials’ Retirement Plan (EORP) had a total rate of return of -17.75% this year. Our equity portfolio had a return of -21.82%, which outperformed the
stock index by 540 basis points. Our fixed income portfolio had a return of -1.82%, which underperformed the index by 702 basis points.
• As of the close of the fiscal year 2009, the Future Benefit Increase Reserve was $3.6 million. Absent a large infusion of new assets into the Reserve, the Reserve’s
balance would only be sufficient to finance a partial post-retirement adjustment as of July 1, 2010, if any.
• Retirement benefits paid totaled $35.1 million for the current year, compared to $32.5 for the previous year. This represents an 8.0% 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 Supplemental Information
The basic financial statements are followed by a section of required supplemental information. This section includes the Schedule of Funding Progress and the Schedule
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 Supplemental Information
The Supporting Schedules and Supplemental Information Section include the Supporting Schedule of Changes in Fund Balance Reserves, Supporting Schedule of Pay-ments
to Consultants, the Supplemental Schedule of Cash Receipts and Cash Disbursements and the Agency Fund Statement of Changes in Assets and Liabilities. The
total columns and information provided on these schedules carry forward to the applicable financial statement.
FINANCIAL ANALYSIS OF THE PLAN
Comparative Statements are included to provide additional analysis of the changes noted on those schedules.
19
EORP 28th Comprehensive Annual Financial Report
FINANCIAL SECTION
The total net assets held in trust for benefits at June 30, 2009 were $258.3 million, a 22.20% decrease from $332.1 million at June 30, 2008. The decrease in net assets
is primarily due to less than favorable financial markets during the fiscal year. The decrease 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 private equity.
Detailed information regarding the Plan’s investment portfolio is included in the investment section of this report. The decrease in security lending collateral is due to
normal fluctuations in the lending program. The investment of the collateral fluctuated in a similar manner.
As of 06/30/2009 As of 06/30/2008 Change % Change
Cash and Short-Term Investments $ 4,535,563 $ 5,973,514 $ (1,437,951) (24.07%)
Total Receivables 1,807,867 8,727,518 (6,919,651) (79.29%)
Total Investments 252,903,599 320,660,224 (67,756,625) (21.13%)
Securities Lending Collateral 39,597,501 61,810,213 (22,212,712) (35.94%)
Net Capital Assets 263,114 277,681 (14,567) (5.25%)
Total Plan Assets 299,107,645 397,449,150 (98,341,505) (24.74%)
Accrued Accounts Payable 630,433 481,965 148,468 30.80%
Investment Purchases Payable 546,607 3,091,720 (2,545,113) (82.32%)
Securities Lending Collateral 39,597,501 61,810,213 (22,212,712) (35.94%)
Total Plan Liabilities 40,774,540 65,383,898 (24,609,358) (37.64%)
Net Assets $ 258,333,105 $ 332,065,253 $ (73,732,148) (22.20%)
SUMMARY COMPARATIVE STATEMENTS OF PLAN NET ASSETS
2009 2008 Change % Change
ADDITIONS
Total Contributions $ 22,343,167 $ 16,832,401 $ 5,510,766 32.74%
Net Investment Income (Loss) (61,526,963) (23,150,918) (38,376,045) (165.76%)
Transfers and Service Purchases 283,226 573,261 (290,035) (50.59%)
Total Additions (Reductions) (38,900,569) (5,745,256) (33,155,313) (577.09%)
DEDUCTIONS
Benefits 34,178,410 31,607,055 2,571,355 8.14%
Service Transfers and Refunds 131,663 67,792 63,871 94.22%
Administrative Expenses 521,507 355,290 166,217 46.78%
Total Deductions 34,831,579 32,030,137 2,801,442 8.75%
Net Increase (Decrease) (73,732,148) (37,775,392) (35,956,756) (95.19%)
Balance Beginning of Year - July 1 332,065,253 369,840,645 (37,775,392) (10.21%)
Balance End of Year - June 30 $ 258,333,105 $ 332,065,253 $ (73,732,148) (22.20%)
SUMMARY COMPARATIVE STATEMENTS OF CHANGES IN PLAN NET ASSETS
Employer and employee contributions increased $5.5 million due to an increase in the employer contribution rates to 28.00% from 20.21% in the prior year. Also, in
2008 the State Legislature approved the collection of additional court fees to be credited to the fund manager during 2009. For FY 2009, EORP recognized net invest-ment
loss of $61.5 million which compares to a $23.1 million loss in the previous year. This 165.76% increase in loss was due to the continuing and worsening negative
returns in the financial markets during the fiscal year. Deductions from the EORP net assets held in trust for benefits consist primarily of pension, disability, survivor
benefits, member refunds and administrative expenses. For FY 2009, these deductions totaled $34.8 million, an increase of 8.75% from the $32.0 million paid during
FY 2008.
FINANCIAL SECTION
EORP 28th Comprehensive Annual Financial Report
20
INVESTMENT ACTIVITIES
During 2007 the fund manager adopted a more diversified asset allocation policy that has been deployed over the past two fiscal years. As a result, investment in do-mestic
equities was reduced by 14.25% this past year. However, due to the unfavorable markets the investment total rate of return was -17.75%. At June 30, 2009,
EORP held $141.0 million in equities. The FY 2009 rate of return for EORP equities was -21.82% versus a benchmark rate of return of -27.22%. At June 30, 2009, EORP
held $79.0 million in fixed income securities. The FY 2009 rate of return for EORP fixed income securities was -1.82% versus a benchmark rate of return of 5.20%. The
benchmarks for both equities and fixed income securities are representative of the returns that could be expected in a similar investing environment. More detailed
information regarding the Plan’s investment portfolio can be found in the investment section of this report.
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
1.44%
2.73%
9.06%
31.94%
19.21%
35.62%
Domestic Equity International Equity
Domestic Fixed Income Real Estate
Private Equity Cash
71.3%
74.6% 76.6%
89.9%
92.3%
141.7% 125.5% 118.7% 104.4%
130.1%
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Valuation Assets Accrued Liabilities
21
EORP 28th 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 over a seven year period. Actuarial valuations of the EORP assets and benefit obligations for the retire-ment
plan are performed annually. The most recent actuarial valuation available is as of June 30, 2009.
At June 30, 2009, the total funded status of the EORP decreased to 71.3% from 76.6% at FYE 2008. This decrease in funded status is related primarily to investment
losses in the current fiscal year as well as investment losses from the fiscal year 2002 being fully reflected. The market value smoothing techniques used in this valua-tion
of the System 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.
IMPLEMENTATION OF GASB 43 AND GASB 45
Historically, the contributions, pension benefits, including the health insurance premium subsidy payments, actuarial accrued liabilities and the funded ratio were
reported by the system as a single, combined pension benefit. However, beginning in FY ’07, the system was required to implement Government Accounting Standards
Board (GASB) Statement No. 43. This statement requires that the system separately report the assets and liabilities associated with the health insurance premium
subsidy by discretely presenting the assets and the liabilities separately from the retirement plan.
The System is not statutorily authorized to separately account for the assets, income and/or benefit payments of a supplemental health care benefit. Additionally, the
System does not administer the health insurance premium subsidy through a separate health care plan as defined by the Internal Revenue Code §401 (h). As men-tioned
earlier, the System has always recognized, reported and funded the actuarial accrued liability for the health insurance premium benefit as another form of
postemployment benefit, similar to the disability benefit. Assets and liabilities are not discretely presented for the disability benefits or any other benefits provided
under the plan.
The characteristics of the plan have resulted in unique and unusual reporting of the benefit under the requirements of GASB Statement No. 43. Complying with this
statement has resulted in the following changes to the financial statements and actuarial disclosures for the System’s pension benefits:
• Contributions and benefits paid totaling $917,286 for the health insurance premium subsidy are not reported on the Statement of Changes in Plan Net Assets with
the financial information for the retirement plan. This information is reported separately as an “Agency Fund” (unaudited) and can be found in the Statement of
Changes in Assets & Liabilities in the Other Supplemental Information section included in the Financial Section of the report.
• The Schedule of Funding Progress does not include the liability for the health insurance premium subsidy. This will increase the System’s funded ratio. The funded
ratio without the health insurance premium subsidy liability is calculated as 73.0%. If the liability associated with the health insurance premium subsidy were to be
included, the funded ratio is calculated as 71.3%.
• The Schedule of Employer Contributions includes the annual required employer contributions for the retirement plan plus the difference between the annual re-quired
contributions calculated for the health insurance premium subsidy and the benefits paid. For FY ’09, this amounted to a difference of $438,247 added back
to the employer contributions, which gives the “appearance” that the contributions for the retirement plan were over funded and the contributions for the health
insurance premium subsidy were under funded. If a portion of the system assets were allocated to both the retirement and health insurance subsidy benefits, the
percentage contributed for both benefits would be 100% funded.
• Beginning FY’08, the participating employer groups implemented GASB Statement No. 45. This statement required the participating employers to report the liabili-ties
associated with the health insurance premium subsidy as well as any other supplemental healthcare benefits provided to the retiree under the healthcare plans
that they administer (sponsor).
The management of the System maintains that the reporting described above has limitations and decreases the reporting transparency of the health insurance pre-mium
subsidy. Management will continue to evaluate options to enhance the reporting of the health insurance premium subsidy benefit payments, employer contri-butions,
and actuarial required disclosures.
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 28th Comprehensive Annual Financial Report
22
STATEMENT OF PLAN NET ASSETS
JUNE 30, 2009 WITH COMPARATIVE TOTALS FOR 2008
JUNE 30, 2009 JUNE 30, 2008
ASSETS
Cash and Short-Term Investments $ 4,535,563 $ 5,973,514
RECEIVABLES
Member Contributions 161,060 153,357
Employer Contributions 334,034 287,763
Court Fees 832,747 361,979
Interest and Dividends 445,121 1,231,288
Investment Sales - 6,681,095
Other 34,905 12,036
Total Receivables 1,807,867 8,727,518
INVESTMENTS AT FAIR VALUE (NOTES 2 AND 3)
U.S. Government Securities 12,746,519 40,292,400
Corporate Bonds 66,211,483 39,793,718
Corporate Stocks 140,997,116 215,778,095
Alternative Investments 32,948,481 24,796,011
Total Investments 252,903,599 320,660,224
Securities Lending Collateral 39,597,501 61,810,213
CAPITAL ASSETS (NOTE 4)
Land 33,145 33,145
Building 233,969 233,969
Furniture, Fixtures & Equipment 52,135 51,335
Total Capital Assets 319,249 318,449
Accumulated Depreciation (56,134) (40,768)
Net Capital Assets 263,114 277,681
TOTAL PLAN ASSETS 299,107,645 397,449,150
LIABILITIES
Accrued Accounts Payable 630,433 481,965
Investment Purchases Payable 546,607 3,091,720
Securities Lending Collateral 39,597,501 61,810,213
Total Plan Liabilities 40,774,540 65,383,898
NET ASSETS HELD IN TRUST FOR PENSION BENEFITS $ 258,333,105 $ 332,065,253
NET ASSET RESERVES
Refundable Members’ Reserve 42,072,605 41,963,744
Employers’ Reserve 212,622,829 271,917,091
Future Benefit Increase Reserve 3,637,670 18,184,418
Total Net Asset Reserves $ 258,333,105 $ 332,065,253
The accompanying notes are an integral part of these financial statements.
23
EORP 28th Comprehensive Annual Financial Report
FINANCIAL SECTION
STATEMENT OF CHANGES IN PLAN NET ASSETS
FOR THE YEAR ENDED 2009 WITH COMPARATIVE TOTALS FOR 2008
2009 2008
ADDITIONS
Contributions
Members’ Contributions (NOTES 2,5) $ 4,436,652 $ 4,355,999
Employers’ Contributions (NOTES 2,5) 9,528,861 7,275,780
Court Fees 8,000,231 4,155,348
Members’ Service Purchase 377,424 1,045,274
Total Contributions 22,343,167 16,832,401
INVESTMENT INCOME
Net Appreciation (Depreciation) in Fair Value of Investments (NOTES 2,3) (67,630,322) (36,152,328)
Interest 1,384,484 7,696,271
Dividends 5,271,959 5,346,698
Securities Lending Income (NOTE 3) 748,175 2,378,622
Borrower Rebates (138,107) (1,978,867)
Agents Share of Income (91,508) (73,272)
Net Securities Lending Income 518,560 326,483
Total Investment Income (Loss) (60,455,317) (22,782,876)
Less Investment Expense (1,071,646) (368,042)
Net Investment Income (Loss) (61,526,963) (23,150,918)
Transfers Into System & Service Purchases 283,226 573,261
Total Additions (Reductions) (38,900,569) (5,745,256)
DEDUCTIONS
Pension Benefits (NOTE 2) 34,178,410 31,607,055
Refunds To Terminated Members (NOTE 2) 131,663 63,958
Administrative Expenses 521,507 355,290
Transfers Out of System - 3,834
Total Deductions 34,831,579 32,030,137
NET INCREASE (DECREASE) (73,732,148) (37,775,392)
NET ASSETS HELD IN TRUST FOR PENSION BENEFITS
Beginning of Year, July 1 332,065,253 369,840,645
End of Year, June 30 $ 258,333,105 $ 332,065,253
The accompanying notes are an integral part of these financial statements.
FINANCIAL SECTION
EORP 28th Comprehensive Annual Financial Report
24
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 Fund Manager of the Public Safety Personnel Retirement System (PSPRS) administers the EORP Plan.
The Fund Manager is a five member board. Effective August 6, 1999, it became the Governor’s responsibility to appoint all members of the Fund Manager, who serve a
fixed three-year term. The Fund Manager 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. Senate Bill 1378, which was enacted August 12, 2005, requires substantial investment experience for the member of the Fund Man-ager
that represents the state as an employer and the public member of the Fund Manager.
The addition or deletion of eligible groups does not require the approval of the other participating employers. The Fund Manager approves new eligible groups for
participation. The EORP is reported as a component unit of the State of Arizona.
The Fund Manager of the EORP is also responsible for the investment and general administration of two other statewide retirement plans-the Corrections Officer Retire-ment
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 Fund Manager to commingle 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, 2009 and 2008, 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, 2009 and 2008, 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 (A.R.S. §38-810.02.B)
To provide a uniform, consistent, and equitable statewide program for those eligible elected officials as defined by the Plan.
GROUP 2009 2008
Cities and Towns 21 21
Counties 15 15
State Agencies 1 1
Total Employers 37 37
RETIREMENT PLAN
MEMEBERSHIP TYPE 2009 2008 2009 2008
Retirees 905 872 505 474
Terminated Vested 119 88 0 0
Current Vested 512 539 0 0
Current Non-Vested 345 285 0 0
Total Members 1,881 1,784 505 474
INSURANCE SUBSIDY
25
EORP 28th Comprehensive Annual Financial Report
FINANCIAL SECTION
ELIGIBILITY (A.R.S. §38-801 and §38-804.A)
All elected officials are members of the Plan, except that an elected official who is subject to term limits may elect not to participate in the Plan for that specific term of
office. An elected official means every elected official of this state, every elected official of each county of this state, every justice of the supreme court, every judge of
the court of appeals, every judge of the superior court, every full-time superior court commissioner, the administrator of the fund manager if the administrator is a
natural person and each elected official of an incorporated city or town whose employer has executed a proper joinder agreement for coverage of its elected officials.
CONTRIBUTIONS (A.R.S. §38-810.A)
Each member shall contribute 7% of salary to the Plan on a pre-tax basis. Each employer shall contribute the following:
For state and county employers, a designated portion of certain fees collected by the Clerks of the Superior Courts, Courts of Appeals and the Supreme Court plus addi-tional
contributions as determined by actuarial valuation to ensure proper funding for the Plan, but not less than 10% of salary.
For incorporated city or town employers, a level per cent of salary as determined by actuarial valuation to ensure proper funding for the Plan but not less than 10% of
salary.
CREDITED SERVICE (A.R.S. §38-801.6)
Means the number of whole and fractional years of a member's service as an elected official after the elected official's effective date of participation for which member
and employer contributions are on deposit with the fund, plus credited service transferred to the Plan from another retirement system or plan for public employees of
this state, plus service as an elected official before the elected official's effective date of participation that is being funded pursuant to a joinder agreement pursuant to
section 38-810, subsection C and section 38-815 or service that was redeemed pursuant to §38-816.
AVERAGE ANNUAL SALARY (A.R.S. §38-801.5)
Means the highest average total salary over a period of three consecutive years within the last 10 completed years of credited service as an elected official that was paid
to the elected official at the time of death or retirement or at the time the elected official ceases to hold office. 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.
NORMAL RETIREMENT (NO REDUCTION FOR AGE) (A.R.S. §§ 38-805.A, 38-808.B.1, and 38-808.C)
An elected official may retire upon meeting one of the following age and service requirements:
1. Age 65 years, with 5 or more years of credited service.
2. Age 62 years, with 10 or more years of credited service.
3. Twenty or more years of credited service regardless of age.
The amount of a normal retirement pension is 4% of the member's average yearly salary multiplied by the years of the member's credited service. Maximum is 80% of
the member's average yearly salary.
Notwithstanding any other provision of this plan, beginning January 1, 1987 payment of benefits to a member shall commence no later than April 1 of the calendar
year following the later of:
1. The calendar year in which the member attains seventy and one half years of age.
2. The date the member terminates employment.
EARLY RETIREMENT (REDUCTION FOR AGE) (A.R.S. §38-805.B and §38-808.B.1)
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%.
VESTED TERMINATION (DEFFERRED RETIREMENT)
An elected official with five or more years of credited service retains entitlement to deferred pension, upon ceasing to be an elected official, if the elected official's accu-mulated
contributions are left on deposit in the retirement plan. The amount of pension is determined in the same manner as a normal or early pension, whichever is
applicable.
DISABILITY RETIREMENT (A.R.S. §38-806 and §38-808.B.2)
The Fund Manager may retire an elected official who becomes incapacitated for the purpose of performing the duties of the member’s office based on a certification by
a majority of the board of physicians that the member is mentally or physically incapacitated, the incapacity occurred during the member’s term of office, and qualifies
for a disability retirement. The amount of pension is 80% of member's average yearly salary if the elected official has ten (10) or more years of credited service or 40%
of the member's average yearly salary if the elected official has five (5) but less than ten (10) years of credited service or 20% of the member's average yearly salary if
the elected official has fewer than five (5) years of credited service.
SURVIVOR PENSION (A.R.S. §38-807)
Payable to the eligible beneficiary of a retired member or an active or inactive member who dies before retirement. An eligible beneficiary is a surviving spouse who
was married to the retired or active or inactive member for at least two years; or, if there is no eligible spouse, then to a minor child. A surviving spouse's pension ter-minates
upon death. A surviving child's pension terminates upon marriage, adoption or death or upon attainment of age 18 years, unless the child is a full-time stu-dent
under the age of 23 or the child is under a disability which began before the child attained the age of 23. The amount of a surviving spouse's pension is three-fourths
of the pension being paid the deceased retired elected official or three-fourths of the pension which the member would have received assuming he had retired
under a disability. The amount of a surviving child's pension is an equal share of the amount of a surviving spouse's pension.
FINANCIAL SECTION
EORP 28th Comprehensive Annual Financial Report
26
DEATH BENEFIT (A.R.S. §38-807.E)
If a member dies and no pension is payable on account of the member’s death, the deceased member’s accumulated contributions shall be paid to the beneficiary
named by the member.
TERMINATION REFUND (A.R.S. §38-804.B)
Upon termination of employment for any reason other than death or retirement, a member shall, within 20 days after filing an application with the Fund Manager,
receive a lump-sum payment, equal to the accumulated contributions, as of the date of termination, less any benefits paid or any amounts owed to the Plan. A member
forfeits all membership rights and credited service in the Plan upon receipt of refund of contributions. If the member has 5 or more years of credited service upon termi-nation
they shall receive an additional amount according to the schedule below:
5 to 5.9—25% of member contributions deducted from the member’s salary pursuant to ARS 38-810.A
6 to 6.9—40% of member contributions deducted from the member’s salary pursuant to ARS 38-810.A
7 to 7.9—55% of member contributions deducted from the member’s salary pursuant to ARS 38-810.A
8 to 8.9—70% of member contributions deducted from the member’s salary pursuant to ARS 38-810.A
9 to 9.9—85% of member contributions deducted from the member’s salary pursuant to ARS 38-810.A
10 or more—100% of member contributions deducted from the member’s salary pursuant to ARS 38-810.A plus interest at 3% if left on deposit after 30 days.
REEMPLOYMENT AND REPAYMENT OF CONTRIBUTIONS (A.R.S. §38-804.F)
An elected official who terminates membership in the Plan and takes a refund of his contributions and is later re-employed as an elected official may restore prior ser-vice
credits, 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 reimbursement will equal the amount previously withdrawn plus interest from the date of withdrawal to the date of repayment at the rate of 9% compounded
annually.
REEMPLOYMENT AFTER RETIREMENT (A.R.S. §38-804.G and H)
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. Addition-ally,
if a retired member, by reason of election or reelection, becomes an elected official of the same office from which the member retired within a time period that is
less than one full term for that office, the member shall not receive a pension until the member ceases to hold the same office.
REDEMPTION OF PRIOR SERVICE (A.R.S.§38-816) (Use Form E2)
Active members who had previous service in this state as an elected official with an employer now covered by the Plan before the effective date of participation and
who received a refund of accumulated contributions from the applicable retirement system upon termination or who were not covered by a retirement system or plan
during the elected official’s prior elected official service may elect to redeem any part of the prior service by paying into the Plan the amounts required in A.R.S. § 38-
816.B. In addition, active members can also elect to redeem prior employment they may have had with the U.S. Government, a state of the U.S. or a political subdivi-sion
of a state of the U.S. A member electing to redeem service pursuant to this section may pay for service being redeemed in the form of a lump sum payment to the
plan, a trustee-to-trustee transfer or a direct rollover of an eligible distribution from a plan described in section 402(c)(8)(B) (iii), (iv), (v) or (vi) of the internal revenue
code or a rollover of an eligible distribution from an individual retirement account or annuity described in section 408(a) or (b) of the internal revenue code.
PURCHASE OF PRIOR ACTIVE MILITARY SERVICE (A.R.S. §38-820) (Use Form 18)
A member may purchase up to four years of prior active military time even if the member will receive a military pension. The member must pay the actuarial present
value of the increase of credited service resulting from this purchase.
TRANSFER BETWEEN STATE RETIREMENT SYSTEMS (A.R.S. §38-921 and §38-922) (Use Form U-2)
Members of any of the four Arizona state retirement systems or plans who have credited service under another Arizona state retirement system or plan may transfer or
redeem the credited service to their current Arizona state retirement system or plan by paying or transferring the actuarial present value of the credited service into
their current Arizona retirement system or plan to the extent funded on a market value basis as of the most recent actuarial valuation with approval of the Fund Man-ager
or retirement boards involved. 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 or plan to the extent funded on a market value basis as of the most recent actuarial valuation.
COLA BENEFIT INCREASES (A.R.S. §38-818)
Effective July 1 of each year, each retired member or survivor of a retired member may be entitled to a permanent benefit increase in their base benefit. The maximum
amount of the increase is 4% of the EORP benefit being received on the preceding June 30 and is contingent upon sufficient excess investment earnings for the fund. To
be eligible for the increase the member or survivor must be age 55 or older on July 1 of the current year and was receiving benefits on or before July 31 of the previous
year. A member or survivor is also eligible if they were receiving benefits on or before July 31 of the two previous years regardless of age.
HEALTH INSURANCE PREMIUM SUBSIDY (A.R.S. §38-817)
For EORP retirees who have elected group health and accident insurance coverage provided and administered by the state or another EORP employer and who had
eight or more years of credited service, the EORP will pay up to the following amounts. Those retired members who had between five and eight years of credited ser-vice
will receive a proportionate share of the subsidies:
27
EORP 28th Comprehensive Annual Financial Report
FINANCIAL SECTION
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
Through June 30, 2009, a retiree or survivor who is eligible for medicare and who lives in a non-service area receives up to the following amounts in addition to the
subsidy listed above after they have paid an out-of-pocket expense as set forth below. A non-service area is defined as an area in this state where the state retiree
group insurance program or employer’s retiree health insurance program does not provide or administer a health maintenance organization (HMO) for which the mem-ber
or survivor is eligible. The subsidy consists of up to the following amounts:
STATE TAXATION OF EORP BENEFITS (A.R.S. §38-811 and §43-1022)
Effective tax year commencing January 1, 1989, all EORP retirement benefits in excess of $2500 annually will be subject to Arizona state tax.
DOMESTIC RELATIONS ORDER; PROCEDURES AND PAYMENTS (A.R.S. § 38-822)
When a member has a divorce decree that splits pension benefits or refunds, EORP requires a Plan-approved Domestic Relations Order (DRO). This statute details the
basic requirements and sets forth a procedure for providing a certified copy of a DRO to EORP.
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. Furni-ture,
fixtures and equipment purchases costing $10,000 or more, when acquired, are capitalized at cost. Improvements, which increase the useful life of the property,
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 $(43,310,081) for FYE 2009 and $38,051,909 for FYE 2008. This calculation is inde-pendent
of the calculation of the change in the fair value of investments and may include unrealized amounts from prior periods.
ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of net assets held in trust for pension benefits at June 30, 2009 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 $100,000 (temporarily increased to $250,000 per depositor October 3, 2008, through December 31, 2009) insured by the Federal Deposit Insur-ance
Corporation (FDIC). The Plan mitigates custodial 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, 2009, as collateral:
$14,565,609 FNIONP 878442 6.50% Maturity Date 05/01/36
8,775,290 FNCL 896548 6.00% Maturity Date 07/01/36
4,395,962 FNCL 896548 6.00% Maturity Date 07/01/36
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. Formerly
all accounts were held at Wells Fargo Bank. A new custodian bank for investments only (BNY Mellon) was retained in August 2007 (effective October 1, 2007). All
deposits 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, 2009:
SINGLE
Medicare Eligible Retired Member & one dependent
Medicare Eligible
Only Retired Member Medicare Eligible
$170.00
After $100.00 out of pocket
$350.00
After $200.00 out of pocket
$470.00
After $400.00 out of pocket
FAMILY
FINANCIAL SECTION
EORP 28th Comprehensive Annual Financial Report
28
REPORTED AMOUNT BANK BALANCE
Pension Trust Fund $ 4,237,889 $ 4,237,889
Operating Fund 297,674 297,674
Total Deposits $ 4,535,563 $ 4,535,563
INVESTMENTS
EORP investments are reported at Fair Value. Fair Values are determined as follows: Short-term investments are reported at Fair Value, which approximates Cost.
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
determined by fixed-income broker/dealers. Directed real estate and venture capital investments are reported at fair value using appraisals to estimate the fair value.
Appraisals will be performed every three years on a rolling schedule unless circumstances warrant otherwise. Investment income is recognized as earned.
Statutes enacted by the Arizona Legislature authorize the Fund Manager to make investments in accordance with the "Prudent Man" rule. The Fund Manager is not
limited to so-called "Legal Investments for Trustees."
In making every investment, the Fund Manager shall exercise the judgment and care under the circumstances then prevailing which men of ordinary prudence, discre-tion
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, consider-ing
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 fund manager 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 other plans that the fund manager 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 com-pany.
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 fund manager 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 §7811);
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 §7811);
C) Listed or approved on issuance for listing on an exchange registered under the laws of this [Arizona] state or any other state; or
D) Listed or approved on issuance for listing on an exchange registered 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 fund manager manages shall be
invested in foreign equity 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 Fund Manager 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, 2009, the fair market value of the PSPRS Trust and the allocation for each system and plan was as follows:
A small portion of the assets (cash and real estate) remain outside the comingled funds, representing less than 2 basis points of the total.
PLAN UNITIZED PERCENT
PSPRS $4,082,266,086 77.08%
CORP 958,074,887 18.07%
EORP 255,479,477 4.85%
TRUST TOTAL $5,295,820,450 100.00%
29
EORP 28th Comprehensive Annual Financial Report
FINANCIAL SECTION
FAIR VALUE
JUNE 30, 2009
% OF ALL FIXED
INCOME ASSETS
WEIGHTED
FIXED SECURITY TYPE AVG. CREDIT
Corporate Bonds $ 63,425,902 80.3% A
Mortgages 728,498 0.9% A
CBO 2,002,830 2.5% BB
CDO 54,254 0.1% A
Total $ 66,211,484 83.9%
AVERAGE CREDIT QUALITY AND EXPOSURE LEVELS OF NON-GOVERNMENT
GUARANTEED SECURITIES
CREDIT RATING LEVEL CORPORATE BONDS MORTGAGES CBO CDO
AAA $ 21,364,257 $ 173,762 $ 0 $ 0
AA 2,633,287 246,548 0 0
A 10,042,315 96,872 1,128,172 54,233
BBB 9,565,734 0 603,976 0
Below BBB 19,820,309 211,316 270,681 21
Total $ 63,425,902 $ 728,498 $ 2,002,829 $ 54,254
RATINGS DISPERSION DETAIL
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, 2009, 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, 2009, the Plan’s fixed income assets
that were not government guaranteed represented 83.9% 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 28th Comprehensive Annual Financial Report
30
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 fund
manager manages shall be invested in foreign securities.
The following table shows the System’s exposure to foreign currency risk (U. S. dollars):
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, 2009 the fair value of securities on loan was $38,842,156 and the collateral was $39,597,501. 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.
CURRENCY TYPE
FIXED
INCOME
PRIVATE
EQUITY
REAL
ESTATE TOTAL
Euro Currency Unit $ 1,683 $ 638 $ 33 $ 2,354
British Pound Sterling 0 0 161 161
Total $ 1,683 $ 638 $ 194 $ 2,515
FOREIGN CURRENCY RISK
(IN THOUSANDS)
FIXED INCOME SECURITY <1 1-5 6-10 11-15 16-20 >20
Corporate $ 0 $ 2,759,023 $ 14,759,541 $ 3,366,908 $ 9,302,932 $ 33,965,995
Agencies 0 801,968 3,370,734 631,779 5,744,203 2,197,835
CBO 0 603,976 596,891 0 250,041 551,922
CDO 0 0 54,233 0 0 21
Total $ 0 $ 4,164,967 $ 18,781,399 $ 3,998,687 $ 15,297,176 $ 36,715,773
SEGMENTED TIME DISTRIBUTION BY SECURITY TYPE
(INCLUDING GOVERNMENT GUARANTEED SECURITIES)
CALLABLE BONDS BY SECURITY TYPE
(INCLUDING GOVERNMENT GUARANTEED SECURITIES)
FIXED INCOME
SECURITY TYPE
FAIR VALUE
JUNE 30, 2009
Corporate $ 533,148 0.81%
Agencies 0 0.00%
Total $ 533,148 0.81%
% OF ALL FIXED
INCOME ASSETS
31
EORP 28th Comprehensive Annual Financial Report
FINANCIAL SECTION
ASSET CLASS OUT ON LOAN
TOTAL AVAILABLE
TO LOAN
% OF AVAILABLE
TO LOAN
Equities $ 28,380,352 $ 140,997,116 20%
Agencies 0 4,204,649 0%
Treasuries 5,615,589 8,541,870 66%
Exchange Traded 4,846,215 66,211,483 7%
Totals $ 38,842,156 $ 219,955,118 18%
LAND
BUILDING AND
IMPROVEMENTS
FURNITURE,
FIXTURES
AND EQUIPMENT
CAPITAL ASSETS
Additions 0 0 800 800
Deletions 0 0 0 0
Balance June 30, 2009 33,145 233,969 52,135 319,249
ACCUMULATED DEPRECIATION
Balance June 30, 2008 0 (16,194) (24,574) (40,768)
Additions 0 (6,271) (9,095) (15,366)
Deletions 0 0 0 0
Balance June 30, 2009 0 (22,465) (33,669) (56,134)
Net Capital Assets $ 33,145 $ 211,504 $ 18,466 $ 263,115
TOTAL
CAPITAL ASSETS
Balance June 30, 2008 $ 33,145 $ 233,969 $ 51,335 $ 318,449
SCHEDULE OF CAPITAL ASSET ACCOUNT BALANCES
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 33 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 $546,607 has been recorded as the Plan’s share.
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, 2009 was $15,366.
The following table is a schedule of the capital asset account balances as of June 30, 2009, and June 30, 2008, and changes to those account balances during the year
ended June 30, 2009.
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 Actuarial 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 thirty (30) year period. Beginning July 1, 2006, the minimum employer contribution rate increased from 5% to 10%.
During the year ended June 30, 2009, contributions totaling $23,800,315 ($11,363,432 employer, $8,000,231 court fees and $4,436,652 member) were made in accor-dance
with contribution requirements determined by an actuarial valuation of the System as of June 30, 2007. The employer contributions including court fees con-sisted
of approximately $12,766,192 for normal cost plus $6,597,471 for amortization of the unfunded actuarial accrued liability in aggregate. Employer contributions
including court fees represented 28.00% of covered payroll [18.46% for normal costs and 9.54% for amortization of the unfunded actuarial accrued liability in aggre-gate].
Member contributions represented 7.00% of covered payroll and are attributable to normal costs.
FINANCIAL SECTION
EORP 28th Comprehensive Annual Financial Report
32
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
Fund Manager, 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 remain-der
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 compen-sation.
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.
NOTE 7: HEALTH INSURANCE PREMIUM SUBSIDY-AGENCY FUND
The plan description, summary of significant accounting policies, investment policies and contributions required for the health insurance subsidy are the same as the
retirement plan and can be found under Notes 1, 2 and 5. The health insurance premium subsidy provided by A.R.S. §38-817 consists of a fixed dollar amount set by
statute and paid by the Plan on behalf of eligible retired members. The subsidized health benefits are provided and administered by the Arizona State Retirement
System, Arizona Department of Administration or the participating employer of the retired member. According to Governmental Accounting Standards Board (GASB)
Statement No. 43, the health insurance subsidy paid by the Plan represents other post employment benefits. The Plan does not administer a separate healthcare plan
as defined under IRC §401(h) or an equivalent arrangement. In addition, the Plan is not statutorily authorized to maintain a separate account for the health insurance
subsidy assets and benefit payments. Therefore, in accordance with GASB No. 43, the healthcare subsidy is reported as an agency fund. All assets of the Plan are avail-able
to pay both pension benefits and health insurance subsidy. The pension benefits and health insurance subsidy are funded through employer contributions based
on an annual actuarial valuation. Contributions are separately accounted for by employer but are not segregated by contribution type.
Contributions in excess of the health benefit subsidy payments are reported in the retirement plan. Therefore, no accumulated assets or liabilities to participating em-ployers
are reported in the agency fund. For FY ’09, contributions collected for the health insurance subsidy amounted to $1,355,533 and the health benefit subsidy
payments were $917,286. The excess contributions of $438,247 were added to the retirement plan for reporting purposes. Effective FY ’08, each participating em-ployer
is required by GASB Statement No. 45 to disclose additional information with regard to funding policy, the employer’s annual OPEB cost and contributions made,
the funded status and funding progress of the employer’s individual plan and actuarial methods and assumptions used.
NOTE 8: PLAN TERMINATION
EORP and its related plans are administered in accordance with Arizona statutes. These statutes do provide for termination of the plans under A.R.S. 41-3016.18. The
plans are scheduled to terminate on July 1, 2016.
NOTE 9: CONTINGENCIES
Some of our real estate partners in the investments categorized as “other investments” have obtained third party financing, which is secured by real property. The Plan
has entered into Capital Call Agreements with regards to these third party financing arrangements. The Capital Call Agreements, in the unlikely event of default, limit
the Plan to the amount of the defaulted payment or the original terms of the investment approved by the Fund Manager, 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 estimates that it may take as long as two years to finalize the settle-ment.
33
EORP 28th Comprehensive Annual Financial Report
FINANCIAL SECTION
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)
06/30/09 360,950 494,437 133,486 73.0% 67,777 197.0%
ACTUARIAL
VALUATION
DATE
NOTE 10: FUNDING STATUS AND PROGRESS
The Plan’s funded status 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, 2009
Actuarial Cost Method Projected Unit Credit
Amortization Method: Level Percent of Payroll, Closed
Remaining Amortization Period: 27 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.
FINANCIAL SECTION
EORP 28th Comprehensive Annual Financial Report
34
REQUIRED SUPPLEMENTAL 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 and 76.6% for 6-30-08 and 71.3% for 6-30-09.
* 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.
* 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.
* See Notes to the Schedules of Required Supplementary Information.
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))
06-30-00 329,777 253,478 (76,299) 130.1% 45,382 (168.1)%
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%
SCHEDULE OF FUNDING PROGRESS
(IN THOUSANDS)
FISCAL YEAR
ENDED
JUNE 30,
ANNUAL
REQUIRED
CONTRIBUTIONS
PERCENTAGE
CONTRIBUTED
2000 $3,851,940 100.00%
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%
EMPLOYER CONTRIBUTIONS
SCHEDULE OF EMPLOYER CONTRIBUTIONS
35
EORP 28th Comprehensive Annual Financial Report
FINANCIAL SECTION
REQUIRED SUPPLEMENTAL INFORMATION
NOTES TO THE REQUIRED SUPPLEMENTAL INFORMATION
ACTUARIAL METHODS AND ASSUMPTIONS FOR VALUATIONS PERFORMED JUNE 30, 2009
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 27-year amortization period were
used for the June 30, 2009 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
2009 were determined by actuarial valuations as of June 30, 2007.
FINANCIAL SECTION
EORP 28th Comprehensive Annual Financial Report
36
REFUNDABLE
MEMBERS’
RESERVE
EMPLOYERS’
RESERVE
FUTURE BENEFIT
INCREASE
RESERVE
BALANCE AS OF JUNE 30, 2007 $ 39,760,374 $ 299,252,390 $ 30,827,881
DISTRIBUTION OF REVENUES AND EXPENSES
Members' Contributions 4,355,999
Employers' Contributions 12,343,051
Earnings (Loss) on Investments Net of Investment Expenses (23,150,918)
Pension and Insurance Benefits (32,518,978)
Refunds to Terminated Members (63,958) -
Administrative Expenses (355,290)
DISTRIBUTION OF TRANSFERS
Excess Investment Earnings to be used for Future Benefit Increases
Earnings (Loss) on Excess Investment Earnings Account Assets 2,340,761 (2,340,761)
Amount Utilized by Benefit Increases Granted 10,302,702 (10,302,702)
Net Transfers In (Out) and Purchase of Service Credits 1,045,274
Inter-System Transfers Member Accounts 229,876 339,552
Balances Transferred to Employers' Reserve due to Retirement (3,363,821) 3,363,821
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 (61,526,963)
Pension and Insurance Benefits (35,095,696)
Refunds to Terminated Members (119,830) (11,834)
Administrative Expenses (521,507)
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 501,740 158,912
Inter-System Transfers Member Accounts
Balances Transferred to Employers' Reserve due to Retirement (4,709,700) 4,709,700
BALANCE AS OF JUNE 30, 2009 $ 42,072,605 $ 212,622,829 $ 3,637,670
SCHEDULE OF CHANGES IN RESERVE BALANCES
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
SUPPORTING SCHEDULES INFORMATION
37
EORP 28th Comprehensive Annual Financial Report
FINANCIAL SECTION
SCHEDULE OF RECEIPTS AND DISBURSEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
2009 2008
RECEIPTS
Members' Contributions $ 4,428,949 $ 4,309,130
Employers' Contributions 10,364,971 8,070,876
Court Fees 7,529,463 4,157,756
Interest 1,647,901 8,234,329
Dividends 5,794,696 4,939,955
Real Estate Income (Net) 12,050 1,190,112
Securities Lending Income 518,560 359,718
Transfer In 283,226 600,232
Service Purchase 377,424 1,045,274
Maturities and Sales of:
U.S. Government Securities 111,463,950 29,904,500
Corporate Bonds 66,019,947 9,790,266
Corporate Notes 0 11,588,779
Other Investments 30,997,805 6,500,483
Common Stock 379,789,615 118,888,802
Total Receipts 619,228,558 209,580,212
DISBURSEMENTS
Pension Benefits 35,095,696 32,518,978
Refunds to Terminated Members 131,663 63,958
Investment and Administrative Expenses 520,070 226,373
Transfer Out 0 30,805
Acquisitions of:
U.S. Government Securities 83,357,472 33,222,528
Corporate Bonds 100,624,847 18,546,699
Other Investments 43,378,393 15,324,136
Common Stock 357,558,369 103,959,090
Total Disbursements 620,666,509 203,892,567
INCREASE (DECREASE) IN CASH (1,437,952) 5,687,645
BEGINNING CASH BALANCE - July 1 5,973,514 285,869
ENDING CASH BALANCE - June 30 $ 4,535,563 $ 5,973,514
SUPPORTING SCHEDULES INFORMATION
FINANCIAL SECTION
EORP 28th Comprehensive Annual Financial Report
38
SCHEDULE OF ADMINISTRATIVE EXPENSES
FOR THE YEAR ENDED JUNE 30, 2009
ADMINISTRATIVE INVESTMENT TOTAL
Accounting and Auditing Services $ 5,466 $ 0 $ 5,466
Actuarial Services 15,740 0 15,740
Building Expenses 0 0 0
Communications 1,779 0 1,779
Computer Related Expense 9,969 839 10,808
Contractual Services 6,475 0 6,475
Depreciation Expense 15,366 0 15,366
Fund Manager Initiatives 4,380 0 4,380
Furniture and Equipment 41 78 119
Investment Services 0 910,048 910,048
Local Board Training 48 0 48
Supplies & Service 2,809 0 2,809
Payroll Taxes and Fringe Benefits 28,484 39,725 68,209
Postage Expenses 4,307 0 4,307
Professional Services 215,387 14,210 229,597
Printing & Publications 2,599 0 2,599
Salaries and Wages 158,128 26,478 184,606
Travel Expenses 847 2,606 3,453
Training Expenses 1,770 978 2,748
Total $ 521,507 $ 1,071,646 $ 1,593,153
Legal Services 47,912 76,684 124,596
SCHEDULE OF CONSULTANT EXPENSES
FOR THE YEAR ENDED JUNE 30, 2009
CONSULTANT FEES PAID
Albourne America, LLC $ 10,593
Cortex Applied Research, Inc. 1,153
Cushman & Wakefield of Arizona, Inc. 2,311
Ernst & Young LLP 11,504
Heinfeld Meech & Co., PC 5,727
Highground, Inc. 4,045
Interactive Data 2,868
Kutak Rock, LLP 124,596
Light Stone Solutions, LLC 11,120
McLagan Partners, Inc. 1,445
Mellon Global Securities 3,793
ORG Portfolio Management 17,396
Peak Performance Consulting 571
Public Policy Partners 4,623
Rodwan Consulting Group 7,067
Wells Fargo Bank 3,199
Total $ 216,750
Bridget E. Feeley, Inc. 4,740
SUPPORTING SCHEDULES INFORMATION
39
EORP 28th Comprehensive Annual Financial Report
FINANCIAL SECTION
OTHER SUPPLEMENTAL 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 and 2009 would be 74.6%, 76.6% and 71.3% respectively.
HEALTH INSURANCE
PREMIUM SUBSIDY
BEGINNING
BALANCE ADDITIONS DELETIONS
ENDING
BALANCE
ASSETS
Cash $ 0 $ 917,286 $ 917,286 $ 0
Total Assets $ 0 $ 917,286 $ 917,286 $ 0
LIABILITIES
Benefits Payable $ 0 $ 917,286 $ 917,286 $ 0
Total Liabilities $ 0 $ 917,286 $ 917,286 $ 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%
HEALTH INSURANCE PREMIUM SUBSIDY
AGENCY FUND
STATEMENT OF CHANGES IN ASSETS & LIABILITIES
FOR YEAR ENDED JUNE 30, 2009
FINANCIAL SECTION
EORP 28th Comprehensive Annual Financial Report
40
THIS PAGE INTENTIONALLY BLANK
INVESTMENT SECTION
Chief Investment Officer’s Letter 42
Fund Investment Objectives 44
Investment Performance
Investment Returns 44
Asset Allocation 44
Ten Year Cumulative Return, Benchmark and Indicies 45
Top 10 Investment Holdings 46
Summary of Change to Investment Portfolios 46
Schedule of Commissions and Investment Management Costs 46
Equity Portfolio 47
Equity Acquired 52
Equity Sold 58
Fixed Income Portfolio 63
Fixed Income Acquired 70
Fixed Income Sold 78
Alternative Investments Portfolio 86
Alternative Investments Acquired 87
Alternative Investments Sold 88
INVESTMENT SECTION
EORP 28th Comprehensive Annual Financial Report
42
November 10, 2009
Dear Members:
On behalf of the entire EORP investment team, I am honored to present the Investment Section of the EORP Comprehensive Annual Financial Report for the fiscal year
ended June 30, 2009. Data used in the Investment Section has been generated by internal staff after review of, and reference to, data generated by the EORP custodian
bank, BNY-Mellon.
2008-2009 THE “MELTDOWN” OF THE GLOBAL FINANCIAL SYSTEM
After the previous “dot com” valuation bubble, the EORP Fund Manager (i.e., the System’s governing Board), staff and consultants began the process of expanding the
EORP core investment strategy. That process, which includes moving away from our historical overreliance upon U.S. equities, helped EORP to more reliably weather
the tremendous volatility of FY’09. EORP achieved returns which were better than many public funds of similar size and better than most endowments during the year.
Moreover, the return exceeded the System’s benchmark return by over three hundred basis points. Asset allocation changes that increased diversity helped reduce the
volatility we otherwise would have experienced during this global economic shock and recession.
Asset allocations as of June 30, 2009 and the previous five years are as follows:
ALTERNATIVE INVESTMENTS
As of year end PSPRS had deployed capital into almost 50 Alternative investments including exposures in:
US Private Equity US Venture Capital
US Real Estate International Real Estate
European Private Equity Real Assets (Including Timber)
Dislocated Debt Core Capital Assets
US Infrastructure European Infrastructure
PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM
CORRECTIONS OFFICER RETIREMENT PLAN
ELECTED OFFICIALS' RETIREMENT PLAN
3010 East Camelback Road, Suite 200
Mike Galloway Phoenix, Arizona 85016-4416
Fund Manager, Chairman www.psprs.com
Brian Tobin Tim Dunne TELEPHONE: (602) 255-5575 James M. Hacking
Fund Manager, Vice Chair Fund Manager, Member FAX: (602) 255-5572 Administrator
Lori Roediger Gregory Ferguson Ryan Parham Tracey D. Peterson
Fund Manager, Member Fund Manager, Member Chief Investment Officer Assistant Administrator-COO
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
2004 2005 2006 2007 2008 2009
US Equities
Int’l Equities
Fixed Income
Real Estate
Private Equity
Cash Equivalents
Credit Opportunities
Real Assets
43
EORP 28th Comprehensive Annual Financial Report
INVESTMENT SECTION
EXPANDING CAPABILITIES
In addition to expanding and enhancing our due diligence capabilities, the System has continued to utilize and expand the services of three specialist external consult-ing
groups: ORG Real Property, Albourne America LLC and StepStone Group LLC. In addition, the Fund Manager has New England Pension Consultants (NEPC) as its
generalist consultant.
PERFORMANCE
EORP returned -17.75% (net of fees) for FY’09. This negative return outperformed the EORP benchmark return of -21.13% by 338 basis points. This outperformance
was primarily the result of active management decisions in asset allocation and securities selections during the year.
GOALS AND OBJECTIVES
During FY’10, the System’s Investment Staff expects to:
• Review our Asset Allocation, utilizing current capital market assumptions reflecting continuing changes in the global economic landscape;
• Continue deployment in Alternatives, including capitalizing on opportunities in the secondary markets;
• Add “alpha” (excess return) seeking strategies to current index-like exposures in public securities, that are attractive on a risk adjusted basis;
• Continue to deploy portions of the remaining, in-house managed, portfolios to external managers so as to capture attractive investment strategies which are diffi-cult
or impossible to replicate internally.
CONCLUSION
While certainly not immune from Global Economic Distress, the EORP portfolio is better positioned to withstand similar shocks than it has been in the past. Increased
exposure to diverse sources of income will help to produce our expected asset growth with greater consistency and with lower volatility over longer time horizons.
In closing, I would like to thank the EORP Fund Manager members, who are the ultimate fiduciaries for this System, for their willingness to maintain a governance
structure that facilitates the pursuit of excellence in all that we do. To the System’s participants and beneficiaries, I commit that our sole purpose will be to persevere to
ensure that the retirement benefits promised are secure.
Respectfully Submitted,
Ryan P. Parham
Chief Investment Officer
INVESTMENT SECTION
EORP 28th Comprehensive Annual Financial Report
44
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 policies and the direction of the Fund Manager, strategically allocating within asset classes and investment styles in order to enhance invest-ment
returns. This strategic allocation must at all times be within ranges set forth in these Policies;
• 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.
* Time weighted rate of return based on the market rate of return. (Net of fees)
1 YEAR 3 YEAR 5 YEAR 10 YEAR
EORP Total Fund * -17.75% -3.83% 1.01% 0.26%
Balanced Index -21.13% -5.05% -1.18% 0.84%
EORP Domestic Equity * -21.82% -6.09% -0.75% -2.54%
S&P 500 Index -27.22% -7.92% -2.05% -2.13%
EORP Fixed Income * -1.82% 2.78% 3.66% 5.73%
Fixed Income Index 5.20% 6.15% 4.78% 5.94%
20 YEAR
7.34%
6.22%
7.75%
6.96%
7.26%
7.02%
ANNUALIZED RATES OF RETURN
ASSET ALLOCATION
JUNE 30, 2009
1.44%
2.73%
9.06%
31.94%
19.21%
35.62%
Domestic Equity International Equity Domestic Fixed Income
Real Estate Private Equity Cash
45
EORP 28th Comprehensive Annual Financial Report
INVESTMENT SECTION
TEN YEAR CUMULATIVE RETURN, BENCHMARK AND INDICIES
TOTAL FUND
EQUITIES
FIXED INCOME
$70
$80
$90
$100
$110
$120
$130
$140
$150
99 00 01 02 03 04 05 06 07 08 09
EORP Total Fund Benchmark
$50
$60
$70
$80
$90
$100
$110
$120
$130
99 00 01 02 03 04 05 06 07 08 09
EORP Equities Equity Benchmark
$100
$110
$120
$130
$140
$150
$160
$170
$180
$190
99 00 01 02 03 04 05 06 07 08 09
EORP Fixed Income Benchmark T-Bill
INVESTMENT SECTION
EORP 28th Comprehensive Annual Financial Report
46
EQUITY PORTFOLIO TOP 10 HOLDINGS
JUNE 30, 2009
Shares Description Fair Value
262,265 ISHARES TR MSCI EAFE INDEX FD $ 12,014,358
452,637 VANGUARD INDEX FDS EXTD MKT 11,868,147
198,041 ETF VANGUARD TOTAL STOCK 9,163,359
359,083 VANGUARD INTL EQUTIY INDEX FDS 7,709,507
883,470 VANGUARD STAR FD INSTL 6,970,582
181,629 ISHARES TR MSCI EMERGING MKTS 5,853,909
107,108 ETF VANGUARD PACIFIC ETF 4,952,661
50,171 EXXON MOBIL CORP 3,507,459
153,619 ISHARES MSCI CDA INDEX FD 3,290,518
71,083 VANGUARD INTL EQUITY INDEX FD 2,552,577
FIXED INCOME PORTFOLIO TOP 10 HOLDINGS
JUNE 30, 2009
Shares Description Fair Value
1,609,768 BGI CORE ACTIVE BOND FUND $ 29,683,967
63,575 ISHARES TR IBOXX $ HIGH YIELD 5,067,597
3,890,218 GS CREDIT OPPS FUND 2008 3,890,218
2,701,131 BLACKROCK MORTGAGE INVESTORS 2,701,131
2,447,706 US TREAS-CPI INFLAT 2,401,812
1,691,496 PSPRS-APOLLO EUR NPL 2,372,577
2,033,139 HIGHLAND CLO 2,033,139
1,876,632 PSPRS PNMAC MORTGOPP 1,876,632
1,917,982 US TREAS-CPI INFLATION INDEX 1,863,445
43,244 SPDR SER TR LEHMAN HIGH YIELD 1,521,762
JUNE 30, 2008 BALANCE JUNE 30, 2009 BALANCE
DESCRIPTION
PERCENT AT
FAIR VALUE
FAIR
VALUE
BOOK
VALUE ACQUIRED
MATURED
AND SOLD
FAIR
VALUE
BOOK
VALUE
PERCENT AT
FAIR VALUE
US Govt Securities 12.57% $ 40,292 $ 39,916 $ 83,357 $ 110,842 $ 12,747 $ 12,431 5.04%
Corporate Bonds 12.41% 39,794 41,928 100,625 71,204 66,211 71,349 26.18%
Total Fixed Income 24.98% 80,086 81,844 183,982 182,046 78,958 83,780 31.22%
Common Stock 67.30% 215,778 220,126 357,558 421,050 140,997 156,634 55.76%
Alternative Investments 7.72% 24,796 22,276 43,378 27,742 32,948 37,912 13.02%
Total Portfolio 100.00% $ 320,660 $ 324,246 $ 584,918 $ 630,838 $ 252,903 $ 278,326 100.00%
SUMMARY OF CHANGES IN INVESTMENT PORTFOLIO
YEAR ENDED JUNE 30, 2009
SCHEDULE OF COMMISSIONS PAID TO BROKERS
YEAR ENDED JUNE 30, 2009
BROKER
NUMBER OF
SHARES TRADED
AVERAGE
COMMISSION
TOTAL
COMMISSIONS
BLOOMBERG TRADEBOOK LLC 4,756,252 .010 47,563
PENSION FINANCIAL SERVICES INC 2,001,688 .005 10,106
TOTAL COMMISSIONS 6,757,940 .009 57,669
47
EORP 28th Comprehensive Annual Financial Report
INVESTMENT SECTION
EQUITY PORTFOLIO
YEAR ENDED JUNE 30, 2009
SHARES SECURITY COST FAIR VALUE
UNREALIZED
GAIN / (LOSS)
8,585 3M CO $ 614,674 $ 515,948 $ (98,726)
16,767 ABBOTT LABS COM 962,947 788,735 (174,212)
7,930 ADOBE SYS INC DEL COM 339,660 224,431 (115,229)
5,790 AES CORP COM 88,352 67,219 (21,133)
5,337 AETNA INC COM NEW 230,240 133,693 (96,547)
4,799 AFLAC INC COM 272,102 149,200 (122,902)
1,719 AIR PRODS & CHEMS INC COM 157,881 111,024 (46,857)
6,473 ALCOA INC COM 207,974 66,865 (141,109)
1,763 ALLEGHENY TECHNOLOGIES INC COM 86,388 61,582 (24,806)
5,349 ALLSTATE CORP COM 241,407 130,519 (110,888)
22,885 ALTRIA GROUP INC 476,762 375,077 (101,685)
3,926 AMAZON.COM INC COM 162,649 328,485 165,836
7,998 AMEREN CORP 255,002 199,077 (55,925)
3,465 AMERICAN ELEC PWR INC COM 135,255 100,090 (35,165)
5,378 AMERICAN EXPRESS CO COM 213,389 124,979 (88,410)
30,013 AMERICAN INTL GROUP INC COM 644,973 34,815 (610,159)
3,379 AMERICAN TOWER CORP 108,200 106,529 (1,670)
12,699 AMGEN INC 798,105 672,262 (125,843)
4,557 APACHE CORP COM 517,009 328,759 (188,250)
9,093 APPLE INC 1,541,468 1,295,059 (246,409)
19,415 APPLIED MATLS INC COM 347,913 213,757 (134,156)
8,541 ARCHER DANIELS MIDLAND CO COM 203,546 228,648 25,102
57,481 AT & T INC COM 1,734,605 1,427,828 (306,776)
7,223 AUTOMATIC DATA PROCESSING INC 320,543 255,972 (64,571)
12,017 BANK NEW YORK MELLON CORP COM 375,075 352,213 (22,862)
62,146 BANK OF AMERICA CORP 1,962,000 820,332 (1,141,669)
8,968 BAXTER INTL INC COM 529,483 474,933 (54,550)
4,586 BEST BUY INC COM 205,301 153,575 (51,727)
328,093 BGI FRONTIER MARKETS FUND 1,454,329 1,729,913 275,584
10,170 BOEING CO COM 666,741 432,223 (234,519)
969 BOSTON PPTYS INC COM 62,824 46,245 (16,579)
12,468 BOSTON SCIENTIFIC CORP COM 111,830 126,422 14,592
16,028 BRISTOL MYERS SQUIBB CO COM 342,039 325,530 (16,509)
2,758 CAMPBELL SOUP CO COM 102,125 81,146 (20,979)
4,188 CAPITAL ONE FINL CORP 184,858 91,633 (93,225)
6,035 CELGENE CORP 418,230 288,718 (129,513)
5,235 CHESAPEAKE ENERGY CORP COM 252,634 103,815 (148,819)
19,735 CHEVRON CORPORATION COM 1,699,946 1,307,426 (392,520)
3,631 CHUBB CORP COM 174,312 144,794 (29,518)
60,520 CISCO SYS INC COM 1,455,496 1,128,690 (326,806)
58,446 CITIGROUP INC COM 1,109,893 173,585 (936,308)
6,169 CITRIX SYS INC COM 186,730 196,723 9,993
1,939 CLOROX CO COM 111,336 108,253 (3,083)
771 CME GROUP INC COM 278,858 239,794 (39,064)
2,971 COACH INC COM 86,129 79,860 (6,269)
INVESTMENT SECTION
EORP 28th Comprehensive Annual Financial Report
48
EQUITY PORTFOLIO
YEAR ENDED JUNE 30, 2009
SHARES SECURITY COST FAIR VALUE
UNREALIZED
GAIN / (LOSS)
19,280 COCA COLA CO COM $ 1,007,157 $ 925,270 $ (81,887)
5,774 COLGATE PALMOLIVE CO 438,959 408,418 (30,542)
20,408 COMCAST CORP NEW CL A SPL 431,420 287,749 (143,671)
15,657 CONOCOPHILLIPS 1,279,389 658,544 (620,845)
1,731 CONSOL ENERGY INC COM 115,183 58,769 (56,414)
2,062 CONSTELLATION BRANDS INC CL A 43,538 26,152 (17,386)
3,708 COSTCO WHSL CORP NEW COM 193,008 169,766 (23,242)
15,625 CVS CAREMARK CORP 571,860 497,955 (73,904)
20,980 DELL INC COM 455,890 288,052 (167,838)
5,062 DEVON ENERGY CORP NEW COM 516,606 275,895 (240,712)
12,525 DISNEY WALT CO COM 405,181 292,207 (112,975)
6,500 DOMINION RES INC VA NEW COM 269,988 217,228 (52,760)
9,971 DOW CHEM CO COM 340,317 160,935 (179,382)
8,530 DU PONT E I DE NEMOURS & CO 357,044 218,526 (138,518)
25,055 DUKE ENERGY CORP NEW COM 399,810 365,559 (34,251)
2,453 ECOLAB INC COM 98,913 95,635 (3,278)
4,110 EDISON INTL COM 167,527 129,290 (38,237)
31,688 EMC CORP MASS 484,185 415,106 (69,079)
5,332 EMERSON ELEC CO COM 192,348 172,763 (19,585)
1,639 ENTERGY CORP NEW COM 169,498 127,087 (42,411)
98,452 ETF VANGUARD FINANCIALS ETF 2,174,585 2,370,223 195,638
107,108 ETF VANGUARD PACIFIC ETF 4,449,890 4,952,661 502,771
198,041 ETF VANGUARD TOTAL STOCK 9,537,657 9,163,359 (374,298)
7,392 EXELON CORP COM 561,523 378,563 (182,961)
2,976 EXPRESS SCRIPTS INC COM STK 218,493 204,623 (13,870)
50,171 EXXON MOBIL CORP 3,980,350 3,507,459 (472,891)
2,521 FAMILY DLR STORES INC 66,404 71,335 4,931
5,827 FEDEX CORP COM 482,562 324,077 (158,484)
3,347 FIRSTENERGY CORP COM 217,793 129,703 (88,091)
3,599 FISERV INC COM 186,656 164,521 (22,135)
1,731 FRANKLIN RES INC COM 180,841 124,616 (56,225)
2,749 FREEPORT MCMORAN COPPER & GOLD 245,496 137,727 (107,769)
3,519 GENERAL DYNAMICS CORP COM 195,815 194,931 (884)
100,318 GENERAL ELEC CO COM 2,700,763 1,175,726 (1,525,037)
3,936 GENERAL MLS INC COM 257,911 220,502 (37,409)
2,717 GENZYME CORP COM 212,763 151,271 (61,492)
9,659 GILEAD SCIENCES INC COM 508,847 452,438 (56,410)
4,628 GOLDMAN SACHS GROUP INC COM 758,854 682,353 (76,501)
2,778 GOOGLE INC CL A 1,184,000 1,171,207 (12,792)
2,323 GRAINGER W W INC COM 209,130 190,199 (18,932)
14,542 HALLIBURTON CO COM 627,555 301,026 (326,528)
3,289 HARTFORD FINL SVCS GROUP INC 207,491 39,044 (168,447)
3,359 HCP INC COM 95,989 71,183 (24,806)
27,660 HEWLETT PACKARD CO COM 1,198,446 1,069,041 (129,406)
7,824 HOME DEPOT INC COM 212,181 184,876 (27,305)
49
EORP 28th Comprehensive Annual Financial Report
INVESTMENT SECTION
EQUITY PORTFOLIO
YEAR ENDED JUNE 30, 2009
SHARES SECURITY COST FAIR VALUE
UNREALIZED
GAIN / (LOSS)
6,302 HONEYWELL INTL INC COM $ 186,622 $ 197,873 $ 11,250
14,193 IBM CORP COM 1,727,659 1,481,986 (245,673)
55,358 INTEL CORP 1,266,034 916,172 (349,862)
3,628 INTERNATIONAL PAPER CO COM 98,133 54,889 (43,244)
553 INTUITIVE SURGICAL INC 163,169 90,440 (72,729)
153,619 ISHARES MSCI CDA INDEX FD 2,736,783 3,290,518 553,735
20,941 ISHARES TR MSCI EAFE GROWTH 958,259 967,263 9,005
262,265 ISHARES TR MSCI EAFE INDEX FD 11,689,149 12,014,358 325,209
25,207 ISHARES TR MSCI EAFE VALUE 1,019,360 1,062,967 43,608
181,629 ISHARES TR MSCI EMERGING MKTS 4,618,831 5,853,909 1,235,079
43,627 ISHARES TR RUSSELL 2000 INDEX 1,961,382 2,228,468 267,086
6,780 ISHARES TR RUSSELL 3000 INDEX 378,860 365,232 (13,628)
27,437 JOHNSON & JOHNSON COM 1,876,375 1,558,396 (317,979)
36,524 JPMORGAN CHASE & CO COM 1,518,621 1,245,847 (272,774)
3,384 KELLOGG CO COM 184,199 157,570 (26,628)
4,870 KEYCORP NEW COM 58,487 25,518 (32,969)
5,088 KIMBERLY CLARK CORP COM 295,681 266,752 (28,928)
3,854 KOHLS CORP COM 189,487 164,747 (24,741)
16,410 KRAFT FOODS INC CL A 477,869 415,826 (62,043)
13,461 LILLY ELI & CO COM 627,972 466,301 (161,671)
6,617 LINEAR TECHNOLOGY CORP COM 215,971 154,501 (61,470)
4,993 LOCKHEED MARTIN CORP COM 581,370 402,675 (178,695)
16,530 LOWES COS INC COM 318,889 320,843 1,954
11,392 MCDONALDS CORP COM 706,273 654,897 (51,376)
9,244 MEDTRONIC INC COM 504,727 322,526 (182,201)
25,206 MERCK & CO INC COM 797,557 704,753 (92,804)
8,023 METLIFE INC COM 434,821 240,756 (194,065)
4,843 MICROCHIP TECHNOLOGY INC COM 155,008 109,198 (45,810)
78,546 MICROSOFT CORP COM 2,143,529 1,867,046 (276,483)
5,004 MONSANTO CO NEW COM 548,111 371,999 (176,112)
5,292 MORGAN STANLEY 216,090 150,888 (65,203)
6,447 NATIONAL OILWELL VARCO INC 475,345 210,562 (264,783)
3,062 NEWMONT MINING CORP HOLDING CO 138,102 125,149 (12,953)
26,322 NEWS CORPORATION CL A 196,372 239,790 43,418
4,239 NORDSTROM INC WASH COM 131,836 84,316 (47,520)
2,270 NUCOR CORP 119,153 100,837 (18,315)
9,123 OCCIDENTAL PETE CORP COM 721,543 600,410 (121,133)
5,419 OMNICOM GROUP INC USD0.15 COM 229,730 171,146 (58,584)
30,006 ORACLE CORPORATION COM 658,025 642,722 (15,303)
3,127 PEABODY ENERGY CORP COM 196,820 94,298 (102,521)
14,218 PEPSICO INC COM 973,618 781,397 (192,221)
73,313 PFIZER INC COM STK USD0.05 1,401,007 1,099,692 (301,316)
3,255 PG&E CORP COM 134,532 125,125 (9,407)
19,089 PHILIP MORRIS INTL INC COM 971,503 832,658 (138,845)
969 PLUM CREEK TIMBER CO INC COM 36,551 28,871 (7,680)
INVESTMENT SECTION
EORP 28th Comprehensive Annual Financial Report
50
EQUITY PORTFOLIO
YEAR ENDED JUNE 30, 2009
SHARES SECURITY COST FAIR VALUE
UNREALIZED
GAIN / (LOSS)
2,918 PNC FINANCIAL SERVICES GROUP $ 375,130 $ 113,235 $ (261,895)
7,174 PPL CORP COM 314,016 236,462 (77,553)
2,739 PRAXAIR INC COM 236,234 194,681 (41,553)
3,204 PRICE T ROWE GROUP INC COM 190,193 133,513 (56,680)
27,121 PROCTER & GAMBLE CO COM 1,892,264 1,385,907 (506,358)
2,908 PROLOGIS INT 61,343 23,442 (37,901)
1,525 PUBLIC STORAGE COM 107,486 99,876 (7,609)
4,244 PUBLIC SVC ENTERPRISE GROUP 173,045 138,496 (34,550)
17,392 QUALCOMM INC 915,697 786,125 (129,572)
3,054 REYNOLDS AMERN INC 130,192 117,943 (12,249)
8,023 ROBERT HALF INTL INC COM 205,377 189,492 (15,885)
2,681 SANDISK CORP 38,762 39,405 643
14,870 SCHERING PLOUGH CORP COM 288,469 373,523 85,054
15,221 SCHLUMBERGER LTD COM 1,413,745 823,607 (590,138)
78,577 SECTOR SPDR TR SBI INDUSTRIAL 1,433,065 1,725,553 292,488
77,559 SELECT SECTOR SPDR FD CONSUMER 1,462,937 1,790,065 327,128
16,578 SELECT SECTOR SPDR FUND 377,945 427,719 49,774
4,678 SEMPRA ENERGY COM 270,937 232,158 (38,779)
9,121 SOUTHERN CO COM 331,615 284,209 (47,406)
15,357 SPRINT NEXTEL CORP COM SER 1 53,854 73,866 20,012
9,106 STAPLES INC COM 220,363 183,758 (36,606)
2,899 STRYKER CORP 153,674 115,197 (38,477)
8,410 TARGET CORP COM 445,915 331,955 (113,960)
15,745 TEXAS INSTRS INC COM 385,898 335,358 (50,540)
4,528 THERMO FISHER SCIENTIFIC 200,123 184,587 (15,536)
2,573 TIME WARNER CABLE INC COM 128,195 81,488 (46,707)
10,251 TIME WARNER INC NEW COM NEW 375,217 258,215 (117,002)
1,339 TRANSOCEAN LTD ZUG NAMEN-AKT 168,887 99,461 (69,426)
5,575 UNITED PARCEL SVC INC CL B 290,915 278,672 (12,242)
946 UNITED STATES STEEL CORP 41,352 33,806 (7,546)
11,377 UNITED TECHNOLOGIES CORP COM 746,215 591,147 (155,068)
10,069 UNITEDHEALTH GROUP INC COM 306,602 251,524 (55,078)
18,529 US BANCORP DEL COM NEW 590,322 332,033 (258,289)
73,284 VANGUARD EMERGING MARKETS ETF 1,747,349 2,331,896 584,547
452,637 VANGUARD INDEX FDS EXTD MKT 10,526,184 11,868,147 1,341,964
71,083 VANGUARD INTL EQUITY INDEX FD 2,330,088 2,552,577 222,489
359,083 VANGUARD INTL EQUTIY INDEX FDS 7,870,250 7,709,507 (160,743)
883,470 VANGUARD STAR FD INSTL 8,586,962 6,970,582 (1,616,380)
2,690 VARIAN MED SYS INC COM 169,921 94,538 (75,383)
27,553 VERIZON COMMUNICATIONS COM 967,657 846,700 (120,957)
996 VORNADO RLTY TR COM 63,262 44,872 (18,390)
20,577 WAL MART STORES INC COM 1,123,284 996,746 (126,538)
8,837 WALGREEN CO 321,928 259,805 (62,123)
6,786 WASTE MGMT INC DEL COM 208,687 191,106 (17,581)
6,526 WELLPOINT INC 344,514 332,114 (12,400)
51
EORP 28th Comprehensive Annual Financial Report
INVESTMENT SECTION
EQUITY PORTFOLIO
YEAR ENDED JUNE 30, 2009
SHARES SECURITY COST FAIR VALUE
UNREALIZED
GAIN / (LOSS)
37,965 WELLS FARGO & CO NEW COM $ 1,152,195 $ 921,036 $ (231,159)
1,714 WEYERHAEUSER CO COM 95,086 52,144 (42,942)
10,824 WYETH COM 468,442 491,280 22,8