Corrections Officer Retirement Plan Comprehensive Annual Report 2011

              CORRECTIONS OFFICER
RETIREMENT PLAN
25th COMPREHENSIVE ANNUAL FINANCIAL REPORT
A PENSION TRUST FUND OF THE STATE OF ARIZONA
FOR THE FISCAL YEAR ENDED JUNE 30, 2011
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
Corrections Officer
Retirement Plan
A Pension Trust Fund of the State of Arizona
Twenty-Fifth
Comprehensive Annual Financial Report
For the Fiscal Year Ended
June 30, 2011
Prepared by the Staff of PSPRS
Public Safety Personnel Retirement System
3010 E. Camelback Road, Suite 200
Phoenix, AZ 85016
Phone (602)255-5575 Fax (602)255-5572
www.psprs.com
TABLE OF CONTENTS
INTRODUCTORY SECTION
Certificate of Achievement 6
Board of Trustees Transmittal Letter 7
Letter from the Administrator 10
Board of Trustees 14
Executive Staff and Organizational Chart 15
Professional Advisors 16
FINANCIAL SECTION
Independent Auditor Report 18
Management Discussion and Analysis 20
Basic Financial Statements
Statement of Plan Net Assets 24
Statement of Changes in Plan Net Assets 25
Notes to the Financial Statements 26
Required Supplementary Information
Schedule of Funding Progress 38
Schedule of Employer Contributions 39
Notes to the Required Supplementary Information 41
Supporting Schedules Information
Schedule of Changes in Fund Balance 42
Schedule of Receipts and Disbursements 43
Schedule of Administrative Expenses 44
Schedule of Consultant Expenses 44
Other Supplementary Information
Statement of Changes in Assets and Liabilities - Agency Fund 45
Schedule of Funding Progress - Agency Fund 45
INVESTMENT SECTION
Chief Investment Officer’s Letter 48
Fund Investment Objectives 50
Investment Performance
Asset Allocation 50
Annualized Rates of Return, Benchmark and Indices 51
Top 10 Investment Holdings 52
Summary of Changes in Investment Portfolio 52
Schedule of Commissions Paid to Brokers 52
TABLE OF CONTENTS (continued)
Equity Portfolio 54
Fixed Income Portfolio 55
Alternative Investments Portfolio
60
61
62
63
63
ACTUARIAL SECTION
Actuary Certification Letter 66
Actuarial Balance Sheet 69
Summary of Valuation Assumptions 70
Solvency Test 72
Summary of Active Member Data 73
Summary of Retirees and Inactive Members 74
Schedule of Experience Gain/Loss 75
STATISTICAL SECTION
Statistical Summary 78
Changes in Plan Net Assets - Last Ten Fiscal Years 79
Schedule of Revenue by Source - Last Ten Fiscal Years 80
Schedule of Expenses by Type - Last Ten Fiscal Years 80
Deductions from Plan Net Assets for Benefits and Refunds by Type- Last Ten Fiscal Years 80
Valuation Assets vs. Pension Liabilities - Last Ten Fiscal Years 81
Contribution Rates - Last Ten Fiscal Years 83
Distribution of Benefit Recipients by Location 84
System Membership - Last Ten Fiscal Years 84
Principal Participating Employers - Last Ten Fiscal Years 85
Summary of Benefit Increases - Last Ten Fiscal Years 85
Summary of Growth of the System - Last Ten Fiscal Years 86
Benefits Payable June 30, 2011 by Benefit Type 86
Average Monthly Benefits and Membership - Last Ten Fiscal Years 87
Schedule of Changes in Refundable Member Reserve Balances 88
Schedule of Changes in Employer Reserve Balances and UAAL 89
Schedule of Changes in Employers Earnings Distribution 90
Participating Employers 91
Credit Opportunities Portfolio
Private Equity Portfolio
Real Assets Portfolio
Real Estate Portfolio
GTAA Securities Portfolio
Absolute Return Portfolio 62
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INTRODUCTORY SECTION
Certificate of Achievement 6
Board of Trustees Transmittal Letter 7
Letter from the Administrator 10
Board of Trustees 14
Executive Staff and Organizational Chart 15
Professional Advisors 16
INTRODUCTORY SECTION
CORP Comprehensive Annual Financial Report
6
7
CORP Comprehensive Annual Financial Report
INTRODUCTORY SECTION
PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM
CORRECTIONS OFFICER RETIREMENT PLAN
Brian Tobin, Chairman ELECTED OFFICIALS' RETIREMENT PLAN
Gregory Ferguson, Trustee 3010 East Camelback Road, Suite 200
Jeff McHenry, Trustee Phoenix, Arizona 85016-4416 James M. Hacking
Richard Petrenka, Trustee www.psprs.com Administrator
Randie Stein, Trustee TELEPHONE: (602) 255-5575 Ryan Parham Jared A. Smout
Lauren Kingry, Trustee FAX: (602) 255-5572 Chief Investment Officer Deputy Administrator
December 9, 2011
The Honorable Janice K. Brewer
Governor of the State of Arizona
Executive Tower
1700 W. Washington
Phoenix, Arizona 85007
Dear Governor Brewer:
The Board of Trustees of the Public Safety Personnel Retirement System (PSPRS) respectfully submits the Twenty-fifth Comprehensive Annual Finan-cial
Report (CAFR) for the Corrections Officer Retirement Plan (CORP) for the fiscal year ended June 30, 2011 (FY’11), in accordance with the provisions
of A.R.S. Section 38-883.
The CORP’s Funding Ratio
As of fiscal year-end, the financial status of the CORP, as reflected in its funding ratio, decreased from 80.3% at June 30, 2010 to 73.0% at June 30,
2011. This decrease continues the funding ratio erosion that resumed two years ago following a modest improvement in FY’08 that interrupted six
consecutive years of funding status decline.
The continuing funding ratio decline is due primarily to the asset value losses and negative rates of return that the Plan experienced in FY’01 and
FY’02 coupled with the additional losses and negative rates of return the Plan experienced in FY’08 and FY’09. The losses in FY’01 and FY’02 were
largely the result of an excessive over-concentration in the securities of U.S.-based high technology and telecommunication companies and a general
lack of diversification in the deployment of the Plan’s assets for investment purposes. The losses in FY’08 and FY’09 were the result of the impact on
the financial markets of the collapse of the U.S. housing market and the intense global recession that followed.
An additional factor has also contributed to the funding erosion – namely downward revisions in the Plan’s actuarial assumptions for investment
return (which was reduced from 8.5% in FY’10 to 8.25% in FY’11) and wage growth (which was reduced from 5.50% in FY’10 to 5.0% in FY’11).
It is important to note that the funding ratio erosion has occurred despite the fact that the Plan had an FY’10 rate of return of 13.47% and an FY’11
rate of return of 17.37% -- returns that were well in excess of the Plan’s actuarial assumed rate of return of 8.25%. (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 Comprehensive
Annual Financial Report (CAFR) which begins on page 20.)
Because the PSPRS-administered Plans use a seven year averaging process (“smoothing”) to determine the fiscal year-end actuarial value of assets,
only one-seventh of any fiscal year’s investment gain or loss is reflected in that year’s results. The remaining six-sevenths are rolled forward and
reflected in the results over the next succeeding six fiscal years. That means that only one-seventh of the positive return that the CORP Plan experi-enced
in FY’11 is reflected in this fiscal year’s results. That was more than offset by factoring into the FY’11 results, one-seventh portions of the -
7.19% and -17.45% returns that the Plan experienced during FY’08 and FY’09 respectively. Because the remainder of the FY’08 and FY’09 investment
losses will be factored into the Plan’s financial status results over the next several fiscal years, the expectation is that the Plan’s funding ratio will
continue to deteriorate unless this trend is offset by several consecutive years of much better-than-expected rates of return or increases in the Plan’s
employee contribution rate or further decreases in the Plan’s benefits or both.
INTRODUCTORY SECTION
CORP Comprehensive Annual Financial Report
8
If the CORPS' funding ratio were calculated using fiscal year-end market value (rather than actuarial value) of assets, the Plan’s funded status would
be only 65.0%, rather than 73.0%. How to move the Plan, within a ten to twenty year time period, back to a pattern of steadily improving funding
ratios remains the principal challenge facing the CORP System and its Board of Trustees.
Although the investment losses that the Plan sustained in FY’08 and FY’09 have taken, and will continue to take, their toll on the financial status of
the Plan, the principal structural impediment to restoring the Plan to a state of financial soundness in a reasonable period of time was the Plan’s
statutory, post retirement adjustment structure. That structure was fundamentally changed by legislation (SB 1609) enacted during FY’11. While the
legislative changes impacting post-retirement benefit adjustments are expected to have a significantly salutary effect on the financial status of the
Plan over time, those changes are facing a legal challenge in the state courts. At this point, the results of that legal challenge are uncertain.
Before the changes made by SB 1609, the CORP statutes required that in any year in which the Plan generated an investment return in excess of 9%,
one-half of the excess return over 9% must be diverted into the CORP’s Reserve for Future Benefit Increases (“The Reserve”). These Reserve assets
were then used to finance the post-retirement adjustments payable to eligible beneficiaries of the Plan. However, these Reserve assets were not
taken into account for funding ratio and employer contribution rate calculations. If these statutory provisions had not been changed (i.e., SB 1609
specifically prohibited any new in-flows of excess return assets into the Plan’s Reserve, effective May 31, 2011), $49.8 million of FY’11 investment
return would have been diverted from the underfunded CORP Plan and into the Plan’s Reserve. That would have amplified the underfunded status of
the Plan as of June 30, 2011.
Employer Contribution Rates
Any change in the CORP’s June 30th fiscal year-end funding ratio impacts the employer contribution rate as of the following July 1st. For example, any
CORP funding ratio decline as a result of this Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, 2011 (FY’11) impacts
the employer contribution rate July 1, 2012 (FY’13).
As the Plan’s funding ratio has eroded, the employer contribution requirements have been rising in large year-over-year increments. The employer
aggregate rate crested at 8.68% of payroll in employer FY’09. For the next two years, the aggregate rate remained relatively stable. But based on the
Plan’s FY’10 results, the aggregate employer rate began to increase again, rising to 9.5% in employer FY’12. Given the further erosion in the Plan’s
funding status as of the end of FY’11, the aggregate employer rate is scheduled to increase to 11.31% of payroll during employer FY’13. That repre-sents
a 1.81% of payroll increase over the current FY’12 aggregate rate. This increase in the employer rate reflects the same combination of factors
that have contributed to the funding ratio erosion, including the actuarial assumption revisions approved by the Board. With further erosion in the
Plan’s funding status expected to occur over the next several years, the forecast is that the employer contribution rates will continue to increase
unless the Plan experiences far better than expected investment returns.
If the current legal challenge to the changes made by SB 1609 to the post-retirement adjustment provisions is ultimately successful, the CORP Board
members, in their capacity as fiduciaries, will likely propose to the Legislature new changes to the Plan’s provisions designed to assure the long-term
financial sustainability of the Plan. Of course any further changes proposed by the Board would take into account any court decisions.
FY’10 Investment Results
The FY’11 net of fee rate of investment return for the CORP was 17.37%. While the FY’11 net of fees return exceeded the benchmark return (17.36%)
by only 1 basis point, the System had to write down the legacy residential real estate values by $63.2 million which equates to 93 basis points of
foregone return.
Although any new FY’11 in-flow of excess investment return assets to the Plan’s Reserve was precluded by SB 1609, the $22.0 million asset balance
remaining in the Reserve as of June 30, 2011 was used to finance a 3.43% permanent life-time increase in benefits for all the Plan’s eligible benefici-aries.
To offset the liability associated with the benefit increase, the $22.0 million was withdrawn from the Reserve, leaving a remaining balance of
zero. A new post-retirement adjustment formula, that was included in SB 1609, will become effective on July 1, 2013; that new formula is expected
to provide periodic (but not annual) adjustments to post-retirement benefits in the future.
The Strategy to Improve the Plan’s Funding Ratio and Decrease Employer Contribution Requirements
To improve the Plan’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 four 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. In the process, the Plan’s over-weight reliance on equities has declined considerably and so has the risk level.
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CORP Comprehensive Annual Financial Report
INTRODUCTORY SECTION
In addition to these changes to the way in which the Plan’s assets are diversified and deployed for investment purposes, the net effect of the provi-sions
of SB 1609 are expected to further improve the financial status of the Plan over time. However, that improvement will be seriously undermined
by any successful legal challenges to the changes made by SB 1609 to the post-retirement adjustment mechanism.
Conclusion
As members of the PSPRS Board of Trustees, we intend to continue our efforts to assure the long-term financial integrity of the System and its Plans
and to faithfully serve the interests of the Plan’s participants and beneficiaries.
We appreciate having the opportunity to serve the State of Arizona, its political subdivisions and its CORP stakeholders and we look forward to con-tinuing
to serve as members of the Board of Trustees for this System.
INTRODUCTORY SECTION
CORP Comprehensive Annual Financial Report
10
December 9, 2011
The Members of the Board of Trustees
Public Safety Personnel Retirement System (PSPRS)
3010 E. Camelback Road, Suite 200
Phoenix, Arizona 85016
Members:
Here is the Twenty-fifth Comprehensive Annual Financial Report (CAFR) of the operations and financial condition of the Arizona Corrections Officer Retirement Plan
(CORP). This report is for the fiscal year ended June 30, 2011. The Plan is a uniform statewide retirement system that provides retirement, disability and survivor bene-fits,
post-retirement adjustments and health insurance subsidies for state, county and local corrections officers, dispatchers and probation, surveillance and juvenile
detention officers.
Arizona Revised Statutes Title 38 requires the Board of Trustees to transmit to the Governor and the Legislature this annual report within six months of the close of each
fiscal year. Incorporated in this Report are the audited financial statements, management’s discussion and analysis, and other financial data from the June 30, 2011
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, 2011 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 controls 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 three sources: member contributions, employer contributions, and realized and unrealized returns on the invested assets of the
Plan. As shown by the Schedule of Revenues by Source included in the Statistical Section later in this report, the Plan had an investment gain of $193.2 million this
fiscal year. That was supplemented by revenue from member contributions of $50.9 million, and direct employer contributions of $52.0 million. Please refer to the
Statistical Section for a ten-year history of revenues and expenses.
Administrative and Investment Expenses
The CORP’s FY’11 administrative and investment-related expenses totaled $5.4 million. Administrative and investment expenses were approximately 41 basis points of
the total assets managed. This is reasonable when compared with other public retirement systems. A dedicated staff and constantly improving internal technology and
expertise has enabled management to keep costs reasonable even though assets are being outsourced to external managers of more expensive portfolios that are
alternatives to equity portfolios; but this has to be done to reduce the System’s exposure to equities and to reduce volatility.
The other factor that has tended to escalate administrative costs results from increased service needs due to increasing numbers of participants and beneficiaries and
the desire to provide consistent support to the PSPRS network of local boards that have important administrative functions to perform.
PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM
CORRECTIONS OFFICER RETIREMENT PLAN
Brian Tobin, Chairman ELECTED OFFICIALS' RETIREMENT PLAN
Gregory Ferguson, Trustee 3010 East Camelback Road, Suite 200
Jeff McHenry, Trustee Phoenix, Arizona 85016-4416 James M. Hacking
Richard Petrenka, Trustee www.psprs.com Administrator
Randie Stein, Trustee TELEPHONE: (602) 255-5575 Ryan Parham Jared A. Smout
Lauren Kingry, Trustee FAX: (602) 255-5572 Chief Investment Officer Deputy Administrator
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CORP Comprehensive Annual Financial Report
INTRODUCTORY SECTION
Investments
The total rate of return on the CORP’s assets for the fiscal year was 17.37% on a net of fees basis. This return was well in excess of the System’s 8.25% actuarial assumed
rate of return. 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 PSPRS. All Plan investments were held in trust by BNY Mellon, the System’s custo-dian
bank.
Enacted Legislation
During FY’11, the State Legislature approved, and the Governor signed, two bills that were of significance; one was of great significance. The first was SB 1317 which
made many administrative, technical and clarifying changes to the PSPRS, CORP and EORP statutes. These include provisions that reconcile all the different local board
reporting requirements, including Title 12, with Title 38 to ensure consistency with notification requirements to the System.
The second bill, SB1609, made many changes to current PSPRS, CORP and EORP statutes; these changes are intended to strengthen the financial status of the under-funded
Plans. Among other things, SB 1609 prohibited any new in-flows of assets to the Reserves of the Plans administered by PSPRS. It also replaced the old post-retirement
adjustment formulas for the Plans with a new one (effective July 1, 2013) that will provide adjustments only periodically, not annually. Finally, it reduced
benefits for “new hires” in all three Plans.
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 CORP is funded by a statutory participant contribution rate of 8.41% of gross payroll for those participants to whom was extended ordinary disability benefit pro-tection
in FY’08 and a contribution rate of 7.96 % for all other participants in the Plan. The Plan’s additional funding comes primarily from employer contributions,
expressed as a level percent of gross payroll and is reset annually, depending on the results of the Plan’s actuarial valuation and from the realized and unrealized re-turns
on the invested assets of the Plan.
The most commonly used measure of a retirement system’s funding progress is the ratio of the actuarial value of assets to actuarial accrued liability, often referred to as
the "percent funded." The percent funded for the CORP had been declining for six out of the last seven years through FY’07. Following modest improvement in FY’08,
the funding ratio started to deteriorate again in FY’09; this trend continued during FY”10 and FY’11, with the ratio falling to 73.0%. Given the System’s seven year
averaging of investment results (actuarial “smoothing”), much of the effect of the FY’08 and FY’09 negative rates of return are yet to be reflected in the funding ratio of
the CORP; therefore, the expectation is that the funding ratio will deteriorate further in the future.
While each employer has a different contribution rate, depending on the liability for its group of participating employees, the current aggregate rate for the contribut-ing
employers is 9.50%. The aggregate rate that will take effect on July 1, 2012 will be 11.31%. Further decline in the Plan’s funding ratio will cause employer rates to
rise even further.
Post Retirement Benefit Increases
State statutes long provided for an annual benefit increase for CORP retirees (or their survivors) two years after retirement, regardless of age, or when the retiree (or
survivor) attained age 55 and had been retired for a year. These increases were limited to four percent of the benefit being paid at the end of the prior fiscal year. A
benefit increase schedule demonstrating the effect of these provisions can be found in the Statistical Section of this CAFR.
These benefit adjustments were fully funded on a present value basis from the assets contained in the CORP’s Reserve for Future Benefit Increases. In any year in which
the Plan generated a return in excess of 9%, one-half of the return in excess of 9% was diverted to the Reserve and withheld from the underlying Fund. For example,
the Plan’s FY’10 13.47% return resulted in a $22.8 million flow of new assets into the Reserve. However, SB 1609 has changed all this.
As of May 31, 2011, the new law prohibited any further transfers of assets to the CORP Reserve. Although any new FY’11 in-flow of excess investment return assets to
the Plan’s Reserve was precluded by SB 1609, the $22.0 million asset balance remaining in the Reserve as of June 30, 2011 was used to finance a 3.43% permanent life
-time increase in benefits for all the Plan’s eligible beneficiaries. To offset the liability associated with the benefit increase, the $22.0 million was withdrawn from the
Reserve, leaving a remaining balance of zero. A new post-retirement adjustment formula, that was included in SB 1609, will become effective on July 1, 2013; that new
formula is expected to provide periodic (but not annual) post-retirement adjustments to benefits in the future.
Certificate of Achievement
The Government Finance Officers Association (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the System for the CORP’s Compre-hensive
Annual Financial Report (CAFR) for the fiscal year ended June 30, 2010. This was the seventeenth consecutive year that the Plan has achieved this prestigious
award. In order to be awarded a Certificate of Achievement, a governmental entity 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’11 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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CORP Comprehensive Annual Financial Report
12
New Developments and Management Initiatives
During this past fiscal year, the PSPRS Board of Trustees continued its strategic initiative that has changed the way in which the CORP’s assets are managed and in-vested.
(See the Board of Trustees’ transmittal letter to the Governor that begins on page 7) In addition, there were other developments and initiatives that are worthy
of note. These included the following:
 Although the FY’11 actual level of administrative spending exceeded the budgeted amount, the excess was the result of the cost of unexpected actuarial pro-jection
work that had to be done to facilitate the passage of SB 1609, the cost for replacement of air-conditioning units, and the costs associated with a num-ber
of lawsuits, including one involving the System’s former Administrator whose pension benefit payments have significantly exceeded what the System’s
administration believes was allowable.
 The System continued its comprehensive and multi-year effort to assure that the PRPRS and CORP local board networks are properly structured and function-ing
so as to assure uniform administration of the statutory responsibilities delegated to them. Staff and other resources continue to be dedicated to this initia-tive.
Within the last twelve months, the System’s outreach efforts to provide training and education to local boards were intensified through more on-site
visits, group meetings/consultations via conference call, video conference and webinars, and the deployment via the web site of a “high three consecutive
years of compensation” calculator to enable the local boards to check the accuracy to their own calculations. In addition, the System staff members are audit-ing
the local boards’ benefit award decisions to be sure they are properly documented.
 The Internal Auditor/Compliance Officer developed and received approval for her annual audit plan and continued her monthly investments compliance re-view.
In addition, the Auditor has continued to approve capital calls made with respect to investment commitments approved by the Board.
 The System’s multi-year document imaging (i.e., scanning) project continued to progress. Once the project is completed, a new “Work Flow” project will be
initiated in accordance with the System’s Strategic Plan.
 The System’s IT Program Development staff in conjunction with the System’s Finance and Accounting staff worked closely with Wells Fargo Bank to plan for a
smooth transition of the monthly benefit payroll process from in-house to the Bank, using the Wells Fargo Payment Manager Plus function. That transition is
now successfully underway.
 The Program Development staff has also been developing programming and processing changes associated with the Plan benefit changes and modifications
made necessary by SB 1609.
 The System’s IT Operations staff has continued to reduce the number of physical servers through increased use of “virtualization” in the System’s production
environment.
 The IT Operations staff also completed the replacement of all the old Desktop PC’s, thus making all the computers current and under warranty and increased
internet bandwidth at PSPRS and the Denver site and configured and deployed at the Denver site a VMWare Site Recovery Manager disaster recovery solution.
 Finally, the IT Operations staff implemented a new switching infrastructure that has increased performance and the stability of the System’s network and will
facilitate a smooth implementation of a new phone system.
New Initiatives for System FY’12
As we have moved through the first four months of the new fiscal year (FY’12), some new initiatives are underway and still others are planned. These include:
 Obtaining the services on a half-time basis of an Assistant Attorney General and filling a number of new or vacant staffing positions, including two for a Call
Center, one for a Deputy Administrator and one for an in-house Investment Counsel;
 Keeping administrative expenses significantly under the FY’12 budgeted levels and providing the Board with a monthly tracking report of budget-to-actual
expenditures;
 Beginning the office renovation project for the purpose of adding more enclosed offices to accommodate our in-house Investment Department, legal counsel,
and management needs;
 Communicating with the Steptoe & Johnson attorneys to assure that they are successful in defending the interests of the Board and the System in the legal
actions that have (or will be) filed challenging certain provisions contained in last year’s SB 1609;
 Preparing the GRS actuaries and staff so that the System will have detailed records available just in case any of SB 1609’s provisions are successfully challenged
in court and the System has to refund contributions to members or “undo” actions taken in conformance with the new law’s requirements;
 Continuing to meet with, and be responsive to, the needs of the System’s constituency groups and conducting meetings in the fall so that the actuarial results
for FY’11 can be disclosed and discussed with the constituent group leaders and the representatives of the System’s principal employers and the employer
groups;
 Completing, through the Wells Fargo Payment Manager Plus capability, the out-sourcing of the monthly beneficiary payroll and planning for the assumption
by Wells Fargo of other processes such as the refund and year-end 1099 processes;
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CORP Comprehensive Annual Financial Report
INTRODUCTORY SECTION
 Implementing a new “pay card” program to eliminate the need to generate and mail paper checks;
 Completing the System’s Disaster Recovery Plan and conducting a full disaster recovery/business continuity test;
 Up-grading the Denver data center and back-up site by configuring new SANs (i.e., Storage Area Networks) and replacing the current production servers; these
up-grades will bring the System closer to the goal of have a complete “data center” environment;
 Adding to the local board outreach, organization, education and training effort by enhancing the a local board web site or “module” within the System’s data-base
to make it possible for local board personnel to input or update data directly without having the administrative staff do it for them.
Summary
This CORP CAFR is a product of the collective efforts of the staff, under the direction of the System’s Board of Trustees. It is intended to provide complete and reliable
information that will facilitate the management decision process and it serves as a means for determining compliance with the System’s governance and investment
policies and legal requirements. Copies of this report are provided to the Governor, State Auditor, Legislature and all our member constituency groups. We hope all
recipients of this report find it informative and useful.
I would like to take this opportunity to express my gratitude to the members of the Board of Trustees, the staff, the System’s advisors, and all others who have worked
so diligently to assure the continued successful operation of the System. I look forward to the challenge of moving the System forward with a program of constructive
and comprehensive change that will maintain high quality customer service and restore the CORP to a state of financial soundness.
Respectfully submitted,
James M. Hacking
Administrator
INTRODUCTORY SECTION
CORP Comprehensive Annual Financial Report
14
BOARD OF TRUSTEES
(AS OF JUNE 30, 2011)
Brian Tobin
Chairman
Trustee
Gregory Ferguson
Trustee Trustee
Randie Stein
Trustee
Alan Maguire
Trustee
Jeff McHenry Richard Petrenka
Trustee
Lauren Kingry
PHOTO
NOT
AVAILABLE
PHOTO
NOT
AVAILABLE
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CORP Comprehensive Annual Financial Report
INTRODUCTORY SECTION
EXECUTIVE STAFF AND ORGANIZATIONAL CHART
Administrator
Jared A. Smout
Deputy Administrator
James M. Hacking
Ryan Parham
Chief Investment Officer
INTRODUCTORY SECTION
CORP Comprehensive Annual Financial Report
16
PROFESSIONAL ADVISORS
A schedule of Administrative Consultant fees may be found in the Financial Section. A schedule of Investment Consultant fees, Brokerage Commissions and Research
Expense may be found in the Investment Section.
Albourne America, LLC International Alternative Investment Consultant
Bank of New York Mellon Custodian
Gabriel, Roeder, Smith & Company Actuary
Heinfeld Meech & Co., P.C. Independent Auditors
HighGround, Inc. Legislative Liaison
Kutak Rock, LLP Legal Counsel
McLagan Partners, Inc. Human Resource Consultant
NEPC, LLC Independent Investment Advisor
Public Policy Partners Legislative Liaison
ORG Portfolio Management, LLC Real Estate Consultant
Step Stone Group, LLC Alternative Investment Consultant
Ballard Spahr, LLC Legal Counsel
Alliance Resource Consulting, LLC Executive Recruitment
CB Richard Ellis Real Estate Consultant
FINANCIAL SECTION
Independent Auditor Report 18
Management Discussion and Analysis 20
Basic Financial Statements
Statement of Plan Net Assets 24
Statement of Changes in Plan Net Assets 25
Notes to the Financial Statements 26
Required Supplementary Information
Schedule of Funding Progress 38
Schedule of Employer Contributions 39
Notes to the Required Supplementary Information 41
Supporting Schedules Information
Schedule of Changes in Fund Balance 42
Schedule of Receipts and Disbursements 43
Schedule of Administrative Expenses 44
Schedule of Consultant Expenses 44
Other Supplementary Information
Statement of Changes in Assets and Liabilities - Agency Fund 45
Schedule of Funding Progress - Agency Fund 45
FINANCIAL SECTION
CORP Comprehensive Annual Financial Report
18
INDEPENDENT AUDITORS’ REPORT
Board of Trustees
Public Safety Personnel Retirement System
We have audited the accompanying Statement of Plan Net Assets of the Corrections Officer
Retirement Plan (CORP) as of and for the year ended June 30, 2011, and the related Statement of
Changes in Plan Net Assets for the year then ended. These basic financial statements are the
responsibility of CORP’s management. Our responsibility is to express an opinion on these
financial statements based on our audit. The comparative totals as of and for the year ended
June 30, 2010, presented in the basic financial statements are included for additional analysis only.
Our audit report dated December 3, 2010, expressed an unqualified opinion on those statements;
however, we have not performed any auditing procedures on this information since the date of our
report.
We conducted our audit in accordance with auditing standards generally accepted in the United
States of America and the standards applicable to financial audits contained in Government
Auditing Standards, issued by the Comptroller General of the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
net assets of the Corrections Officer Retirement Plan, as of June 30, 2011, and the changes in net
assets for the year then ended in conformity with accounting principles generally accepted in the
United States of America.
In accordance with Government Auditing Standards, we have also issued our report dated
December 9, 2011, on our consideration of the Corrections Officer Retirement Plan’s internal
control over financial reporting and on our tests of its compliance with certain provisions of laws,
regulations, contracts, and grant agreements and other matters. The purpose of that report is to
describe the scope of our testing of internal control over financial reporting and compliance and the
results of that testing, and not to provide an opinion on the internal control over financial reporting or
on compliance. That report is an integral part of an audit performed in accordance with
Government Auditing Standards and should be considered in assessing the results of our audit.
10120 N. Oracle Road, Tucson, Arizona 85704
Tel: (520) 742-2611 Fax: (520) 742-2718
19
CORP Comprehensive Annual Financial Report
FINANCIAL SECTION
Accounting principles generally accepted in the United States of America require that the
management’s discussion and analysis on pages 20 through 23 and the Schedule of Funding
Progress and Schedule of Employer Contributions on pages 39 through 41 be presented to
supplement the basic financial statements. Such information, although not a part of the basic
financial statements, is required by Governmental Accounting Standards Board, who consid-ers
it to be an essential part of financial reporting for placing the basic financial statements in
an appropriate operational, economic, or historical context. We have applied certain limited
procedures to the required supplementary information in accordance with auditing standards
generally accepted in the United States of America, which consisted of inquiries of manage-ment
about the methods of preparing the information and comparing the information for con-sistency
with management’s responses to our inquiries, the basic financial statements, and
other knowledge we obtained during our audit of the basic financial statements. We do not ex-press
an opinion or provide any assurance on the information because the limited procedures
do not provide us with sufficient evidence to express an opinion or provide any assurance.
Our audit was conducted for the purpose of forming an opinion on the financial statements that
collectively comprise CORP’s financial statements. The Introductory Section, Supporting
Schedules Information, Other Supplementary Information, Investment Section, Actuarial Sec-tion
and Statistical Section are presented for purposes of additional analysis and are not a re-quired
part of the financial statements. The Supporting Schedules Information and Other Sup-plementary
Information, as listed in the table of contents under the Financial Section, have
been subjected to the auditing procedures applied in the audit of the financial statements and
certain additional procedures, including comparing and reconciling such information directly to
the underlying accounting and other records used to prepare the financial statements or to the
financial statements themselves, and other additional procedures in accordance with auditing
standards generally accepted in the United States of America. In our opinion, the information
is fairly stated in all material respects in relation to the financial statements as a whole. The
Introductory Section, Investment Section, Actuarial Section and Statistical Section have not
been subjected to the auditing procedures applied in the audit of the basic financial statements
and, accordingly, we express no opinion on them.
HEINFELD, MEECH & CO., P.C.
Certified Public Accountants
December 9, 2011
FINANCIAL SECTION
CORP Comprehensive Annual Financial Report
20
CORP MANAGEMENT DISCUSSION & ANALYSIS
The Corrections Officer 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 2011 are as follows:
 The Corrections Officer Retirement Plan (CORP) had a total rate of return (net of fees) of 17.37% this year. Our total portfolio outperformed the target fund bench-mark
by 1 basis point. This is an improvement over the prior year’s return of 13.47%.
 As of the close of the fiscal year 2011, the Future Benefit Increase Reserve had been depleted.
 Retirement benefits paid totaled $76.4 million for the current year, compared to $64.0 million for the previous year. This represents a 19.2% 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 and an increase in retire-ments.
OVERVIEW OF THE FINANCIAL STATEMENTS
Using this Comprehensive Annual Financial Report (CAFR)
This annual report consists of a series of financial statements and notes to those financial statements. These statements are organized so the reader can understand the
Plan as an operating entity. The statements and notes then proceed to provide an increasingly detailed look at specific financial activities.
The Statement of Net Assets and The Statement of Changes in Net Assets
These statements include all assets and liabilities of the Plan using the accrual basis of accounting, which is similar to the accounting used by most private-sector com-panies.
These two statements report the Plan’s net assets and changes in them. Net assets are the difference between assets and liabilities, one way to measure the
financial health, or financial position. Over time, increases or decreases in the net assets are one indicator of the financial health of the Plan.
Notes to the Financial Statements
The notes provide additional information that is essential to a full understanding of the data provided in the financial statements. The notes can be found immediately
following The Statement of Net Assets and The Statement of Changes in Net Assets.
Required Supplementary Information
The basic financial statements are followed by a section of required 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 Supplementary Information
The Supporting Schedules and Other Supplemental Information Section include the Supporting Schedule of Changes in Fund Balance Reserves, Supporting Schedule of
Administrative Expenses and Payments to Consultants, the Supplemental Schedule of Cash Receipts and Cash Disbursements and the Agency Fund Statement of
Changes in Assets and Liabilities (see Note 7). The total columns and information provided on these schedules carry forward to the applicable financial statement.
21
CORP Comprehensive Annual Financial Report
FINANCIAL SECTION
Summary Comparative Statements of Plan Net Assets Analysis
The total plan net assets held in trust for benefits at June 30, 2011 were $1.3 billion, a 17.16% increase from $1.1 billion at June 30, 2010. The increase in net assets is
primarily due to favorable financial markets during the fiscal year. The decrease in cash or increase in receivables is attributable to normal fluctuations in investment
income receivables during the year. CORP 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 as well as an increase in exposure to other alternative investments. The investment of the collateral fluctuated in a similar
manner.
As of 06/30/2011 As of 06/30/2010 Change % Change
Cash and Short-Term Investments $ 29,168,545 $ 12,494,835 $ 16,673,710 133.44%
Total Receivables 5,620,985 18,943,401 (13,322,416) (70.33)%
Total Investments 1,278,722,303 1,092,448,589 186,273,714 17.05%
Securities Lending Collateral 90,201,160 120,324,821 (30,123,661) (25.04)%
Net Capital Assets 646,649 675,362 (28,713) (4.25)%
Total Plan Assets 1,404,359,642 1,244,887,008 159,472,634 12.81%
Accrued Accounts Payable 1,833,212 1,813,876 19,336 1.07%
Investment Purchases Payable 8,527,478 9,959,008 (1,431,530) (14.37)%
Securities Lending Collateral 90,201,160 120,324,821 (30,123,661) (25.04)%
Total Plan Liabilities 100,561,850 132,097,705 (31,535,855) (23.87)%
Net Assets $ 1,303,797,792 $ 1,112,789,303 $ 191,008,489 17.16%
SUMMARY COMPARATIVE STATEMENTS OF PLAN NET ASSETS
2011 2010 Change % Change
ADDITIONS
Total Contributions $ 100,971,508 $ 107,279,216 $ (6,307,708) (5.88)%
Net Investment Income 193,212,289 129,267,190 63,945,099 49.47%
Transfers and Service Purchases 241,548 542,806 (301,258) (55.50)%
Total Additions (Reductions) 294,425,345 237,089,212 57,336,133 24.18%
DEDUCTIONS
Benefits 76,359,270 64,039,674 12,319,596 19.24%
Service Transfers and Refunds 25,872,830 20,360,973 5,511,857 27.07%
Administrative Expenses 1,184,756 915,378 269,378 29.43%
Total Deductions 103,416,856 85,316,025 18,100,831 21.22%
Net Increase (Decrease) 191,008,489 151,773,187 39,235,302 25.85%
Balance Beginning of Year - July 1 1,112,789,303 961,016,116 151,773,187 15.79%
Balance End of Year - June 30 $ 1,303,797,792 $ 1,112,789,303 $ 191,008,489 17.16%
SUMMARY COMPARATIVE STATEMENTS OF CHANGES IN PLAN NET ASSETS
FINANCIAL ANALYSIS OF THE PLAN
The following schedules present comparative summary financial statements of the System for FY2011 and FY2010. Following each schedule is a brief summary of the
significant changes noted in these schedules.
Summary Comparative Statements of Changes in Plan Net Assets Analysis
There was a decrease in employer and employee contributions of $6.3 million in relation to 2010 in spite of an increase in the employer contribution rates from 7.49%
to 8.57% partially due to economic conditions, layoffs and furloughs that have resulted in a decline in salaries paid active members.
For FY2011, CORP recognized a net investment income of $193.2 million which compares to $129.3 million in the previous year. This 49.5% increase in income was due
to the more positive returns in the financial markets during the fiscal year.
Deductions from the CORP net assets held in trust for benefits consist primarily of pension, disability, survivor benefits, member refunds and administrative expenses.
For FY2011, these deductions totaled $103.4 million, an increase of 21.2% from the $85.3 million paid during FY2010. The total benefit payments increase is due to a
net increase in the number of benefit recipients plus post-retirement adjustments provided to existing benefit recipients. Details of these changes can be found on
pages 69 and 70 of the Actuarial Section of this report. Service Transfers and Refunds increased $5.1 million over the prior year (27.1%). Refunds represent a return of
contributions held on account when a member leaves employment. This increase is due to current economic conditions that have led to layoffs and reduction of many
governmental services. Administrative expenses were less due to a decrease in legal and professional services from the prior year.
FINANCIAL SECTION
CORP Comprehensive Annual Financial Report
22
INVESTMENT ACTIVITIES
During FY 2007, the Board of Trustees adopted a more diversified asset allocation policy and began an asset management restructuring that has been deployed over the
past three years. As illustration, at the end of FY07, 72.8% of the entire investment portfolio was invested in equities versus 35.4% at the end of FY11. Fixed income
has remained about 18.6% of the entire portfolio. However, alternative investments have increased from 3.5% in FY07 to 44.5% in FY11.
At June 30, 2011, CORP held $459.2 million in equities. The FY 2011 rate of return for Total CORP equities was 29.98% versus a benchmark rate of return of 31.29%. At
June 30, 2011, CORP held $241.2 million in fixed income securities. The FY 2011 rate of return for CORP fixed income securities was 4.20% versus a benchmark rate of
return of 3.90%. The benchmarks for both equities and fixed income securities are representative of the returns that could be expected in a similar investing environ-ment.
More detailed information regarding the Plan’s investment portfolio can be found in the investment section of this report.
CORP earns additional income by lending investment securities to brokers. This was done on a pooled basis by our custodial banks, BNY Mellon. The brokers provide
collateral and generally use the borrowed securities to cover short trades and failed trades.
HISTORICAL TRENDS
20.25%
15.11%
18.56%
8.91%
7.94%
5.39%
10.63%
9.04%
2.57%
1.60%
U S Equity Non-U S Equity Fixed Income Credit Opportunities
Private Equity Real Assets Real Estate GTAA
Absolute Return Short Term Investments
80.3%
73.0%
123.8% 114.4% 104.8% 101.4%
93.7%
84.6%
86.8%
82.6%
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
$2,200
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Valuation Assets Accrued Liabilities
23
CORP Comprehensive Annual Financial Report
FINANCIAL SECTION
Accounting standards require that the “Statement of Plan Assets” reflect investment asset values at fair market value and include only benefits and refunds due to plan
members and beneficiaries and accrued investment and administrative expenses as of the reporting date. Information regarding the actuarial funding status of the
plan is provided in the “Schedule of Funding Progress.” The asset value stated in the “Schedule of Funding Progress” is the actuarial value of assets as determined by
calculating the ratio of the market value to book value of assets and the actuarial gains/losses smoothed over a seven year period. Actuarial valuations of the CORP
assets and benefit obligations for the retirement plan are performed an nually. The most recent actuarial valuation available is as of June 30, 2011.
At June 30, 2011, the total funded status of the CORP decreased to 73.0% from 80.3% at FYE 2010. This decrease in funded status is related primarily to the seven year
smoothing period with only 1/7 of the investment gain from the FY2011 investment return being reflected in the calculation. The market value smoothing techniques
used in this valuation of the Plan recognize both past and present investment gains and losses. A more detailed discussion of the funding status can be found in the
Administrator’s Letter of Transmittal in the Introductory Section of this report.
REQUEST FOR INFORMATION
This report is designed to provide a general overview of the Corrections Officer Retirement Plan’s finances. Questions concerning any of the information provided in this
report or requests for additional financial information should be addressed to: Corrections Officer Retirement Plan, 3010 E. Camelback Road, Suite 200, Phoenix, AZ
85016.
FINANCIAL SECTION
CORP Comprehensive Annual Financial Report
24
STATEMENT OF PLAN NET ASSETS
JUNE 30, 2011 WITH COMPARATIVE TOTALS FOR 2010
JUNE 30, 2011 JUNE 30, 2010
ASSETS
Cash and Short-Term Investments $ 29,168,545 $ 12,494,835
RECEIVABLES
Member Contributions 1,870,692 1,800,020
Employer Contributions 1,910,540 1,816,092
Interest and Dividends 1,479,277 1,274,245
Investment Sales 338,773 14,041,201
Other 21,703 11,843
Total Receivables 5,620,985 18,943,401
INVESTMENTS AT FAIR VALUE (NOTES 2 AND 3)
U.S. Equity 263,259,903 266,195,299
Non U.S. Equity 195,922,503 188,346,257
GTAA 117,653,995 76,359,082
Real Estate 138,132,088 109,251,743
Total Investments 1,278,722,303 1,092,448,589
Securities Lending Collateral 90,201,160 120,324,821
CAPITAL ASSETS (NOTE 4)
Land 86,588 86,588
Building 628,951 627,784
Funiture, Fixtures & Equipment 164,097 153,015
Total Capital Assets 879,636 867,387
Accumulated Depreciation (232,987) (192,025)
Net Capital Assets 646,649 675,362
TOTAL PLAN ASSETS 1,404,359,642 1,244,887,008
LIABILITIES
Accrued Accounts Payable 1,833,212 1,813,876
Investment Purchases Payable 8,527,478 9,959,008
Securities Lending Collateral 90,201,160 120,324,821
Total Plan Liabilities 100,561,850 132,097,705
NET ASSETS HELD IN TRUST FOR PENSION BENEFITS 1,303,797,792 1,112,789,303
NET ASSET RESERVES
Refundable Members’ Reserve 358,456,820 345,295,534
Employers’ Reserve 945,340,972 748,758,990
Future Benefit Increase Reserve - 18,734,779
Total Net Asset Reserves $ 1,303,797,792 $1,112,789,303
Fixed Income 241,229,832 210,411,164
Credit Opportunities 115,942,329 106,705,613
Private Equity 103,237,702 87,361,965
Real Assets 69,958,118 47,817,466
Absolute Return 33,385,833 -
The accompanying notes are an integral part of these financial statements.
25
CORP Comprehensive Annual Financial Report
FINANCIAL SECTION
STATEMENT OF CHANGES IN PLAN NET ASSETS
FISCAL YEAR ENDING 2011 WITH COMPARATIVE TOTALS FOR 2010
2011 2010
ADDITIONS
Contributions
Members’ Contributions (NOTES 2,5) $ 50,891,168 $ 54,480,961
Employers’ Contributions (NOTES 2,5) 49,303,602 52,064,974
Members’ Service Purchase 776,738 733,281
Total Contributions 100,971,508 107,279,216
Investment Income
From Investment Income
Net Appreciation (Depreciation) in Fair Value of Investments (NOTES 2,3) 176,936,936 112,839,752
Interest 2,839,921 5,894,277
Dividends 11,707,978 13,081,882
Other Income 5,340,305 913,857
From Securities Lending Activities
410,126 594,459
282,080 281,430
(103,763) (133,197)
588,443 742,692
Total Investment Income (Loss) 197,413,583 133,472,460
Less Investment Expense (4,201,294) (4,205,270)
Net Investment Income (Loss) 193,212,289 129,267,190
Transfers Into System 241,548 542,806
Total Additions (Reductions) 294,425,345 237,089,212
DEDUCTIONS
Pension Benefits (NOTE 2) 75,021,222 63,377,270
DROP Benefits (NOTE 2) 1,338,048 662,404
Refunds To Terminated Members (NOTE 2) 24,927,660 19,774,873
Administrative Expenses 1,184,756 915,378
Transfers Out of System 945,170 586,100
Total Deductions 103,416,856 85,316,025
NET INCREASE (DECREASE) 191,008,489 151,773,187
NET ASSETS HELD IN TRUST FOR PENSION BENEFITS
Beginning of Year, July 1 1,112,789,303 961,016,116
End of Year, June 30 $ 1,303,797,792 $ 1,112,789,303
Securities Lending Activities (NOTE 3)
Securities Lending Income
Borrower Rebates
Agents Share of Income
Net Securities Lending Income
The accompanying notes are an integral part of these financial statements.
FINANCIAL SECTION
CORP Comprehensive Annual Financial Report
26
CORP NOTES TO THE FINANCIAL STATEMENTS
NOTE 1: PLAN DESCRIPTION
ORGANIZATION
The Corrections Officer Retirement Plan (CORP), 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 6 of the Arizona Revised Statutes, to provide benefits for prison and jail employees of certain state, county and local governments.
The Board of Trustees (formerly Fund Manager) of the Public Safety Personnel Ret irement System (PSPRS) and 26 local boards administer the CORP Plan.
Effective August 6, 1999, it became the Governor’s responsibility to appoint all members of the Board of Trustees. Effective April 28, 2010, SB 1006 was passed that
changed the name of the Fund Manager to Board of Trustees and expanded the size of the Board from five to seven members. SB 1006 also increased the term from
three to five years. There will be a transitional period during which the terms of office may vary. The Board of Trustees is responsible for the investment of the Plan’s
assets, setting employer contribution rates in accordance with an actuarial study, adopting a budget, hiring personnel to administer the Plan, setting up records, setting
up accounts for each member, paying benefits and the general protection and administration of the System. Substantial investment experience is required for the
member of the Board that represents the state as an employer and the two public members of the Board.
Each eligible group participating in the Plan has a five-member local board. In general, each member serves a fixed four-year term. Each local board is responsible for
determining eligibility for membership, service credits, eligibility for benefits, the timing of benefit payments, and the amount of benefits for its eligible group of em- ployees.
The various governing bodies pay all costs associated with the administration of the local boards.
The addition or deletion of eligible groups does not require the approval of the other participating employers. The Board of Trustees approves new eligible groups for
participation. The CORP is reported as a component unit of the State of Arizona.
The Board of Trustees of the CORP is also responsible for the investment and general administration of two other statewide retirement plans-the Elected Officials’ Re-tirement
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 CORP until September 1, 2008. Arizona Revised Statutes Section 38-848 was amended by Laws 2008, Ch. 286, § 22 to authorize the Board of Trustees to 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, 2011 and 2010, the number of participating local government employer groups was:
Any county or city in the State of Arizona may elect to have its eligible employees (generally, prison or jail personnel who have direct inmate contact) covered by CORP.
At June 30, 2011 and 2010, statewide CORP membership consisted of::
CORP 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:
GROUP 2011 2010
Counties 15 14
Cities 1 1
State Agencies 3 3
Total Employers 27 26
Dispatchers 8 8
RETIREMENT PLAN
MEMBERSHIP TYPE 2011 2010 2011 2010
Retirees 3,256 2,908 1,795 1,588
Terminated Vested 1,300 1,601 0 0
Current Vested 4,483 8,167 0 0
Current Non-Vested 10,082 6,152 0 0
Total Members 19,121 18,828 1,795 1,588
INSURANCE SUBSIDY
27
CORP Comprehensive Annual Financial Report
FINANCIAL SECTION
SUMMARY OF BENEFITS
PURPOSE (A.R.S. § 38-900.01b)
To provide a uniform, consistent and equitable statewide program for those eligible corrections officers as defined by the Plan.
AVERAGE MONTHLY BENEFIT
Employees who became a member of the Plan on or before December 31, 2011, an average of your highest 36 consecutive months of salary within the last 10 years
(i.e., 120 months) of service. A.R.S. § 38-881(7).
Employees who become a member of the Plan on or after January 1, 2012, an average of your highest 60 consecutive months of salary within the last 10 years (i.e., 120
months) of service.
Salary includes base wages, shift and military differential pay, holiday and overtime pay that is paid a member for personal services rendered in a designated position to
a participating employer on a regular monthly, semi-monthly or biweekly payroll basis. For the purposes of computing retirement benefits, “base salary” does not
include any extra monies, including overtime pay, shift differential pay, holiday pay, fringe benefit pay (such as uniform allowance, cell phone or mileage reimburse-ment)
and similar extra payments. A.R.S. § 38-881(41).
BENEFIT INCREASE / COST OF LIVING ADJUSTMENT (COLA)
A retired member or survivor of a retired member may receive an increase (COLA) if monies are available (See A.R.S. § 38-905). However, effective July 1, 2013 (A.R.S. §
38-905.02) and each July 1 thereafter, as long as there are no monies left to pay under the old COLA structure (See A.R.S. § 38-905), a COLA will be issued if funds are
available as long as the following criteria have been met:
 Retired members who became a member on or before December 31, 2011, or the survivor of a retired member, was receiving benefits on or before July 31 of the two
previous years, OR was 55 or older on July 1 of the current year and receiving benefits on or before July 31 of the previous year.
 Retired members who became a member on or after January 1, 2012, or the survivor of a retired member, was 55 or older on July 1 of the current year and is receiv-ing
benefits, OR the retired member was under 55 on July 1 of the current year, was receiving an accidental disability retirement benefit and was receiving benefits
on or before July 31 of the two previous years, OR a survivor was under 55 on July 1 of the current year, is the survivor of a member who was killed in the line of duty
and was receiving benefits on or before July 31 of the two previous years.
The increase will be calculated based on (if there are insufficient earnings to cover the maximum increases, the percentage increase is limited to the earnings available):
 If the ratio of the actuarial value of assets to liabilities is 60-64% and the total return is more than 10.5% for the prior fiscal year, 2% maximum increase to all eligible
retirees and survivors.
 If the ratio of the actuarial value of assets to liabilities is 65-69% and the total return is more than 10.5% for the prior fiscal year, 2.5% maximum increase to all eligi-ble
retirees and survivors.
 If the ratio of the actuarial value of assets to liabilities is 70-74% and the total return is more than 10.5% for the prior fiscal year, 3% maximum increase to all eligible
retirees and survivors.
 If the ratio of the actuarial value of assets to liabilities is 75-79% and the total return is more than 10.5% for the prior fiscal year, 3.5% maximum increase to all eligi-ble
retirees and survivor.
 If the ratio of the actuarial value of assets to liabilities is 80% or more and the total return is more than 10.5% for the prior fiscal year, 4% maximum increase to all
eligible retirees and survivors
From and after December 31, 2015, legislature may enact permanent one-time benefit increases after an analysis of the effect of the increase on the Plan by the Joint
Legislative Budget Committee (JLBC). A.R.S. § 38-905.03 .
CONTRIBUTIONS
Through June 30, 2011, all non-dispatchers shall contribute 8.41% and all full-time dispatchers shall contribute 7.96% of salary to the Plan on a pre-tax basis by payroll
deduction. A.R.S. § 38-891(H).
After June 30, 2011, all non-dispatchers shall contribute, on a pre-tax bases basis by payroll deduction, 8.41% of salary and dispatchers 7.96%, or 50% of the member’s
total contribution from the previous fiscal year and the combined employer contribution rate, whichever is lower. The employee contribution rate shall not be less than
7.65% of the member’s salary and the employers shall contribute a percent of salary determined by actuarial valuations to ensure proper funding for the Plan (but not
less than 6% of the employee’s salary). (For any employer whose actual contribution rate is less than 6%, that employer’s contribution rate shall be at least 5% and not
more than the employer’s actual contribution rate.) For more detailed information in regard to the contributions rates for employee and employers see A.R.S. § 38-891.
CREDITED SERVICE
Service in a designated position for which member contributions have been made to the Plan, or transferred to the Plan from another retirement system for public
employees of this state. A.R.S. § 38-881(11).
FINANCIAL SECTION
CORP Comprehensive Annual Financial Report
28
DEATH BENEFITS - ACTIVE MEMBER
Spouse’s Pension. The surviving spouse of an active member will receive a monthly benefit for lifetime which is 40% of the member's average monthly salary. If the
member was killed in the line of duty, the spouse will receive 100% of the member’s average monthly benefit compensation. A.R.S. § 38-888, OR
Guardian Benefit. If there is no surviving spouse and there is at least one eligible child, a guardian benefit of 40% of the member's average monthly salary will be paid
to the guardian of the eligible child(ren) until the child turns 18, or until the age of 23 if the attending full-time school between the ages of 18 and 23.
If a guardian benefit is paid to a disabled child (the child’s disability occurred prior to the age of 23) and remains a dependent of the guardian, the benefit is payable for
the lifetime of the child. A.R.S. § 38-904(B), OR
Balance of Contributions. If there is no surviving spouse or eligible child(ren), the member's named beneficiary on file will receive two times the member’s contribu-tions.
A.R.S. § 38-904(A and B).
Note: Divorce automatically terminates the ex-spouse as the member’s beneficiary. To maintain an ex-spouse as a beneficiary, you must complete a Beneficiary Desig-nation
Form after the date of the divorce .
DEATH BENEFITS - INACTIVE MEMBER
Balance of Contributions. If the member was inactive, the member's named beneficiary on file will receive two times the member’s contributions. A.R.S. §§ 38-881(27)
and 38-904(A).
Note: Divorce automatically terminates the ex-spouse as the member’s beneficiary. To maintain an ex-spouse as a beneficiary, you must complete a Beneficiary Desig-nation
Form after the date of the divorce .
DEATH BENEFITS - RETIRED MEMBER
Spouse’s Pension. The surviving spouse of a retired member will receive 80% of member's pension benefit for lifetime. Requires two consecutive years of marriage at
time of death. A.R.S. § 38-887, OR
Guardian Benefit. If there is no surviving spouse, or the pension of the surviving spouse is terminated, a guardian benefit (80% of member's pension) may be paid to
the guardian of the surviving unmarried child(ren) until the child(ren) turns 18, or until the age of 23 if attending full-time school between the ages of 18 and 23. If a
guardian benefit is paid to a disabled child (the child’s disability occurred prior to the age of 23) and remains a dependent of the guardian, the benefit is payable for the
lifetime of the child. A.R.S. §§ 38-881(19) and 38-904(B), OR
Balance of Contributions. If there is no surviving spouse or eligible child(ren), the member's named beneficiary on file will receive the balance of the member's accumu-lated
contributions less the pension payments made to the member. If there is no beneficiary, the balance of the member's accumulated contributions will be paid to
the legal representative of the last surviving individual who was being paid the benefit. A.R.S. § 38-889.
Note: Divorce automatically terminates the ex-spouse as the member’s beneficiary. To maintain an ex-spouse as a beneficiary, you must complete a Beneficiary Desig-nation
Form after the date of the divorce .
DEFERRED ANNUITY
Inactive members (not making contributions to the Plan) that have at least 10 years of credited service may elect to receive a Deferred Annuity at the age of 62. This
annuity is a lifetime monthly payment that is actuarially equivalent to the member’s accumulated contributions in the Plan plus an equal amount paid by the employer.
This annuity is not a retirement benefit and annuitants are not entitled to survivor benefits, benefit increases, or the group health insurance subsidy. A.R.S. § 38-911(A).
ACCIDENTAL DISABILITY
A physical or mental condition which totally and permanently prevents an employee from performing a reasonable range of duties within the employee's department,
that was incurred in the performance of the employee's duties, or was the result of either physical contact with inmates, or responding to a confrontational situation
with inmates, or a job-related motor vehicle accident, and was not the result of a physical or mental condition that existed or occurred before the employee’s date of
membership in the Plan. A.R.S. § 38-881(1).
Eligibility for an accidental disability will be determined by the Local Board upon an independent medical examination. The monthly benefit is 50% of the member's
average monthly salary. (There is no credited service requirement.) The Local Board may require periodic medical re-evaluations until the member reaches age 62.
Accidental disability terminates if the Local Board finds the retired member no longer meets the requirements for the disability benefit. A.R.S. § 38-886 .
CATASTROPHIC DISABILITY
A physical or mental condition which totally and permanently prevents a member from engaging in any gainful employment, that is in the direct and proximate result
of the member's performance of the employee’s duties and is not the result of a physical or mental condition or injury that existed or occurred before the member's
date of membership in the Plan. A.R.S. § 38-881(44).
Eligibility for a total and permanent disability will be determined by the Local Board upon an independent medical examination. The monthly benefit is 50% of the
member's average monthly salary. (There is no credited service requirement.) The Local Board may require periodic medical re-evaluations until the member reaches
age 62. The total and permanent disability terminates if the Local Board finds the retired member no longer meets the requirements for the disability benefit. A.R.S. §
38-886.
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CORP Comprehensive Annual Financial Report
FINANCIAL SECTION
ORDINARY DISABILITY
A physical condition which totally and permanently prevents an employee from performing a reasonable range of duties within the employee’s department, or a men-tal
condition that totally and permanently prevents the employee from engaging in any substantial gainful activity, and was not the result of a condition that existed or
occurred before the employee’s date of membership in the Plan. Dispatchers disabled on/after September 21, 2006 and non dispatchers disabled on/after September
26, 2008 may qualify for an ordinary disability. A.R.S. §§ 38-881(30) and 38-886.01.
Eligibility for an ordinary disability will be determined by the Local Board upon an independent medical examination. The benefit is a percentage of normal retirement
and based on the employee’s years of credited service divided by 20 (except for a full-time dispatcher or a person who becomes a member on or after January 1, 2012).
The full-time dispatchers or a person who becomes a member on or after January 1, 2012, are divided by 25). The Local Board may require periodic medical re-evaluations
until the member reaches age 62. Ordinary disability terminates if the Local Board finds the retired member no longer meets the requirements for the
disability benefit. A.R.S. § 38-886.01 .
REVERSE DEFERRED RETIREMENT OPTION PLAN (REVERSE DROP)
Beginning July 1, 2006, through June 30, 2016, the CORP shall offer the Reverse Deferred Retirement Option Plan (Reverse DROP) to members that are eligible for a
normal pension (who is not awarded an accidental, ordinary or total and permanent disability pension) and have at least 24 or more years of credited service
(dispatchers must have at least 25 years) may elect to participate in the Reverse DROP. Under the Reverse DROP, the member must voluntarily and irrevocably elect to
terminate employment and receive a normal retirement upon participation in the Reverse DROP. The Reverse DROP date that is the first day of the month immediately
following completion of 24 years of credited service (for dispatchers, 25 years of credited service) or a date not more than 60 consecutive months before the date the
member elects to participate in the Reverse DROP, whichever is later.
The member’s pension will be calculated using the factors of credited service and average monthly benefit compensation in effect on the Reverse DROP Date. The lump
sum distribution is credited as though it accrued monthly from the Reverse DROP date to the date the member elected to participate in the Reverse DROP (plus interest
equal to the yield on a 5-year Treasury note as of the first day of the month as published by the Federal Reserve Board).
Neither the member nor the employer is entitled to a refund of contributions made between the Reverse DROP date and the date the member elects to participate in
the Reverse DROP. A.R.S. § 38-885.01.
ELIGIBILITY
Designated positions for the following employers that elect to join the Plan are eligible to participate in the CORP if the employee’s customary employment is for at
least 40 hours per week, or as defined by statute. A.R.S. § 38-881(13):
 For a County: A county detention officer and non-uniformed employee’s of a sheriff's department whose primary duties require direct inmate contact.
 For the State Department of Corrections and the Department of Juvenile Correction: Specific positions are eligible to participate. Refer to the statute for specific
positions.
 For a City or Town, a City or Town Detention Officer.
 For an employer of an eligible group as defined in A.R.S. § 38-842, full-time dispatchers.
 For the judiciary, probation, surveillance, and juvenile detention officers and those positions designated by the Local Board.
 For the Department of Public Safety, state detention officers.
Dispatchers hired after November 24, 2009 must participate in the Arizona State Retirement System. A.R.S. § 38-902(C) .
CONTINGENT LIABILITIES
The System is a party in various litigation matters. While the final outcome cannot be determined at this time, management is of the opinion that the final outcome
will be favorable or the final obligation, if any, for these legal actions will not have a material adverse effect on the System’s financial position or results of operations.
HEALTH INSURANCE
Pursuant to A.R.S. §§ 38-906, 38-651.01 and 38-782, retirees and survivors under the Plan that elect group health insurance and/or accident insurance coverage
through the Arizona State Retirement System group plan (ASRS), the Arizona Department of Administration (ADOA) group plan, or a group plan through an employer
of the CORP, the Plan will pay up to the following Premium Benefit amount:
JOINDERS
Specific positions and employers may participate in the CORP if the governing body of the employer enters into a joinder agreement to bring such employees into the
CORP. The joinder agreement shall be in accordance with the provisions of this Plan. The transfer of the Arizona defined benefit state retirement System or Plan shall
be transferred within ninety days after the employer’s effective date. A.R.S. § 38-902.
SINGLE
Not Medicare Eligible Medicare Eligible All Not Medicare Eligible All Medicare Eligible One With Medicare
$150.00 $100.00 $260.00 $170.00 $215.00
FAMILY
FINANCIAL SECTION
CORP Comprehensive Annual Financial Report
30
REFUNDS
Employees who became a member on or before December 31, 2011, pursuant to A.R.S. § 38-884, upon termination of employment (for any reason other than death or
retirement) within 20 days after filing an application with the CORP, the member will receive a lump-sum payment of accumulated contributions (less any benefits paid
or any amounts owed to the Plan) - thus, forfeiting all membership rights and credited service in the Plan upon receipt of refund of contributions. If the member has
five or more years of credited service, an additional percentage of contributions will be refunded to the member according to the member’s years of service as stated
below low:
5 to 5.9 years of service = 25% of additional member contributions.
6 to 6.9 years of service = 40% of additional member contributions.
7 to 7.9 years of service = 55% of additional member contributions.
8 to 8.9 years of service = 70% of additional member contributions.
9 to 9.9 years of service = 85% of additional member contributions.
10 or more years of service = 100% of member contributions plus 3% interest if left on deposit after 30 days.
Employees who became a member on or after January 1, 2012, pursuant to A.R.S. § 38-884(E), upon termination of employment (for any reason other than death or
retirement) within 20 days after filing an application with CORP, shall receive a lump-sum payment of ONLY their accumulated contributions (less any benefits paid or
any amounts owed to the Plan) - thus, forfeiting all membership rights and credited service in the Plan upon receipt of refund of contributions. The member will NOT
receive the additional percentage of contributions as stated above.
Note: Arizona Revised Statutes do not allow a CORP member to borrow against your retirement account. A refund of your contributions can only be paid to you upon
termination of your employment with the CORP employer
REQUEST TO REMAIN IN CORP
The local board of the state department of corrections, or the department of juvenile corrections may specify a position within the department as a designated position
if the position is filled by an employee who has at least five years of credited service under the Plan, is transferred to temporarily fill the position, provides a written
request to the local board (within ninety days of being transferred) to specify the position as a designated position. When the employee leaves the position, the posi-tion
is no longer a designated position. A.R.S. § 38-891(E).
The local board of the state department of corrections, or the department of juvenile corrections may specify a designated position within the department as a non-designated
position if the position is filled by an employee who has at least five years of credited service under the Arizona State Retirement System and who provides a
written request to the local board (within ninety days of being transferred) to specify the position as a non-designated position. When the employee leaves the posi-tion,
the position reverts to a designated position. A.R.S. § 38-891(F).
The local board of the judiciary may specify positions within the Administrative Office of the Courts (AOC) that require direct contact with and primarily provide training
or technical expertise to county probation, surveillance or juvenile detention officers as a designated position if the position is filled by an employee who is a member of
the Plan currently employed in a designated position as a probation, surveillance or juvenile detention officer that has at least five years of credited service under the
Plan. An employee who fills such a position shall make a written request to the local board to specify the position as a designated position within ninety days of accept-ing
the position. When the employee leaves the position, the position reverts to a non-designated position. A.R.S. § 38-891(G).
RETIREMENT ELIGIBILITY AND CALCULATION
Employees who became a member on or before December 31, 2011:
Normal Retirement. Pursuant to A.R.S. §§ 38-881 (7, 11, 27, 28, 41 and 43) and 38-885, retirement benefits will commence the first day of month following termination
of employment and based upon the following:
 20 years of credited service but less than 25 years of credited service, or 80 points (age plus credited service) if membership date is on/after 8/9/01: 50% of the mem-ber’s
average monthly salary plus 2% of member’s average monthly salary multiplied by each year of credited service over 20 (include fractional years).
 25 years of credited service for dispatchers, or 80 points (age plus credited service) if membership date is on/after 8/9/01: 50% of the member’s average monthly
salary plus 2.5% of member’s average monthly salary multiplied by each year of credited service over 20 (include fractional years). (12-years maximum so that the
benefit does not exceed the 80% of the average monthly salary)
 20 years of service but less than 20 years of credited service, or 80 points if membership date is on/after 8/9/01: Member’s average monthly salary multiplied by each
year of credited service (include fractional years) multiplied by 2.5%.
 80 points (age plus credited service) if membership date is PRIOR to 8/9/01: Member’s average monthly salary multiplied by each year of credited service (include
fractional years) multiplied by 2.5% (maximum 75% of average monthly salary).
 Age 62 with 10 years of service but less than 20 years of credited service: Member’s average monthly salary multiplied by each year of credited service (include frac-tional
years) multiplied by 2.5%.
Note: The maximum pension is capped at 80% of the average monthly salary (which a person would receive at 32 years of credited service).
Deferred Annuity. Inactive members (not making contributions to the Plan) that have at least 10 years of credited service may elect to receive a Deferred Annuity at the
age of 62. This annuity is a lifetime monthly payment that is actuarially equivalent to the member’s accumulated contributions in the Plan plus an equal amount paid
by the employer. This annuity is not a retirement benefit and annuitants are not entitled to survivor benefits, benefit increases, or the group health insurance subsidy.
A.R.S. § 38-911(A).
31
CORP Comprehensive Annual Financial Report
FINANCIAL SECTION
Employees who became a member on or after January 1, 2012:
Normal Retirement. Pursuant to A.R.S. §§ 38-881 (7, 11, 27, 28, 41 and 43) and 38-885, retirement benefits will commence the first day of month following termination
of employment and based upon the following:
 Age 62 with 10 years of service: 62.5% of the member’s average monthly salary plus 2.5% of the average monthly salary multiplied by each year of credited service
over 25 (include fractional years).
 Age 52.5 with 25 or more years of credited service: 62.5% of the member’s average monthly salary plus 2.5% of the average monthly salary multiplied by each year
of credited service over 25 (include fractional years).
 Age 52.5 with 25 years of service but less than 25 years of credited service: Average monthly salary multiplied by the member’s total credited service multiplied by
2.5%.
Employees who became a member on or after January 1, 2012 are not eligible for a “Deferred Annuity.” However, a member who attains the service requirement for a
normal retirement, but does not meet the age requirement, may elect to leave contributions on account until reaching the age requirement and then elect to receive a
retirement benefit (survivor benefits, benefit increases, or the group health insurance subsidy). A.R.S. § 38-911(B).
RETURN TO WORK AFTER RETIREMENT
A retired member may become re-employed and continue to receive a pension if the employment occurs 12 months or more after retirement. The retired member shall
not contribute to the fund and shall not accrue credited service. A.R.S. § 38-884(K).
If a retired member becomes employed by an employer in a designated position before twelve months after retirement, the retired member’s pension shall be sus-pended
during reemployment in a designated position and the retired member shall not make contributions to the Plan nor accrue credited service during such reem-ployment.
A.R.S. § 38-884(K).
Retired CORP members that returned to work, entitled to continue to receive a pension from the Plan pursuant to Laws 2006, Chapter 241, section 1 and who is em-ployed
by an employer of the CORP as of September 30, 2009 is entitled to again begin receiving the retired member’s pension from the Plan effective September 30,
2009. (HB 2326, Section 12, Previous return to work retirees).
Effective July 20, 2011, the employer is required to pay an alternate contribution rate on behalf of a retired member who returns to work in any capacity in a designated
position ordinarily filled by an employee. The current alternate contribution rate is 6.0%. A.R.S. § 38-891.01.
Effective July 20, 2011, the premium benefit (subsidy) will not apply if the retired member or survivor is reemployed and participates in health care coverage provided
by the member's or survivors new employer. A.R.S. § 38-906(D).
SALARY
Salary is defined as the base salary/wages, shift differential pay, military differential and holiday pay paid to an employee for personal services rendered in a designated
position to a participating employer on a regular monthly, semimonthly or biweekly payroll basis. For the purposes of the paragraph above, “base salary/wages”
means the amount of compensation each member is regularly paid for personal services rendered before the addition of any extra monies, including overtime pay, shift
differential, holiday pay, sale of compensatory time, fringe benefit pay and similar extra payments. A.R.S. § 38-881(41).
SERVICE PURCHASE
Purchase of Prior Active Military Service. Members with at least 10 years of credited service with the Plan may purchase up to 60 months of credited service for periods of
active military service performed before employment with their current employer (even if the member receives a military pension). A.R.S. § 38-907(A). Active mem-bers
may also receive credited service limited to 60 months if ordered/volunteered to active military service while working for the current employer if the criteria is met
pursuant to A.R.S. § 38-907. The member shall pay the members contributions, upon which the employer shall make employer contributions. If member performs
military service due to presidential call-up, the employer shall make the employer and employee contributions not to exceed 48 months pursuant to A.R.S.38-907 (G).
For more information, contact your employer.
Purchase of Prior Service from an Out-of-State Agency. Active members with at least 10 years of credited service with the Plan that have previous service with an agency
of the U.S. Government, a state of the U.S., or a political subdivision of a state of the U.S. as a full-time paid corrections officer, or full-time paid certified peace officer
may elect to redeem up to 60 months of any part of the prior service if the prior service is not on account with any other retirement system. A.R.S. § 38-909.
Purchase of Prior Forfeited Service within the SAME Retirement Plan. If a former member becomes RE-EMPLOYED with the SAME EMPLOYER and, within two years after
the former member's termination date and applies with the Plan (within ninety days of reemployment), may elect to purchase all of the previously forfeited credited
service. The amount required to reinstate the credited service is the amount previously withdrawn plus interest at the rate of 9% compounded annually from the date
of withdrawal to the date of repayment and the reimbursement is required to be paid within 1-year from the date of reemployment. A.R.S. § 38-884(I). (Form C1B), OR
If the statutory requirements above are not met, the member may still purchase some or all of the previously forfeited credited service calculated based on an amount
computed by the Plan’s actuary to equal the actuarial present value of the account. A.R.S. § 38-884(J). (Form C2).
Purchase of Service Between the Arizona Retirement Plans/Systems. Members of any of the four Arizona state retirement System/Plans that have credited service under
another Arizona state retirement System/Plan may redeem the credited service to their current Arizona state retirement System/Plan by paying the full actuarial pre-sent
value of the credited service into the current Arizona retirement System/Plan with the approval of the CORP or governing board. A.R.S. § 38-922.
TAXATION OF RETIREMENT BENEFITS
All CORP retirement benefits in excess of $2,500 annually will be subject to Arizona state tax. A.R.S. §§ 38-896, and 43-1022.
FINANCIAL SECTION
CORP Comprehensive Annual Financial Report
32
TRANSFERS
Transfer of Contributions Between CORP Employers. A member who terminates employment with an employer and accepts a position with the same or another em-ployer
participating in the Plan shall have their credited service transferred to their record with the new employer if they leave their accumulated contributions on
deposit with the Plan. The period not employed shall not be considered as credited service. A.R.S. § 38-908.
Transfer of Service Between the Arizona Retirement Plans/Systems. Members of any of the four Arizona state retirement System/Plans that have credited service under
another Arizona state retirement System/Plan may transfer the credited service to their current Arizona state retirement System/Plan by transferring the full actuarial
present value of the credited service into the current Arizona retirement System/Plan with the approval of the CORP or governing board. A reduced credited service
amount may be transferred based on the transfer of the actuarial present value of the credited service under the prior Arizona state System/Plan. A.R.S. §§ 38-921 and
38-922.
Transfer of Service Between Municipal Retirement Systems & Special Retirement Plans. An active or inactive member of a retirement System or Plan of a municipality of
this state (i.e., City of Phoenix and City of Tucson) or of the CORP may transfer the service to their current retirement System or Plan based on the member’s accumulated
contributions plus interest, or the member may elect a reduced service amount to be transferred based on the actuarial present value. A.R.S. §§ 38-923 and 38-924.
This is not an official version of the Arizona Revised Statutes. If there are any differences or discrepancies, the official version will prevail.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PLAN ASSET MATTERS
BASIS OF ACCOUNTING
CORP 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. Benefits are recognized when due and payable in accordance with the terms of the Plan. Refunds are due
and payable by state law within 20 days of receipt of a written application for a refund. Refunds are recorded when paid.
Furniture, fixtures and equipment purchases costing $10,000 or more, when acquired, are capitalized at cost. Improvements, which increase the useful life of the prop-erty,
are also capitalized. Investment income net of administrative and investment expenses are allocated to each employer group based on the average relative fund
size for each employer group for that year.
By state statute, the Plan is required to provide information in the financial statements used to calculate Net Effective Yield. Net Effective Yield includes only realized
gains and losses. The Net Realized Gains (Losses) used in this calculation totaled $56,158,378 for FYE 2011 and $(322,346) for FYE 2010. This calculation is independ-ent
of the calculation of the change in the fair value of investments and may include unrealized amounts from prior periods.
ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of net assets held in trust for pension benefits at June 30, 2011. Actual results could differ from those
estimates.
NOTE 3: CASH AND INVESTMENTS
CASH
Custodial credit risk for deposits is the risk that in the event of a bank failure, the Plan’s deposits may not be returned. The deposits are held in two financial institutions
with a balance of up to $250,000 (permanently guaranteed as of July 21, 2010) insured by the Federal Deposit Insurance Corporation (FDIC). The Plan mitigates custo-dial
credit risk for deposits by requiring the financial institution 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 CORP, Wells Fargo pledged the following securities to Public Safety Person-nel
Retirement System, CORP, and the Elected Officials’ Retirement Plan on June 30, 2011, as collateral:
All monies shall be secured by the depository in which they are deposited and held to the same extent and in the same manner as required by the general depository
law of the state. Cash balances represent both operating and cash accounts held by the bank and investment cash on deposit with the investment custodian. All de-posits
are carried at cost plus accrued interest. The following table is a schedule of the aggregate book and bank balances of all cash accounts as of June 30, 2011:
Description CPN Maturity Market Value
FED NATL MTG ASSN POOL #867436 6.00 5-1-2036 2,010,835
FED NATL MTG ASSN POOL #868293 6.00 4-1-2036 3,048,232
FED NATL MTG ASSN POOL #888268 6.00 3-1-2037 354,062
FED NATL MTG ASSN POOL #974411 6.00 10-1-2037 1,012,237
FED NATL MTG ASSN POOL #985011 6.00 8-1-2038 876,783
TOTAL 7,302,149
33
CORP Comprehensive Annual Financial Report
FINANCIAL SECTION
INVESTMENTS
CORP investments are reported at Fair Market Value. Fair Market Values are determined as follows: Short-term investments are reported at cost plus accrued interest.
Equity securities are valued at the last reported sales price. Fixed-income securities are valued using the last reported sales price or the estimated fair market value as
determined by fixed-income broker/dealers plus accrued interest. Investments in hedge funds are valued monthly at the last reported valuations. Limited partnership
investments in credit opportunities, private equity, real assets and real estate are valued on a quarterly or monthly basis at last reported valuations adjusted by any
subsequent cash flows. Joint venture real estate investments are reported at fair market value using either appraisals or manager assessment to estimate the fair mar-ket
value. Appraisals will be performed every three years on a rolling schedule unless circumstances warrant otherwise. Investment income is recognized as earned.
Statutes enacted by the Arizona Legislature authorize the Board of Trustees to make investments in accordance with the "Prudent Man" rule. The Board of Trustees is
not limited to so-called "Legal Investments for Trustees." In making every investment, the board shall exercise the judgment and care under the circumstances then
prevailing which men of ordinary prudence, discretion and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to
the permanent disposition of their funds, considerin g the probable income from their funds as well as the probable safety of their capital, provided:
1) That not more than eighty percent of the combined assets of the system or other plans that the board manages shall be invested at any given time in corporate
stocks, based on cost value of such stocks irrespective of capital appreciation.
2) That not more than five percent of the combined assets of the system or other plans that the board manages shall be invested in corporate stock issued by any one
corporation, other than corporate stock issued by corporations chartered by the United States Government or corporate stock issued by a bank or insurance company.
3) That not more than five percent of the voting stock of any one corporation shall be owned by the system and other plans that the board administers, except that this
limitation does not apply to membership interests in limited liability companies.
4) That corporate stocks and exchange traded funds eligible for purchase shall be restricted to stocks and exchange traded funds that, except for bank stocks, insurance
stocks and membership interests in limited liability companies, are either:
a) Listed or approved on issuance for listing on an exchange registered under the Securities Exchange Act of 1934, as amended (15 United States Code §78a
through §78ll).
b) Designated or approved on notice of issuance for designation on the national market system of a national securities association registered under the Securities
Exchange Act of 1934, as amended (15 United States Code §78a through §78ll).
c) Listed or approved on issuance for listing on an exchange registered under the laws of this [Arizona] state or any other state.
d) Listed or approved on issuance for listing on an exchange 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 percent of the combined assets of the system and other plans that the board manages shall be invested
in foreign securities, based on the cost value of the stocks irrespective of capital appreciation.
e) An exchange traded fund that is recommended by the chief investment officer of the system, that is registered under the investment company act of 1940 (15
United States Code Section 80a-1 through 80a-64) and that is both traded on a public exchange and based on a publicly recognized index.
A.R.S. § 38-848.B as amended in 2008 authorized the Board of Trustees to commingle the assets of all the plans entrusted to its management, subject to the crediting
of receipts and earnings and charging of payments to the appropriate employer, system or plan. As a result, the various assets of the Public Safety Retirement System,
Elected Officials’ Retirement Plan, and the Corrections Officer Retirement Plan were unitized beginning September 1, 2008 into the PSPRS Trust. Investments for each
fund are allocated daily via a constant dollar unitization methodology. Realized and unrealized gains are allocated monthly using the same methodology.
At June 30, 2011, 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 (real estate) remain outside the comingled funds, representing less than 8 basis points of the total.
CUSTODIAL CREDIT RISK
Custodial Credit Risk is the risk that CORP 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, 2011, CORP 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 CORP have any
investments that are not registered in the name of CORP or the PSPRS Trust and are either held by the counterpart or the counterpart’s trust department or agent.
PLAN UNITIZED PERCENT
PSPRS $ 5,172,346,509 76.24%
CORP 1,300,135,556 19.16%
EORP 312,388,278 4.60%
TRUST TOTAL $6,784,870,343 100.00%
REPORTED AMOUNT BANK BALANCE
Pension Trust Fund 28,938,770 28,938,770
Operating Fund 229,775 229,775
Total Deposits 29,168,545 29,168,545
FINANCIAL SECTION
CORP Comprehensive Annual Financial Report
34
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, 2011, the Plan’s fixed income assets
that were not government guaranteed represented 95.6% 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 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.
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.
FAIR VALUE
JUNE 30, 2011
% OF ALL FIXED
INCOME ASSETS
WEIGHTED
FIXED SECURITY TYPE AVG. CREDIT
Corporate Bonds 223,953,600 97.2% AA
Mortgages 2,127,072 .9% Below BBB
CBO 4,455,646 1.9% A
CDO - - -
Total 230,536,318 100.0% AA
AVERAGE CREDIT QUALITY AND EXPOSURE LEVELS OF NON-GOVERNMENT
GUARANTEED SECURITIES
CREDIT RATING LEVEL CORPORATE BONDS MORTGAGES CBO CDO
AAA - - - -
AA 178,125,336 - - -
A 14,656,435 - 2,093,324 -
BBB 5,257,161 91,733 - -
Below BBB 25,914,669 2,035,339 2,362,321 -
Total 223,953,601 2,127,072 4,455,645 -
RATINGS DISPERSION DETAIL
FIXED INCOME SECURITY <1 1-5 6-10 11-15 16-20 >20
Corporate - 1,785,683 15,301,606 1,015,773 2,115,556 203,734,983
Agencies - 27,669 404,948 1,124,710 6,001,704 3,134,484
CBO - - 2,362,321 - - 2,093,324
CDO - - - - - -
Total - 1,813,352 18,068,875 2,140,483 8,117,260 208,962,791
SEGMENTED TIME DISTRIBUTION BY SECURITY TYPE
(INCLUDING GOVERNMENT GUARANTEED SECURITIES)
35
CORP Comprehensive Annual Financial Report
FINANCIAL SECTION
FOREIGN CURRENCY RISK
Foreign currency risk is the risk that changes in the foreign exchange rate will adversely impact the fair value of an investment. The PSPRS is allowed to invest part of its
assets in foreign investments. According to Arizona state statutes, no more than twenty per cent of the combined assets of the system and other plans that the Board of
Trustees manages shall be invested in foreign securities.
The following table shows the System’s exposure to foreign currency risk (U. S. dollars):
DERIVATIVES
Derivative instruments are financial contracts whose values depend on the values of one or more underlying assets, reference rates, or financial indexes. They include
futures contracts, options contracts, and forward foreign currency exchange. The Board of Trustees has adopted a derivative policy that specifically authorizes external
investment managers to enter into certain derivative contracts based on an analysis that the use of such derivatives will have a positive impact on the Trust’s ability to
manage its underlying assets and liabilities. The PSPRS Trust investment program, indirectly through its external managers, holds investments in futures contracts. The
external money managers enter into these certain derivative instruments primarily to enhance the performance and reduce the volatility of the PSPRS portfolio, to gain
or hedge exposure to certain markets, and to manage interest rate risk. The external managers are required to follow certain controls, documentation and risk man-agement
procedures when employing these financial instruments.
The fair value exposure associated with these derivative instruments was recorded on the financial statements as a portion of the unrealized gains and losses related to
U.S. Equity and Fixed Income. The total of unrealized gains for CORP was $4,444,226 at June 30, 2011 consisting of U.S. Equity (gain of $4,453,436) and Real Assets
(gain of $9,210). Interest risk associated with these investments are included in the tables on page 34.
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, 2011 the fair value of securities on loan was $87,764,367 and the collateral was $90,201,160 for Corrections Officer Retirement Plan. The Plan receives a
negotiated fee for its loan activities and is indemnified for broker default by the securities lending agent.
CALLABLE BONDS BY SECURITY TYPE
(INCLUDING GOVERNMENT GUARANTEED SECURITIES)
FIXED INCOME
SECURITY TYPE
FAIR VALUE
JUNE 30, 2011
Corporate 980,235 .43%
Agencies - -
Total 980,235 .43%
% OF ALL FIXED
INCOME ASSETS
CURRENCY SHORT TERM FIXED INCOME
AUSTRALIAN DOLLAR 21,582 -
SWISS FRANC 128,469 -
TOTAL MARKET VALUE 705,476 -
BRITISH POUND STERLING 75,472 -
CANADIAN DOLLAR 31,366 -
DANISH KRONE 13,070 -
EURO CURRENCY UNIT 49,072 -
HONG KONG DOLLAR 25,306 -
ISRAELI SHEKEL 12,972 -
JAPANESE YEN 292,969 -
NEW ZEALAND DOLLAR 5,614 -
NORWEGIAN KRONE 11,064 -
SINGAPORE DOLLAR 13,832 -
SWEDISH KRONA 24,688 -
EQUITY
10,499,225
25,927,675
14,321,886
1,299,961
38,177,956
3,329,486
861,548
24,607,233
158,053
1,105,512
2,094,648
3,812,689
10,128,447
136,324,319
OTHER
-
3,400,132
-
-
6,257,776
-
-
-
-
-
-
-
-
9,657,908
TOTAL
10,520,807
29,403,279
14,353,252
1,313,031
44,484,804
3,354,792
874,520
24,900,202
163,667
1,116,576
2,108,480
3,837,377
10,256,916
146,687,703
FOREIGN CURRENCY RISK
FINANCIAL SECTION
CORP Comprehensive Annual Financial Report
36
LAND
BUILDING AND
IMPROVEMENTS
FURNITURE,
FIXTURES
AND EQUIPMENT
CAPITAL ASSETS
Additions - 1,167 11,083 12,249
Deletions - - - -
Balance June 30, 2011 86,588 628,951 164,097 879,636
ACCUMULATED DEPRECIATION
Balance June 30, 2010 - (89,875) (102,150) (192,025)
Additions - (17,711) (23,251) (40,962)
Deletions - - - -
Balance June 30, 2011 - (107,586) (125,401) (232,987)
Net Capital Assets 86,588 521,364 38,696 646,649
TOTAL
CAPITAL ASSETS
Balance June 30, 2010 86,588 627,784 153,015 867,387
SCHEDULE OF CAPITAL ASSET ACCOUNT BALANCES
The Plan participates in a collateral investment pool. All security loans may be terminated on demand by either the lender or the borrower. All matched loans shall
have matched collateral investments. The total cash collateral investments received for unmatched loans (any loan for which the cash collateral has not been invested
for a specific maturity) will have a maximum effective duration of 233 days. And, at least 20% of total collateral investments shall be invested on an overnight basis. At
June 30, 2011, the weighted average maturity was 166 days for all investments purchased with cash collateral from unmatched loans. The Plan has no credit risk be-cause
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 CORP was informed
that due to recent market events one or more securities lending collateral vehicles that held assets had 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 $2,052,630 has been recorded as CORP’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, 2011 was $40,962.
The table below is a schedule of the capital asset account balances as of June 30, 2010, and June 30, 2011, and changes to those account balances during the year
ended June 30, 2011.
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 a projected unit
credit actuarial funding method. Unfunded actuarial accrued liabilities and assets in excess of actuarial accrued liabilities are being amortized as a level percent of pay-roll
over a twenty-five (25) year period. Beginning July 1, 2007, the minimum employer contribution rate was established at 6%.
ASSET CLASS OUT ON LOAN
TOTAL AVAILABLE
TO LOAN
% OF AVAILABLE
TO LOAN
Equities 75,654,453 135,202,902 56.0%
Agencies - - -
Treasuries - - -
Exchange Traded 12,109,914 16,901,808 71.7%
Totals 87,764,367 152,104,710 57.7%
37
CORP Comprehensive Annual Financial Report
FINANCIAL SECTION
During the year ended June 30, 2011, contributions totaling $102,893,899 ($52,002,731 employer [$43,928,305 pension and $8,074,426 health insurance subsidy
contributions in excess of the benefits paid] and $50,891,168 member) were made in accordance with contribution requirements determined by an actuarial valuation
of the Plan as of June 30, 2009. The employer contributions consisted of approximately $39,017,218 for normal cost [$33,641,921 pension and $5,375,297 health
insurance subsidy] plus $12,985,513 for amortization of the actuarial accrued liability in aggregate [$10,286,384 pension and $2,699,129 health insurance subsidy].
Employer contributions represented 8.57% of covered payroll [6.43% for normal costs (5.82% pension and .61% health insurance) and 2.14% for amortization of assets
in excess of the actuarial accrued liability in aggregate (1.60% pension and 0.54% health insurance)]. Member contributions represented 7.96% (Dispatchers) and
8.41% (Non-Dispatchers) of covered payroll and are attributable to normal costs.
NOTE 6: OTHER BENEFITS
The PSPRS adopted a supplemental defined contribution plan for all contributing members of an eligible group. An eligible group is defined as the employees of the
Board of Trustees, PSPRS, the CORP and the EORP. The employees of any of these eligible groups must make an election to participate within two years after the em-ployee
first meets the eligibility requirements to participate in the plan. The election to participate is irrevocable and continues for the remainder of the employee’s
employment with the employer. If an employee elects to participate, the employee must contribute at least 1% of the employee’s gross compensation. The IRS main-tains
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, Inc. All contributions are sent directly to the third party
administrator from the participating employer groups.
NOTE 7: HEALTH INSURANCE 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. §38-857 consists of a fixed dollar amount set by
statute and paid by the System 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 System 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 insur-ance
subsidy assets and benefit payments. Therefore, in accordance with GASB No. 43, the healthcare subsidy is reported as an agency fund. All assets of the Plan are
available to pay both pension benefits and health insurance subsidy. The pension benefits and health insurance subsidy are funded through employer contributions
based on an annual actuarial valuation. Contributions are separately accounted for by employer but are not segregated by contribution type.
Contributions in excess of the health benefit subsidy payments are reported in the retirement plan. Therefore, no accumulated assets or liabilities to participating em-ployers
are reported in the agency fund. For FY2011 contributions collected for the health insurance subsidy amounted to $8,074,426 and the health benefit subsidy
payments were $2,699,129. The excess contributions of $5,375,297 were added to the retirement plan for reporting purposes. Effective FY2008, each participating
employer is required by GASB Statement No. 45 to disclose additional information with regard to funding policy, the employer’s annual OPEB cost and contributions
made, the funded status and funding progress of the employer’s individual plan and actuarial methods and assumptions used.
NOTE 8: PLAN TERMINATION
CORP and its related plans are administered in accordance with Arizona statutes. These statutes do provide for termination of the plans under A.R.S. 41-3016.18. The
plans are scheduled to terminate on July 1, 2016.
NOTE 9: CONTINGENCIES
Some of our real estate partners in the investments categorized as “other investments” have obtained third party financing, which is secured by real property. The Plan
has entered into Capital Call Agreements with regards to these third party financing arrangements. The Capital Call Agreements, in the unlikely event of default, limit
the Plan to the amount of the defaulted payment or the original terms of the investment approved by the Board of Trustees, whichever is less. In management’s opin-ion,
any loss realized 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 Plan was notified 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 approximately 10.7 million
dollars for all three plans and has been recorded as a liability. It is anticipated that a final resolution will be reached this next fiscal year.
FINANCIAL SECTION
CORP Comprehensive Annual Financial Report
38
NOTE 10: FUNDING STATUS AND PROGRESS
The Plan’s funded status (excluding health insurance subsidy) as of the most recent valuation data is as follows:
The required schedule of funding progress immediately following the notes to the financial statements presents multi-year trend information about whether the actu-arial
value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits.
The actuarial methods and assumptions used for the pension benefits are as follows:
Valuation Date: June 30, 2011
Actuarial Cost Method: Entry Age Normal
Amortization Method: Level Percent of Payroll, Closed
Remaining Amortization Period: 25 years closed for unfunded accrued actuarial liability, 20 years open for excess
Asset Valuation Method: 7-Year Smoothed Market Value
Investment Rate of Return: 8.25%
Projected Salary Increases: 5.00-8.00% 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 calcula-tions
reflect a long-term perspective. Consistent with this perspective, actuarial methods and assumptions used include techniques that are designed to reduce short-term
volatility in actuarial accrued liabilities and the actuarial value of assets. The actuarial calculations are based on the benefits provided under the terms of the Plan
in effect at the time of each valuation. These benefits are described in Note 1 under “Summary of Benefits”.
NOTE 11: REQUIRED SCHEDULES
The Schedule of Funding Progress and the Schedule of Employer Contributions are presented immediately following the notes to the financial statements.
ACTUARIAL
VALUE OF
ASSETS
ACTUARIAL
ACCRUED
LIABILITY
UNFUNDED
AAL(UAAL)
FUNDED
RATIO
ANNUAL
COVERED
PAYROLL
UAAL AS A %
OF COVERED
PAYROLL
(A) (B) (B-A) (A/B) (C) ((B-A)/C)
06/30/11 1,466,750 1,914,464 447,715 76.6% 609,243 73.5%
ACTUARIAL
VALUATION
DATE
(IN THOUSANDS)
39
CORP Comprehensive Annual Financial Report
FINANCIAL SECTION
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))
06-30-02 782,446 632,238 (150,208) 123.8% 330,428 (45.5)%
06-30-03 758,579 709,298 (49,281) 106.9% 358,161 (13.8)%
06-30-04 833,621 795,775 (37,846) 104.8% 381,942 (9.9)%
06-30-05 872,981 906,025 33,044 96.4% 404,156 8.2%
06-30-06 919,867 981,207 61,340 93.7% 437,743 14.0%
06-30-07 940,126 1,061,811 121,685 88.5% 515,428 23.6%
06-30-08 1,207,026 1,336,662 129,636 90.3% 642,621 20.2%
06-30-09 1,309,124 1,515,563 206,439 86.4% 630,825 32.7%
06-30-10 1,382,144 1,648,733 266,589 83.8% 616,481 43.2%
06-30-11 1,466,750 1,914,464 447,715 76.6% 609,243 73.5%
SCHEDULE OF FUNDING PROGRESS
(IN THOUSANDS)
REQUIRED SUPPLEMENTARY INFORMATION
* Entry Age Normal Cost method through 6-30-05. Projected Unit Credit method from 6-30-06 through 6-30-10. Entry Age Normal since 6-30-11.
* 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 84.6% for 2007, 86.8% for 2008, 82.6% for 2009, 80.3% for 2010 and 62.1% for 2011.
* See Notes to the Schedules of Required Supplementary Information.
* Total Employer Contributions received during FY2007 were $24,622,693. 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 $5,742,051. The benefits paid for the health insurance subsidy were $1,913,186. The difference
between the calculated annual required contributions and the benefits paid of $3,828,865 were then added back to the annual required contributions for the retirement plan. This required
calculation resulted in a percent contributed of 120.0% for the retirement plan.
FISCAL
YEAR
ENDED
JUNE 30,
ANNUAL
REQUIRED
CONTRIBUTIONS
PERCENTAGE
CONTRIBUTED
2002 7,101,112 100.00%
2003 7,397,595 100.00%
2004 14,555,335 100.00%
2005 16,291,914 100.00%
2006 24,028,050 100.00%
2007 22,709,507 120.00% *
2008 43,858,925 108.00% *
2009 53,807,249 108.10% *
2010 52,064,974 105.39% *
2011 49,303,602 105.50% *
EMPLOYER CONTRIBUTIONS
SCHEDULE OF EMPLOYER CONTRIBUTIONS
FINANCIAL SECTION
CORP Comprehensive Annual Financial Report
40
* Total Employer Contributions received during FY2008 were $150,729,218. This included $104,797,048 for a group transfer from Arizona State Retirement System to CORP. This amount was
not used in the ARC calculation. 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 $5,398,020. The benefits paid for the health insurance subsidy were $2,073,245. The difference between the calculated annual required
contributions and the benefits paid of $3,324,775 were then added back to the annual required contributions for the retirement plan. This required calculation resulted in a percent contributed
of 108.0% for the retirement plan.
*Total Employer Contributions received during FY2009 were $56,015,138. 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 $6,245,994. The benefits paid for the health insurance subsidy were $2,207,889. The difference
between the calculated annual required contributions and the benefits paid of $4,038,105 were then added back to the annual required contributions for the retirement plan. This required
calculation resulted in a percent contributed of 108.1% for the retirement plan.
* Total Employer Contributions received during FY2010 were $54,437,078. 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 $5,178,444. The benefits paid for the health insurance subsidy were $2,372,104. The difference
between the calculated annual required contributions and the benefits paid of $2,806,340 were then added back to the annual required contributions for the retirement plan. This required
calculation resulted in a percent contributed of 105.4% for the retirement plan.
* Total Employer Contributions received during FY2011 were $52,002,731. 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 $8,074,426. The benefits paid for the health insurance subsidy were $2,699,129. The difference
between the calculated annual required contributions and the benefits paid of $5,375,297 were then added back to the annual required contributions for the retirement plan. This required
calculation resulted in a percent contributed of 105.5% for the retirement plan.
* See Notes to the Schedules of Required Supplementary Information.
41
CORP Comprehensive Annual Financial Report
FINANCIAL SECTION
REQUIRED SUPPLEMENTARY INFORMATION
NOTES TO THE REQUIRED SUPPLEMENTARY INFORMATION
ACTUARIAL METHODS AND ASSUMPTIONS FOR VALUATIONS PERFORMED JUNE 30, 2011
The entry age normal actuarial cost method of valuation is used in determining liabilities and normal cost. Differences in the past between assumed experience and
actual experience (actuarial gains and losses) beco