Roll Call States - NASRA · Process improvements. The division has embarked on analyzing our processes using Lean and Six Sigma approaches. Already several processes have been restructured,

Roll Call of the States

National Association of State Retirement Administrators

60th Annual ConferenceAugust 2–6, 2014 • Asheville, North Carolina

NASRA - Roll Call of the States

Table of Contents Alabama

Retirement Systems of Alabama .......................................... 1

Alaska Alaska Public Employees Retirement System ...................... 3

American Samoa ASG Employees’ Retirement Fund ...................................... 5

Arizona Arizona State Retirement System ......................................... 6

Public Safety Personnel RetirementSystem…………….. ..10

Arkansas Arkansas Public Employees Retirement System ................ 12

California California Public Employees’ Retirement System ............. 14 California State Teachers’ Retirement System .................. 38

Colorado Fire & Police Pension Association of Colorado ............... 50

Public Employees’ Retirement Association of Colorado ... 53

Delaware Delaware Public Employees’ Retirement System .............. 60

District of Columbia District of Columbia Retirement Board ............................. 62

Florida Florida Retirement System ................................................ 64

Georgia Employees’ Retirement System of Georgia ........................ 67

Teachers Retirement System of Georgia ............................ 71

Hawaii State of Hawaii Employees’ Retirement System ................ 73

Idaho Public Employee Retirement System of Idaho ................... 76

Illinois Illinois Municipal Retirement Fund................................... 82 Illinois Teachers’ Retirement System ................................ 88

Indiana Indiana Public Retirement System .................................... 94

Iowa Iowa Public Employees’ Retirement System ..................... 98

Kansas Kansas Public Employees Retirement System ................. 100

Kentucky Kentucky Retirement Systems .......................................... 103

Louisiana Parochial Employees Retirement System of Louisiana…..................................................................... 107

Louisiana State Employees Retirement System ............... 108 Teachers’ Retirement System of Louisiana ..................... 111

Maine Maine Public Employees Retirement System .................. 115

Maryland State Retirement and Pension System of Maryland ......... 118

Michigan Municipal Employees Retirement System of Michigan ... 123 Michigan Office of Retirement Services .......................... 126

Minnesota Public Employees Retirement Association of MN ........... 137 Minnesota State Retirement System ................................ 139 Minnesota Teachers Retirement Association .................. 141

Mississippi Public Employees’ Retirement System of Mississippi ..... 143

Missouri MoDOT & Patrol Employees’ Retirement System .......... 148 Local Government Employees Retirement System .......... 150 Public School Retirement System of Missouri ................. 152 Missouri State Employees’ Retirement System ................ 154


Table of Contents Montana

Montana Public Employee Retirement Administration ... 159

Nebraska Nebraska Public Employees Retirement Systems ............ 163

Nevada Public Employees’ Retirement System of Nevada ........... 165

New Hampshire New Hampshire Retirement System ................................. 167

New Mexico New Mexico Educational Retirement Board ................... 169 Public Employees Retirement Association of NM ........... 172

New York NYS and Local Retirement Systems ................................. 174 NYS Teachers’ Retirement System ................................... 176

North Carolina North Carolina Retirement Systems ................................ 179

North Dakota North Dakota Public Employees’ Retirement System ...... 185

Ohio Ohio Public Employees Retirement System ..................... 188

Ohio Police and Fire Pension Fund ................................ 195

School Employees Retirement System of Ohio ................ 198 State Teachers Retirement System of Ohio ...................... 204

Oklahoma Oklahoma Public Employees Retirement System ............ 206

Oregon Oregon Public Employees Retirement System ................. 208

Pennsylvania PA Public School Employees’ Retirement System ........... 211 Pennsylvania State Employees’ Retirement System ........ 213

Rhode Island Employees’ Retirement System of Rhode Island.............. 217

South Dakota South Dakota Retirement System .................................... 219

Tennessee Tennessee Consolidated Retirement System .................... 221

Texas Texas County & District Retirement System ................... 223 Employees Retirement System of Texas ........................... 226 Texas Municipal Retirement System ................................ 230 Teacher Retirement System of Texas ............................... 234

Utah Utah Retirement Systems ................................................. 240

Virginia Virginia Retirement System ............................................. 241

Washington Washington State Department of Retirement Systems ..... 244

West Virginia WV Consolidated Public Retirement Board .................... 249

Wisconsin Wisconsin Department of Employee Trust Funds ........... 251

Wyoming

Wyoming Retirement System ........................................... 256

1


State: Alabama Retirement System: Retirement Systems of Alabama Executive Director: Dr. David G. Bronner Market Value of Assets: $31.2 B Assets as of: 9/30/2013 Number of Active Members: 247,464 Number of Annuitants: 126,250 Participants as of: 9/30/2013

LEGISLATION During the 2014 Regular Session of the Alabama Legislature there were several positive actions relating to RSA. Both ERS and TRS were funded at 100% of the actuarially requested rate continuing the historical precedent of 100% funding of the requested employer rate. Funding for our health insurance program for public education employees was increased from $714 to $780 per active member per month which prevented increases in out of pocket costs for PEEHIP participants. ERS retirees received a one-time bonus equal to $2 per service month which will be paid in October 2014. This was the first benefit increase for any group of retirees since 2008. Legislation was passed that clarified return-to-work limitations and specifically included those performing service as independent contractors. This legislation levels the playing field by applying the same rules to all retirees who continue to work after retirement and also imposes reporting requirements on the retiree. A final piece of legislation codified RSA’s long held position that we are not subject to the state Administrative Procedures Act.

SYSTEM GOVERNANCE The ERS Board of Control questioned whether their fiduciary role required that the Investment Committee of the Board approve or disapprove specific investments recommended by the RSA investment staff, which were already within the parameters Board’s investment policy. To resolve this issue, the TRS Board of Control requested an opinion from the State Attorney General. The Attorney General opined in pertinent part: “In considering investments recommended by the Secretary-Treasurer, the Investment Committee for the Board of Control of the Teachers’ Retirement System is statutorily mandated to determine whether to approve or disapprove investments based on whether the investments are in accordance with the investment policies set by the Board of Control, and not based on other factors beyond those investment policies. The proper performance of that function fulfils the investment committee’s fiduciary duty to the members of TRS.” Since the statutes governing ERS and TRS are essentially identical on this issue, the same legal conclusion applies to both ERS and TRS.

TECHNOLOGY RSA is currently underway in a massive IT modernization project. Our current IT system is based on a combination of old technologies which have become both difficult and costly to maintain. We have embarked on an upgrade to a newer and more stable platform. RSA has just completed an RFP process and is currently in contract negotiations with the selected vendor for this project. We are using this opportunity to review and improve our work methodologies and functions in order to raise what we already consider to be a very high level of customer service for our members. The end result will be an entirely new pension administration system, including ECM and CRM components. The projected completion time is three years. Our goal is to have a state of the art system that will provide the highest possible customer service and will serve RSA and its’ members for many years to come.

2

FUNDING ISSUES Funding status of RSA funds are as follows for the fiscal year ending September 30, 2013: Employees’ Retirement System {ERS} -------------62.4% Teachers’ Retirement System {TRS} ----------------66.2% Judicial Retirement Fund {JRF} -----------------------59.1% Note: Data for September 30, 2014 is not yet available Both ERS and TRS have adopted a new funding policy that incorporates moving to a closed 30 year amortization period for all new liabilities and moving all previously accrued liability to a closed 30 year period over a fixed time frame. This new funding policy will allow us to stabilize what has been a declining funded level and gradually move to a sustainable funded level, while not increasing funding requests to a level that would be unattainable due to the limited revenue available to the State.

INVESTMENT ACTIVITY/INITIATIVES RSA has remained heavy in the equity side following the 2008-2009 downturn which has resulted in excellent returns over the past few years. Our overall returns as of September 30, 2013 are as follows: One Year------19.41% Three Year----11.29% Five Year------10.22% Ten Year--------6.00%

ASSET ALLOCATION Combined

Domestic & Foreign Equities

Fixed Income Real Estate Alternatives Cash Other Assets managed externally

Assets managed internally

63.6 % 11.3 % 9.1 % 11.7 % 4 % 0 % 0 % 100 %

3

NASRA - Roll Call of the States State: Alaska Retirement System: Alaska Public Employees Retirement System Executive Director: Jim Puckett Market Value of Assets: $13 B Assets as of: 6/30/2012 Number of Active Members: 29,024 Number of Annuitants: 28,540 Participants as of: 6/30/2011

LEGISLATION HB 385 This legislation allows for the infusion of $1B from the constitutional budget reserve into the pension trust fund to reduce the amount of unfunded liability of the system. HB 116 This legislation, passed by the legislature and awaiting the Governor’s signature, will allow Tier 2 and 3 peace officers or fire fighters to use claimed military service to meet the 25-year requirement for system-paid medical insurance benefits in a service-based retirement. The member must pay the full actuarial cost of the increased benefit they will receive. SB 145 This legislation enacted provisions of the HEART Act. It allows for survivors to receive benefits: If a member dies while performing qualified military service, as defined in 38 U.S.C. 43, the survivors of the member are entitled to any additional benefits that would have been provided to the survivors under the plan had the member resumed employment and then terminated employment on account of death. However, periods of qualified military service are not included in calculations of credited service.

SYSTEM GOVERNANCE Formerly, the division was led by the Director of the Division of Retirement and Benefits, who had sole responsibility as Administrator of the retirement and benefit plans. With this change, four chief officers that are subject matter experts in the areas of operations, pension, finance, and health will report directly to the Deputy Commissioner of the Department of Administration. This form of management structure recognizes the importance of having a subject matter expert “chief” who is principally responsible for the systems, plans and operations within their purview. There is now a Chief Operating Officer, a Chief Pension Officer, a Chief Health Officer, and a Chief Financial Officer.

TECHNOLOGY Operating Systems. The division is changing to an Oracle single platform operating system. This will replace several outdated systems, which will allow increase operational efficiency and enhanced systems integration, including work flow systems. A completion date of 6/30/2016 is anticipated. Imaging. The division has switched from microfiche records retention to digital imaging. This allows for greatly enhanced image retention and improved access to member records for employees. We are in the process of converting decades of microfiche imaging to digital, which should be completed by 6/30/15. Education delivery. Alaska is a large state, with many employers located in very remote areas which are cost-prohibitive to visit in person. Counseling staff will utilize WebEx to deliver benefit education to members and employers, allowing a much greater level of outreach to areas we have not been able to visit.

4

FUNDING ISSUES The Public Employees’ Retirement System employer statutory contribution rate is 22% for FY 2014. The PERS pre-funds for post-employment healthcare. The funding ratio for PERS as of the actuarial valuation report of 6/30/12, which includes pension and post-employment healthcare is 61.3%. The system rate of return as of 6/30/13 was 12.5%.

MODEL PRACTICES Process improvements. The division has embarked on analyzing our processes using Lean and Six Sigma approaches. Already several processes have been restructured, resulting in a higher level of efficiency and a reduction in unnecessary steps. Coinciding with these improvements is a much greater level of staff development and empowerment; affected staff members achieve better job satisfaction and empowerment as a result of being allowed direct input into their daily activities. Risk Mitigation. As a result of member appeals and complaints, the division is now analyzing processes and errors with an eye on staff training and process improvements which will reduce liability to our plans in the future. When an error occurs or an appeal is resolved, managers and staff are immediately informed of what occurred, what resulted, and what needs to change to avoid similar problems.





51.3 % 17.7 % 9.2 % 0 % 1.6 % 20.2 % 0 % 0 %

Other: Private Equity Pool 9.9%, Other Investments Pool 6.1%, Absolute Return Pool 4.2%

DEFINED CONTRIBUTION PLANS Supplemental Annuity Plan – 401(a) defined contribution plan. This is a mandatory plan for State of Alaska employees in lieu of Social Security, and for approximately 28 other public employers in the state. Participants 42,780 Assets $3.3B 29 investment options Administrator – Chief Pension Officer Recordkeeper – Great-West Financial Deferred Compensation Plan – 457 plan. This is a voluntary plan for State of Alaska employees. Participants 10,495 Assets $787M 29 Investment options Administrator - Chief Pension Officer Recordkeeper – Great-West Financial PERS Defined Contribution Retirement Plan (Tier 4) – 401(a) Defined Contribution Plan. This is a mandatory plan for PERS-Participating employees first hired on or after 7/1/06. Participants 23,398 Assets $488M Administrator – Chief Pension Officer Recordkeeper - Great-West Financial

5

NASRA - Roll Call of the States State: American Samoa Retirement System: ASG Employees' Retirement Fund Executive Director: Filisouaiga (Fili) F. Ta’afua Market Value of Assets: $0.21 B Assets as of: 9/30/2013 Number of Active Members: 4,588 Number of Annuitants: 1,801 Participants as of: 10/1/2013

SYSTEM GOVERNANCE Effective June 4, 2013, Amending Chapter 14 Section 7.1410, American Samoa Code Annotated (House Bill 33-3), increased the number of trustees of the Fund (ASGERF) from five to seven. The seven member Board of Trustees is selected to ensure the fund’s investment portfolio remains sound and strong.

FUNDING ISSUES As of the October 1, 2013 Actuarial Valuation, ASGERF’s funded status was 79.9% compared to the prior year of 80.8%.

MODEL PRACTICES ASGERF has been awarded the Certificate of Achievement for Excellence in Financial Reporting by the Government Finance Officers Association for its Comprehensive Annual Financial Report (CAFR) for the fiscal year ended September 30, 2012. This was the twenty-third consecutive year that the Fund has achieved this prestigious award. We believe our current comprehensive annual financial report continues to meet the Certificate of Achievement Program’s requirements and we are submitting it to the Government Finance Officers Association to determine its eligibility for another certificate.

INVESTMENT ACTIVITY/INITIATIVES For 2013, the Fund’s total net investment gain was $10.7 Million, a 5% increase from 2012. Rates of Return – (as of September 30, 2013) 1 YR: 12.2% 3 YR: 7.3% 5 YR: 8.3





70 % 27 % 3 % 0 % 0 % 0 % 82 % 18 %

The Asset Allocation Plan has a total exposure to equities of 70% (U.S. 20%, International 20%, Emerging 25%, and Frontier 5%), Fixed Income of 27% (Domestic 12% and Local (ASG L/Term Notes) 15%), and Real Estate of 3%. We allocated 18% as managed internally and 82% managed externally.

6

NASRA - Roll Call of the States State: Arizona Retirement System: Arizona State Retirement System Executive Director: Paul Matson Market Value of Assets: $30.6 B Assets as of: 6/30/2013 Number of Active Members: 207,572 Number of Annuitants: 122,257 Participants as of: 6/30/2013

LEGISLATION Effective retroactive to January 1, 2014:

1. Elected Officials resume ASRS membership: ASRS members who become elected officials on/after 1/1/14 must resume ASRS membership and cannot participate in the Elected Officials Defined Contribution Plan

Effective July 24, 2014:

1. University and Community College charter schools: Community College and University charter schools can now participate in ASRS. This bill is effective 7/24/14 then goes retroactive to 7/1/11.

2. Social Security 218 Agreement: Eliminates the requirement that ASRS members must be covered by the Social Security 218 Agreement. Closes the defined contribution plan established by HB 2562.

SYSTEM GOVERNANCE • Two new Board trustees were appointed.

• The risk management duties have been formalized by changing a standing security staff committee name to the Enterprise Risk Management Committee (ERMC) to reflect the actual focus of the committee’s duties. The ERMC is overseen by the Operations and Audit Committee of the Board.

• The Board adopted some changes to the Strategic Planning section of the Board Governance Policy Handbook to reflect the Board’s desire for earlier and more frequent engagement with staff regarding strategic priorities.

TECHNOLOGY This year the ASRS began a major effort to convert all of its older pension administration applications from Oracle Forms to Java. The Oracle Modernization effort is expected to take five years to complete. In January 2014 the ASRS implemented a web application that will allow new and re-enrolling ASRS members to register for secure web access and designate a beneficiary at the time of hire. In March 2014, the ASRS implemented a new public website (www.azasrs.gov). The new website was built using a content management platform, which should provide users with more robust ability to maintain and update the public website. In June 2014, the ASRS implemented an online application for members who wish to return to work after retirement. The new application is expected to help members understand return to work requirements and reduce

http://www.azasrs.gov/

7

instances of non-compliance with statutes. In addition, the new application will reduce manual effort for ASRS staff and employers associated with the return to work process.

LITIGATION / CORPORATE GOVERNANCE In May 2014, the Arizona Court of Appeals ruled that the ASRS service purchase program prior to purchase is a retirement benefit protected by the Arizona Constitution, Article 29 and may not be diminished for pre-July 20, 2011 ASRS members. The ASRS will be filing a Petition for Review to the Arizona Supreme Court. Case – Pendergast v. Arizona State Retirement System.

FUNDING ISSUES Total Funded Status as of 6/30/13: Pension fund: 75.9% Health Insurance Supplement: 89.2% Funding levels had generally fallen since 2000 due to the two major equity bear markets centered in 2001 and 2008 but are now gradually expected to rise. The ASRS health insurance supplement (OPEB) funded status continues to be considered one of the highest of the HI OPEB’s in the US. The ASRS as an organization has initiated significant plan design modification since 2003 in order to ensure plan sustainability. These modifications are not a recent phenomenon at the ASRS. The modifications have resulted in a reduction in future liabilities of approximately $5.4 billion (closed group analysis) and $10.7 billion (open group analysis). The modifications made include changes to: interest accrual rates on refunds; refund of employer contributions; cost for purchasing service; repeal of DROP program; increase in normal retirement definition; implementation of an alternate contribution rate for retired members who return to work; in addition to others. The ASRS recently completed an actuarial audit, which was conducted by the firm Gabriel, Roder, and Smith (GRS). Actuarial Audits are conducted every five years. The audit did not make any major recommendations for changes to actuarial assumptions and methods used by the ASRS.

MODEL PRACTICES In March 2014, as part of its new public website implementation, the ASRS was proud to announce a new website educational tool called GPS = Guide to Pre-retirement Services. The new tool uses a multi-media, interactive map to guide members through their entire membership right into retirement. In addition, the ASRS began to send personalized emails to members on their birthday to remind them to log in to check their account, update their contact information and beneficiaries and to get their real-time benefit estimates. This email replaces the annual member statement mailings that used to occur each September, saving the agency more than $180,000 per year in mailing costs alone.

INVESTMENT ACTIVITY/INITIATIVES ASRS has two primary performance objectives: 1) achieve a net ROR of 8% or higher over a 20+ year horizon and 2) achieve multi-period net RORs that exceed ASRS’ policy benchmark. For period ending March 31, 2014:

20 Year Return 8.60%

8

1 Year 3 Year 5 Year 10 Year Since Inception

Total Fund 13.8% 9.6% 15.9% 7.0% 10.0%

SAA Policy 13.9% 9.5% 15.7% 6.9% 9.8%

Excess Return -0.1% 0.1% 0.2% 0.1% 0.2%

Investment Activities that has occurred over the past year or Initiatives currently in process:

• Commenced a biweekly Director, CIO and staff Investment Idea Exchange meeting with the following key objectives: 1) promote & share investment ideas, 2) determine which ideas can be timely researched & if prudent, implemented, 3) update each other on views and initiatives, and 4) further enhance the structure and efficiency of the ASRS Fund.

• Redesigned ASRS securities lending program is pending final contract negotiations with State Street. The program will include two parts: ‘base lending’ to initiate a conservative strategic lending program and ‘opportunistic lending’ to profit from relatively large or one-off individual lending transactions, the latter of which will be evaluated and approved on a case-by-case basis by the Director and CIO.

• Developed and Funded ASRS private debt program whose structure, terms and strategies provide for flexibility to expand or modify depending on the tactical opportunities available in the corporate and real estate debt markets.

• Currently evaluating enhanced cash management options to mitigate cash drag on total fund returns and to more efficiently manage monthly internal and external cash flow requirements. The proposed solutions ensure that excess cash balances are synthetically exposed to either equity or fixed income markets while providing ample liquidity to meet pension funding needs and minimizing associated transaction costs.

• In private markets, ASRS has engaged a team of organization psychologists to help develop interview techniques to better discern the organizational dynamic of our private equity counterparties and its relationship to favorable fund performance.

• Implemented a series of investor forums (energy, housing, etc.) implemented in partnership with our private equity sponsors to take a deeper dive in sectors and topics of current investment interest.

• ASRS internally-managed 7 public equities and fixed income portfolios (w/ an approx. aggregate market value of $9.5 billion or 28% of Total Fund) continue to provide value to the ASRS. Since their inception, these public portfolios in aggregate have provided $89 million in excess return.





56 % 25 % 8 % 7 % 0 % 4 % 72 % 28 %

28 % Assets managed internally (7 public equity/fixed income portfolios) Global Tactical Asset Allocation (GTAA) - 10% SAAP (5-15% range) reside within each ASRS asset class.

Opportunistic Investment 0% (0-10%) – aggregate exposure of the Total Fund.

9

DEFINED CONTRIBUTION PLANS The ASRS offers to participating employers a deferred compensation program that allows active members to save additional money on a pre-tax basis. The plan is qualified under Section 401(a) of the Internal Revenue Code. The SRSP allows eligible members to contribute tax-deferred compensation to the plan that can later be drawn upon in retirement. The SRSP plan is offered voluntarily to ASRS employers that then adopt the plan in which eligible employees may participate. The SRSP is offered in addition to the ASRS Defined Benefit Plan. Participants may elect to defer up to 100% of pay or $52,000, whichever is lower. In addition, the SRSP permits loans. Due to the distinctive features and benefits of the SRSP, the Internal Revenue Service requires restrictions that are unique from regular 457 and 403(b) tax-deferred compensation and tax-sheltered annuity plans. These restrictions include: an irrevocable election to participate with a two-year window of opportunity; an irrevocable election to contribute a percentage of pay, a flat-dollar amount, or a scheduled contribution over time; and, a mandate that account balances be distributed upon retirement. Governance: Internal Management Committee Plan Type: 401(a) Participation: Voluntary # of Employers: 26 # of Participants: 169 Total Assets: $6,437,750 (as of 3/31/2014) Administrator: Nationwide Retirement Solutions # of Investment Options: 19 Investment Option Types: Asset Allocation, International, Small Cap, Mid Cap, Large Cap, Balanced, Bonds, Short Term, Self-Directed Option, Global Real Estate Fund 403(b) / 457 Arizona State Retirement System (ASRS) Supplemental Salary Deferral Plan (SSDP) The ASRS offers to participating employers a deferred compensation program that allows active members to save additional money on a pre-tax basis. The plan is qualified under Sections 403(b) and 457 of the Internal Revenue Code. The SSDP allows eligible members to contribute tax-deferred compensation to the plan that can later be drawn upon in retirement. The SSDP plan is offered voluntarily to ASRS employers that then adopt the plan in which eligible employees may participate. The SSDP is offered in addition to the ASRS Defined Benefit Plan. Participants may elect to defer up to $17,500 and, for those age 50 and older, an additional $5,500. Unlike the ASRS SRSP 401(a) plan, there are no restrictions as to participation, amount contributed (except for the maximums mentioned), or how often the contribution amount may change. Governance: Internal Management Committee Plan Type: 403(b) and 457 Participation: Voluntary # of Employers: 92 # of Participants: 526 Total Assets: $9,870,000 (as of 3-31-14) Administrator: TIAA-CREF # of Investment Options: 26 Investment Option Types: Asset Allocation, International, Small Cap, Mid Cap, Large Cap, Balanced, Bonds, Short Term, Self-Directed Option, Global Real Estate Fund

10

NASRA - Roll Call of the States State: Arizona Retirement System: Public Safety Personnel Retirement System Executive Director: Jim Hacking Market Value of Assets: $7.908 B Assets as of: 3/31/2013 Number of Active Members: 39,048 Number of Annuitants: 16,284 Participants as of: 3/31/2013

SYSTEM GOVERNANCE The Board of Trustees has removed the requirement that it approve all investment decisions, but has delegated to its Investment Committee the authority to recommend changes to the Trust’s investment strategies and asset allocations, and in rare cases, to determine whether to make certain investments. The Investment Committee and Board are free to advise the Administrator, Staff and the Chief Investment Officer of any information they deem material to particular investments that are then being contemplated for or that have already been made by the Plans and Trust, but authority is given to the Chief Investment Officer, through the Administrator, to make all investment decisions in consultation with independent investment consultants in accordance with those investment strategies and asset allocation targets.

LITIGATION / CORPORATE GOVERNANCE In February of this year, the Arizona Supreme Court upheld the decision of the Superior Court in the Fields case (retirees) wherein the changes to the permanent benefit increase (PBI) formula and funding mechanism were ruled unconstitutional. As a result, retroactive PBI payments were made to all retirees eligible as of July 1, 2011 and the old mechanism for payment and funding the PBI reserve fund were reinstituted for these retirees. Actuarial projections show this ruling to negatively impact the three plans by increasing the aggregate employer contribution rates by 5.14% PSPRS, 2.44% CORP, and 23.03% EORP and decreasing the aggregate funding levels by 5.90% PSPRS, 6.80% CORP, and 11.40% EORP. Additionally, there is another lawsuit pending (in the Hall case) wherein these same provisions are being challenged by the active membership. If this ruling also turns out to be unfavorable, in combination with the Fields case, actuarial projections show both rulings to negatively impact the three plans by increasing the aggregate employer contribution rates by 11.46% PSPRS, 8.65% CORP, and 36.49% EORP and decreasing the funding levels by 9.80% PSPRS, 14.70% CORP, and 14.70% EORP.

FUNDING ISSUES The most recent funded status available is as of June 30, 2013 as follows:

• PSPRS: 57.1% • CORP: 66.9% • EORP: 55.5%

The Board of Trustees has chosen to keep the assumed earnings rate at 7.85% for FY2015. Additionally, at their June 25 meeting, a formal, written funding policy was adopted.

11

INVESTMENT ACTIVITY/INITIATIVES Rates of Return (through 5/31/14):

• 10.95% FYTD • 12.01% 1 yr. • 7.48% 3 yr. • 10.94% 5yr • 02% 10 yr.

Asset Allocation: Mostly cosmetic changes, reducing Equities and Fixed Income by 1% each, but increasing exposure to Private Equity and Opportunistic Credit by 1% each.





31.37 % 9.57 % 11.79 % 43.47 % 3.8 % 0 % 90 % 10 %

Alternatives breakdown:

• 12.75% private equity • 9.23% credit opps • 3.87% absolute return • 9.00% GTAA • 6.20% real assets • 2.42% risk parity

DEFINED CONTRIBUTION PLANS In the 2013 legislative session, the EORP DB plan was closed to new hires as of December 31, 2013. Beginning January 1, 2014, all new elected officials who do not have prior service with EORP or ASRS are mandatorily required to enter this new DC plan. As of June 30, 2014 there are only 5 elected officials in this new 401a DC plan. It is being administered by Nationwide Retirement Solutions.

FUTURE DEVELOPMENTS / OTHER ISSUES We will be releasing RFPs for an actuarial audit and possibly for a third-party administrator for our Cancer Insurance Fund.

12

NASRA - Roll Call of the States State: Arkansas Retirement System: Arkansas Public Employees Retirement System Executive Director: Gail H. Stone Market Value of Assets: $7.5 B Assets as of: 3/31/14 Number of Active Members: 45,703 Number of Annuitants: 30,533 Participants as of: 6/30/2013

LEGISLATION This was an off-year for any retirement legislation. However, we are hearing rumors of push for some sort of DC alternative; either a cash balance or 401(k) style plan.

TECHNOLOGY APERS is now one year into a 3-year initiative to develop an interactive and flexible pension administration system. There will be both an employer reporting portal and a member self-service portal. While a final decision has not been made, the intention is be hosted in the vendor’s “cloud” using Oracle software. We are currently on a mainframe application, so the leap forward for staff is enormous. Executive staff must be constantly vigilant that we are not simply creating “mainframe 2.0”. At the same time, we are going through a massive data cleansing process that will have a nice side benefit of establishing data fields that will help APERS implement GASB 68.

LITIGATION / CORPORATE GOVERNANCE APERS was co-lead plaintiff it litigation against Bank of America for fraudulent packaging of mortgage-backed securities. This particular case was settled for $75 million in damages. Other litigation is being considered but not yet approved at this writing. APERS issued an RFP for additional securities litigation services this last winter. Three firms were added; none terminated.

FUNDING ISSUES APERS was 74% funded (77% on a market basis) in FY2013. Based on current investment performance we are likely to be better than 80% funded at the end of FY2014 – if nothing changes. Later in August, the APERS board of trustees will be considering some economic assumption changes recommended by System actuaries. Among these will be suggested lowered return assumptions, and shortened amortization periods. These changes are part of a new funding policy draft in response to the GASB rules.

MODEL PRACTICES Business process reengineering will be an integral part of the new pension administration system (“COMPASS”). We hope to be able to report specific changes at next year’s conference.

13

INVESTMENT ACTIVITY/INITIATIVES Returns as of 3/31/14: 1-year -15.26%, 3-year – 10.24%, 5-year – 15.83%. As of 5/31/14, fiscal year to date return is 17.20%. We look to finish up at 17.50% – 18.00% range. The heavy lifting of moving our asset allocation was accomplished two years ago. Moving 16% (targeted) into Real Assets has successfully diversified our risk profile, thus dampening the volatility of our returns.





67.55 % 15.8 % 6.1 % 10.5 % 0.05 % 0 % 100 % 0 % Alternatives include: real estate, timberland, energy strategies, hedge fund of funds, GTAA. (with a commodities component).

FUTURE DEVELOPMENTS / OTHER ISSUES As Arkansas politics move dramatically to the right, it is uncertain what our political future holds.

14


State: California Retirement System: California Public Employees' Retirement System Executive Director: Anne Stausboll, CEO

Market Value of Assets: $296 B Assets as of: 6/19/2014 Number of Active Members: 1,104,237 Number of Annuitants: 566,975 Participants as of: 6/30/2013

LEGISLATION ADMINISTRATIVE Retirement System Board Member Education and Training – AB 1163 This bill would require the California Public Employees’ Retirement System (CalPERS) Board of Administration to adopt an education policy for Board members that identifies appropriate topics and training opportunities related to pension fund administration and investments. The bill would also require each Board member to receive at least 24 hours of education in each two-year period, and directs the Board to post its education policy and an annual report on Board member compliance on the CalPERS website. The CalPERS Board voted to support this bill, and it is still pending as of this writing. INVESTMENTS Firearm and Ammunition Manufacturer Divestment – AB 761 This bill would have prohibited CalPERS and the California State Teachers’ Retirement System from investing in companies that manufacture firearms or ammunition for a recipient other that the United States military, and would have required the sale or transfer of any existing investments in these companies. Further, this bill would have required the governing board of each retirement system to report to the Legislature any investments in these specified firearms and ammunition manufacturers, and the sale or transfer of those investments, subject to their fiduciary duty, by January 1, 2015, and every year thereafter. This measure was opposed by the Board and it died in committee. PENSION Pension Reform Exception for Transit Workers – AB 1222 (Chapter 527, Statutes of 2013) Existing federal labor law extends additional collective bargaining protections for transit workers as a condition of local and state agencies receiving transit-related federal grants. After the enactment of the Public Employees’ Pension Reform Act of 2013 (PEPRA), several labor groups filed complaints that PEPRA violated these federal labor protections. To allow federal transit grants to be released in the short-term, this bill exempts California transit employees of public employers from all provisions of PEPRA until January 1, 2015, or until a court determines that PEPRA does not violate specified federal transit labor laws, whichever is sooner. If a court determines that PEPRA does violate federal transit labor laws, this exemption would continue indefinitely. The bill also authorizes the California Department of Finance to provide $26 million in cash-flow loans to local transit agencies impacted by the federal withholding of transit grant dollars. Salary Increases Pension Phase-in – SB 102 (Chapter 397, Statutes of 2013) This bill enacted several collectively bargained side letters between the state and different employee bargaining units. Of particular interest was a provision that granted significant salary and salary range increases to specific classifications in one bargaining unit, but phased in how much of those salary increases may be counted toward an

15

employee’s pension calculation. Under this phase-in, an employee retiring within two years of the salary increase would have only a specified percentage of the increase counted for pension benefit calculation. Governmental Defined Contribution Plan Termination – SB 277 (Chapter 755, Statutes of 2013) In 1998, the state of California and state correctional employees collectively bargained for the creation of a defined contribution plan for these employees to be funded by employer contributions. In 2011, the state and the employee bargaining unit negotiated an end to those employer contributions and agreed to pursue a closure of the plan. This bill makes the necessary statutory changes to terminate this defined contribution plan, subject to Internal Revenue Service approvals, in order to allow asset distribution to plan participants. HEALTH CARE Rural Health Care Equity Program – AB 298 The bill would have reestablished the Rural Health Care Equity Program until January 1, 2015, and extend benefits to include all state employees and retired annuitants living in rural areas, as defined. It would have provided that the program be operative only to the extent funding is provided in the annual Budget Act. CalPERS did not take a position on this bill, and it failed in committee. Prescription Drugs: Biosimilar Products – SB 598 This bill would have allowed a pharmacist filling a prescription order for a prescribed biological product to select a biosimilar, if the biosimilar is approved and deemed interchangeable with the prescribed biologic product by the U.S. Food and Drug Administration, and the prescriber does not affirmatively indicate “Do not substitute” on the prescription order. For prescriptions filled prior to January 1, 2017, the bill would have required the pharmacist to notify the prescriber whether the prescription dispensed was a biological product or an interchangeable biosimilar, or enter the information in a patient record system shared by the prescriber within five business days of the selection of a biological product or an interchangeable biosimilar. The CalPERS Board voted to oppose this bill unless amended, and it was vetoed by the Governor. Large Group Health Market: Data Disclosure – SB 1182 Among other things, this bill would require health plans and insurers to submit to the Department of Managed Health Care or the California Department of Insurance for rate review any large group plan contract or policy rate increases that exceed 5 percent of the prior year’s rate. The bill also would establish new data disclosure requirements to be provided to purchasers. The CalPERS Board voted to support this bill if amended. It is still pending as of this writing. Health Care Provider Contracts: Transparency – SB 1340 Currently, contracts between health plans or insurers and hospitals are prohibited from including provisions that restrict the release of information to subscribers, enrollees, policyholders or insureds regarding the cost range of medical procedures and quality of care for inpatient or ambulatory care services performed by a network hospital or affiliated licensed facility. If enacted, this bill would recast the descriptions of entities and individuals subject to these disclosure requirements to conform to existing definitions of provider and supplier, and establish new definitions of consumer and purchaser, in order to capture all licensed health care facilities, other entities that furnish health care services, individual health care practitioners, and self-funded health coverage arrangements administered by a health plan or insurer. It would also require a health plan or insurer to provide a provider or supplier 30 days to review the methodology and data used, instead of the current 20 days. The CalPERS Board voted to support this bill. It is still pending as of this writing. BENEFITS School Member Post-Retirement Death Benefits – AB 507 Current law requires a $2,000 death benefit be paid to the designated beneficiary of a retired school member, and

16

allows school employers to elect to provide a higher benefit of $3,000, $4,000, or $5,000, with the additional employer contributions required to fund the benefit computed as a level percentage of member compensation. This bill would have eliminated these contract options and raised the required benefit to $4,000 for school member deaths occurring during 2014, and increased the benefit each year by $500 until it reaches $6,000, whereupon it would be adjusted annually in the same manner as retiree cost-of-living adjustment payments. It also would have provided school employers the ability to contract to pay a $5,000 benefit until the mandatory benefit level reaches that amount. CalPERS did not take a position on this measure. It failed in committee. Prohibition on Lifetime Healthcare Benefits for Part-time Local Elected Officials – AB 1448 This bill would have prohibited the legislative or governing body of a city, county, city and county, school board, special district, or other local government entity from granting lifetime health care benefits to an elected official who serves on a part-time basis. CalPERS did not take a position on this bill. It failed in committee. Post-employment Health Benefits: San Francisco Bay Area Rapid Transit District - AB 2582 This bill would provide an employer contribution toward annuitant health benefits for employees that are first hired on or after January 1, 2014, that worked at least 10 years for the San Francisco Bay Area Rapid Transit District, with the full contribution amount determined in a Memorandum of Understanding agreed to by its employees’ exclusive representative. Annuitants would receive 50 percent of the full employer contribution after 10 years of service with the district, increasing 10 percent annually to 100 percent after 15 years of service with the district, with a specified exception for those employees who retire for disability. CalPERS was neutral on this bill, and it is still pending as of this writing. Post-employment Health Benefits: State of California – SB 1114 This bill would have provided an employer contribution toward annuitant health benefits to state employees first hired on or after January 1, 2015, that worked at least 15 years for the state. Annuitants would receive 50 percent of the full employer contribution after 15 years of service, increasing 5 percent annually to 100 percent after 25 years of service. It also specifies that an annuitant subject to its provisions shall not receive an employer contribution that is more generous than that provided to active state employees, and requires an annuitant to use Medicare benefits to the fullest extent possible. CalPERS did not take a position on this measure. It failed in committee. Post-employment Health Benefits: City of Indio – SB 1202 This bill would have provided an employer contribution toward annuitant health benefits for employees first hired on or after October 1, 2013, who worked at least 10 years for the city of Indio, with the full employer contribution amount determined in a Memorandum of Understanding agreed to by its employees’ exclusive representative. Annuitants would receive 50 percent of the full employer contribution after 10 years of service with the city, increasing 5 percent annually to 100 percent after 20 years of service with the city. CalPERS did not take a position on this bill. It failed in committee. PEMHCA: Retiree Benefits After Reinstatement - AB 410 (Chapter 525, Statutes of 2013) This bill allows an annuitant who reinstates to active employment with a different employer, then subsequently retires from that second employer, to still enroll as an annuitant of the first employer from which he or she first retired. To be eligible, the second retirement must occur within 120 days after separation from employment from the second employer. In addition, the person would not be eligible for a post-retirement health benefit contribution from the second employer if the post-retirement health benefit contribution payable by that employer is less than the contribution payable by the first employer during his or her prior retirement.

SYSTEM GOVERNANCE As part of its continuing efforts to improve the effectiveness of the Board, CalPERS continues to take significant measures in implementing the actions approved by the Board in 2011, in response to a report released by Funston

17

Advisory Services, LLC (FAS), a strategic advisory professional services firm. CalPERS’ actions are organized in areas of focus, and include the following: Role of the Board and Committees. The Board agreed to take actions to emphasize its fiduciary responsibilities, commitment to governance improvements, and value of long-term perspective. As stated in the Board Governance Policy, the Board members and their designees completed the 2013 Annual Board Fiduciary Training and all certifications have been recorded. Board Committee Structure. The Board’s committee structure includes the following six committees:

• Board Governance • Finance and Administration • Investment • Pension and Health Benefits • Performance, Compensation, and Talent Management • Risk and Audit

The annual review of delegation resolutions for each committee was revised in April 2014. The Risk and Audit Committee reviewed its delegation resolution at its June 2014 meeting. These delegation resolutions will continue to be reviewed annually and updated as needed. Board Self-Assessment Process. In November 2013, the Board Governance Committee began the process of creating a spring-fed pool of Board governance consultants and selecting a facilitator to lead the Board’s next Self-Assessment Process to be conducted in July 2014. The process will assess the Board as a whole, as well as the Board president and vice president, individual members, committees, and committee chairs and vice-chairs. The next assessment will be conducted by the consulting firm Hewitt EnnisKnupp, a third-party facilitator. Board Self-Development Process. The goal of the Board Self-Development Process is to improve the effectiveness and efficiency of the Board. The Board continues to actively participate in trainings and workshops on various topics. Additionally, since the Board Governance Policy was implemented, a third fiduciary workshop was conducted on December 17, 2013. Board Governance Policy – Enhancement of Board Member Competencies. Proposed revisions to the Board Governance Policy were introduced in August 2013, to include a list of desirable Board member competencies. In November 2013, as continuation of its work to develop Board member competencies, CalPERS began the process of developing a Board Education Policy. The Board Education Policy was adopted in March 2014. Board Governance Policy – Ensuring an Ethical Environment. Based on an evaluation by the Board and executive team, revisions to the Board Governance Policy were adopted in March 2014, to remove the provision requiring staff to certify each year in arrears that they are free of undue influence and replace it with a requirement that staff implement a policy regarding impartial decision making and immediate reporting of undue influence. Select Policies Governing Board Conduct. In September 2013, the Board approved revisions to the CalPERS Statement of Policy and Procedures – Compliance with Bagley-Keene Open Meeting Act. The revisions clarify the responsibilities of the Board and staff under the act and mitigate the risk of inadvertent violations of both the act and the policy. The Board also adopted the Board Education Policy in March 2014. Enterprise Strategy. To assist the Board in evaluating the success of the CalPERS 2012-17 Strategic Plan, the Strategic Measures Project was initiated in 2013, which used a phased approach to support the use of enterprise-wide measurements to guide the organization. A total of 16 measures have been identified to date, and as areas of

18

strategic opportunity emerge, additional measures may be developed. We will continue to develop and refine strategic measures.

TECHNOLOGY my|CalPERS – The my|CalPERS system launched in 2011 and replaced more than 49 legacy systems and 60 support systems, as well as the entire CalPERS health and pension infrastructure. With the new system, the organization is better positioned to react and adapt to changes in the health and pension marketplaces. For example, the my|CalPERS platform enabled staff to incorporate sweeping and complex pension reform changes with the implementation of PEPRA. Highlight accomplishments since launch include:

• Conducted 32 monthly warrant rolls for more than $33 billion in pension benefits • Completed two annual member statement cycles for more than 1 million members each cycle • Processed three annual tax cycles for 650,000 retirees each cycle • Completed two annual health statement cycles for 460,000 participants each cycle

my|CalPERS Member Self Service Enhancements – CalPERS has made notable progress to improve service delivery over the past year and has completed stabilization efforts, resulting in continual refinement of functionality that directly benefits our members, employers, and staff. Member self service enhancements this year include:

• Expanded online health services to support 2014 health plan options, new carriers, and more detailed plan information

• Launched online member surveys for beneficiary changes, retirement estimate calculations, and other self-service capabilities

• Implemented Actuarial Option Factor changes for retirement benefits for state agencies, schools, and public agencies

In addition, there have been significant enhancements to response times for internal staff, showing an average improvement of 20 percent for the top 100 online screens accessed. CalPERS Security Roadmap – The Security Roadmap Program (SRP) is an ongoing, multi-year effort that will ensure CalPERS technology remains secure against the constantly changing landscape of threats. This program includes prioritized yearly initiatives and deliverables focused on implementing the latest preventative measures. SRP was implemented to manage, measure, and track known information security vulnerabilities and gaps, as well as provide a mechanism to continuously and proactively manage enterprise information security risks. Now in year three of implementation, the SRP team has successfully provided numerous security controls, all on budget and on time, resulting in a greatly reduced information security risk profile. A sampling of our successful SRP implementation includes:

• Network/EndPoint Data Loss Prevention • Web Filtering Gateway • eDiscovery – Streamlines the responses to electronic discovery requests and ensures the appropriate chain of

custody for discoverable electronic mail • Non-signature based protection against malicious mobile code • Mobile device management

19

• Centrally managed encrypted USB devices • Cloud-based policy management tools • Improved patch management processes • Customized periodic security assessment process

Business Intelligence – With the increased demand for timely, reliable, and accessible information, CalPERS initiated an enterprise-wide Business Intelligence (BI) program in 2011, to enhance risk-intelligent decision making. A five-year roadmap was developed with the goal of incrementally maturing the CalPERS BI program across the organization. With a collaborative partnership between all program areas and technology, the organization is utilizing BI for strategic performance measurement, tactical analysis, and enhanced operational services for its members and employers. BI requires a broad collection of knowledge, skills, processes, practices, and technology to extract information from a wide variety of data sources for better decision making. BI allows for immediate access to accurate information by distilling member and employer trends. This results in:

• Timely and enhanced insight into member needs • Innovative approaches to services • Comprehensive assessment of proposed legislation and policy changes

BI is less about tools and more about how people use knowledge, skill, and information to become more business intelligent. CalPERS will use BI to transform our business, improve operational efficiency and effectiveness, and support innovation to meet strategic goals. Enterprise Content Management – The Enterprise Content Management (ECM) initiative is a multi-year effort that involves implementing an ECM system to centralize enterprise content, improve content structure, and establish governance processes to improve Intranet usability by June 2015. ECM content transition activities include training curriculum for content evaluation, user experience, information architecture, CalPERS brand, style, and SharePoint authoring. There are three areas of focus for this project:

1. Internal content/design improvement usability (intranet) 2. New social media (another internal tool/platform) 3. Website usability (external content/design improvement)

Over the past year, ECM has been focused on development of an enhanced governance model to support the future state of ECM, including collaboration, content publishing, and a social networking strategy. Technology enhancements included infrastructure upgrades to support future growth and the addition of collaboration sites. Intranet content migration is scheduled to continue through June 2015. Also part of ECM is The Spark, the CalPERS internal online community platform. Designed to promote innovation, collaboration, openness, and transparency, The Spark is an essential business communication tool, enhancing CalPERS core values. The Spark empowers employees to share their ideas and expertise, promotes knowledge transfer, and builds relationships across the organization. The Spark provides an online setting for employees to communicate about projects and topics that are important to CalPERS. As a social media tool, it enables employees to collaborate, discuss, and exchange ideas in real time. The Spark can also be used to host virtual town halls.

20

Along with the ability to post messages across the CalPERS organization and network in groups, The Spark also uses the Socialcast Mobile App for instantaneous on-the-go updates. The Spark fosters a sense of community and helps break down organization barriers. Employees can quickly connect with peers and senior leaders, striking up conversations across the enterprise, from Sacramento to Regional Offices throughout the state. The ECM initiative is also focused on improving the usability of the CalPERS external-facing website. Employing a user-centric approach, this initiative will focus on examining current usage patterns and the usability of the site, then creating a newly designed information architecture and user experience that provides easy and intuitive access to the most-needed information; improved search capabilities; and new content and tools to help customers in decision-making processes. This initiative will also involve replacement of the existing content management system and creation of a fully responsive design for the website, optimized for mobile devices and tablets. This initiative is scheduled to continue through June 2015, as part of the Service Delivery Tranformation Roadmap. Interactive Voice Response System – To enhance the CalPERS customer experience, a new and improved Interactive Voice Response (IVR) system was expected to launch on June 30, 2014. The new system establishes a foundation for business-driven Customer Contact Center (CCC) functionality enhancements and introduces high availability and failover capabilities. CCC and Information Technology staff worked collaboratively to implement an improved routing architecture and navigation structure that will route incoming calls to the correct agents using skills-based routing technology. Following a user-centered design process, a series of usability tests with a wide range of members, helped to identify areas in the current system that were difficult or confusing to navigate. The tests validate improvements in user satisfaction and confidence using the new design. The recorded messages and voice prompts will be more clear, concise, and easy to understand. Throughout the call, customers will have the option to press zero to speak to a representative, and will have consistent navigation options to get back to the main menu. The new system follows best practices for IVR, which recommends no more than three to five options per menu level. To connect a caller as quickly as possible to the most appropriately-trained CCC agent, the new IVR structure employs skills-based technology. Agents’ specialties include retirement, health, disability, and death. The improved structure will help CalPERS members and employers navigate the CalPERS IVR system with greater ease. The success of this implementation is the result of a truly collaborative partnership between the Information Technology Services Branch, Customer Service & Outreach Division, and the Office of Public Affairs. CalPERS Identity & Access Management – The CalPERS Identity and Access Management (CalIAM) Project, which we successfully implemented in February 2014, resulted in the creation of an identity and access management infrastructure that designed to support the CalPERS enterprise. CalIAM provides improved fraud protection, proactive risk management, personalized verification of authenticity, and ease of use for password changes. CalIAM enables CalPERS to increase operational efficiency through the consolidation of identity and access management functions and processes, while achieving the primary benefit of increasing the security of critical applications and sensitive data across the enterprise. The state-of-the-art infrastructure provides a solid basis to support future system integrations and provides increased security for external members and business partners. The enhanced self-service functionality makes it easier for our members and business partners to edit their account profiles and reset their passwords, and reduces call volume to the Customer Contact Center.

21

LITIGATION / CORPORATE GOVERNANCE In re City of Stockton, California In June 2012, the city of Stockton filed a voluntary petition under Chapter 9 of the United States Bankruptcy Code, commencing the bankruptcy case which is currently pending in the U.S. Bankruptcy Court for the Eastern District of California, Case No. 12-32118. The initial issues in the case revolved around whether the city was eligible to remain in bankruptcy. Capital markets creditors, principally bond insurers, challenged the city’s eligibility. The arguments made at the eligibility phase were that unless the city would seek to impair its obligations to its pension system, CalPERS, the city had not fulfilled its obligations to negotiate with creditors and to file the case in good faith. In a June 12, 2013, opinion, the bankruptcy court overruled the capital markets parties’ objections and determined that the city was eligible to remain in bankruptcy. In its ruling, the bankruptcy court found that the objecting bond insurers had not acted in good faith in their pre-filing negotiations with the city and found that it was not necessary that the city consider impairment of pensions in order to be eligible. The court also issued an early opinion in the case, approving the city’s rejection of its obligations to continue to pay for retiree health care. Prior to and after filing its bankruptcy case, Stockton was able to negotiate agreements with all city unions, retirees, and other major creditors, including the two insurers of the city’s largest bond issues, who opposed the city’s eligibility for bankruptcy. The city proposed a plan of adjustment premised on the settlements. The proposed plan of adjustment fully ratifies its obligations to CalPERS. One bondholder group, the Franklin Funds, continues to oppose the city’s plan. The city’s plan proposed to pay Franklin approximately one penny on the dollar. In a trial triggered by the opposition of Franklin, the bankruptcy judge heard arguments about whether the city’s plan of adjustment should be confirmed by the court. Franklin’s principal arguments at trial were that the city has sufficient funds to pay it in full and certainly has sufficient resources to pay Franklin more than one penny on the dollar. Franklin argued that was unfairly discriminatory to pay other creditors significantly more than Franklin, while discharging virtually all of the Franklin claim. In particular, Franklin argued that it was unfair to continue to contribute a significant percentage of the city’s budget to CalPERS for pensions, when Franklin is to be paid very little under the plan. Stockton argued that its CalPERS pensions are essential to be competitive in the job marketplace, particularly for police. The employee share of debt reduction will be pay cuts, no retiree health care, and a state law giving new hires lower pensions. CalPERS, the Retirees Committee, and labor unions supported the city’s plan and, with the city, have requested that the court refrain from making an advisory ruling on whether pensions can theoretically be impaired in a municipal bankruptcy case. A decision on certain aspects of plan confirmation, in particular valuation of Franklin’s collateral, is expected to be announced on July 8, 2014. The court may address other aspects of plan confirmation at that time as well. In re City of San Bernardino, California In August 2012, the city of San Bernardino filed a voluntary petition under Chapter 9 of the United States Bankruptcy Code, commencing the bankruptcy case which is currently pending in the U.S. Bankruptcy Court for the Central District of California, Case No. 6:12-bk-28006 MJ. Immediately after filing its case, the city unilaterally reduced its pension payments to CalPERS, and deferred payments in a principal amount of approximately $13.5 million over the first year of the case. In July 2013, the city resumed making its full regularly scheduled contribution payments to CalPERS, but did not address the deferred amounts. CalPERS and certain of the labor unions pressed the city for reliable financial information early on in the case,

22

and CalPERS and one of the unions objected to the city’s eligibility to file for Chapter 9 protection. CalPERS’ objection to eligibility was based on arguments that the city did not file its case with an intent to confirm a plan and that the city had not filed its case in good faith. CalPERS argued that the city had filed the bankruptcy case principally to delay its creditors, and the city had not commenced the process of outlining a plan of adjustment of its debts even long after the case was filed. The bankruptcy court ruled in favor of the city and determined that the city was eligible. CalPERS appealed that decision and obtained permission to have the appeal heard directly by the Court of Appeals for the Ninth Circuit. CalPERS and the city recently jointly announced that the parties have agreed to delay the briefing schedule on the eligibility appeal. The safety unions, police, and fire, have been involved in litigation with the city over whether their collective bargaining agreements can be rejected in bankruptcy. Motions by the city to reject the collective bargaining agreements and by the unions for relief from stay to proceed with labor negotiations under state law, have been pending for many months, but have not yet been calendared for decision by the court. The bankruptcy court ordered the principal parties in the case to attend judicially supervised mediation sessions before bankruptcy Judge Gregg Zive, a Reno, Nevada-based senior judge. The parties have been engaged in mediation with Judge Zive since November, 2013. Elma Sanchez, Holly Wedding, Richard M. Lodyga and Eileen Lodyga, individually and on behalf of all others similarly situated, v. California Public Employees’ Retirement System, et al. Plaintiffs Elma Sanchez, Holly Wedding, Richard M. Lodyga, and Eileen Lodyga (Plaintiffs) filed this putative class action against CalPERS and CalPERS Board of Administration members Rob Feckner, George Diehr, Michael Bilbrey, Richard Costigan, J.J. Jelincic, Henry Jones, Priya Mathur, and Bill Slaton (Board Defendants) in Los Angeles Superior Court. Plaintiffs’ claims all challenge the propriety of announced rate increases on their long-term care coverage. The original complaint alleged four causes of action against CalPERS for breach of contract, breach of the implied covenant of good faith and fair dealing, rescission, and declaratory and injunctive relief. On October 9, 2013, CalPERS filed a demurrer to the original complaint. Plaintiffs then voluntarily amended their original complaint, filing a First Amended Complaint on December 17, 2013, and a Corrected First Amended Complaint (FAC) on January 10, 2014. The FAC added the Board Defendants as named defendants in the case. The FAC alleges a cause of action for breach of fiduciary duty against both CalPERS and the Board Defendants and four additional causes of action against CalPERS for breach of contract, breach of the implied covenant of good faith and fair dealing, rescission, and declaratory relief. On April 2, 2014, CalPERS and the Board Defendants demurred to each cause of action alleged in the FAC on the grounds that they have governmental immunity from suit on Plaintiffs’ claims for breach of fiduciary duty and rescission, and none of the claims stated a cognizable claim for relief. On May 29, 2014, the trial court issued an order overruling the demurrer. In that order, the trial court ordered CalPERS and the Board Defendants to answer the FAC on or before June 11, 2014. However, the parties then entered into a joint stipulation extending the time for CalPERS and the Board Defendants to answer the FAC until June 26, 2014. On June 24, 2014, CalPERS and the Board Defendants filed a petition for writ of mandate in the California Court of Appeal, seeking an order directing the trial court to vacate its May 29 order overruling CalPERS’ and the Board Defendants’ demurrer and to enter an order sustaining, without leave to amend, the demurrer in its entirety. In the writ petition, CalPERS and the Board Defendants also sought a stay of all of the trial court proceedings, which would include discovery, pending the resolution of the writ petition. To date, some limited document discovery has taken place. CalPERS and the Board Defendants have responded to document requests and have

23

produced documents to Plaintiffs. CalPERS v. Richard S. Fuld Jr. et al. CalPERS initiated this litigation in the Northern District of California for violation of the federal securities laws to recover losses on its purchases of common stock and bonds of Lehman Brothers Holdings, Inc. (LBHI) between June 12, 2007, and September 15, 2008. CalPERS filed its complaint in February 2011, alleging violations of the federal securities laws against certain Lehman Brothers, Inc.'s (LBI) officers, directors, and underwriters, who purportedly made materially false and misleading statements about its financial condition causing LBI's stock and bond prices to be artificially inflated. In December 2011, CalPERS added Ernst & Young to the case after the action was transferred to the Southern District of New York. On August 9, 2013, the court issued a dismissal order in favor of most of the underwriter banks, and dismissed the Securities Act claims on five of the six offerings at issue. In October 2011, CalPERS recovered $11 million from the officer/director defendants. In June 2013, CalPERS settled with underwriter Cabrera Capital Markets, LLC for $2.1 million. In October 2013, CalPERS settled with Loop Capital Markets LLC for $2.5 million. In May 2014, CalPERS settled with Ernst & Young for $12.75 million. The case remains active as to Williams Capital Management. CalPERS v. Moody’s Corp. et al. and Related Cases CalPERS initiated this litigation in state court to recover losses incurred in structured investment vehicles (SIVs) that were acquired as part of CalPERS’ securities lending program. In 2007 and 2008, the SIVs collapsed, defaulting on their obligations to CalPERS and other senior note holders. CalPERS filed its complaint against Moody's, Standard & Poor's, and Fitch on July 9, 2009, alleging negligent misrepresentation and interference with prospective economic advantage by the rating agencies. In October 2010, defendants filed an anti-SLAPP (Strategic Lawsuit Against Public Participation) motion which was ultimately denied on January 11, 2012. On March 8, 2012, defendants Moody's and Standard & Poor's each filed a notice of appeal. On July 30, 2012, defendants Moody’s and Standard & Poor’s (Fitch was voluntarily dismissed on August 25, 2011) filed their opening brief with the California Court of Appeal. CalPERS filed its opening opposition brief with the appellate court on September 13, 2012, and all additional briefing by the parties was completed on or before December 19, 2012. On April 9, 2014, the appellate court heard arguments on the appeal. On May 23, 2014, the Appellate Court affirmed the trial court’s order and found, among other things, that dismissal pursuant to the anti-SLAPP statute is not warranted. Discovery is expected to commence shortly. On February 5, 2012, the California Attorney General filed a lawsuit in San Francisco Superior Court against Standard & Poor’s, alleging that Standard & Poor’s violated California’s False Claims Act, Unfair Competition Law, and False Advertising Law in connection with credit ratings issued on the SIVs and certain residential mortgage-backed securities purchased by CalPERS between 2004 and 2007 (Attorney General Case). On March 11, 2013, the Attorney General’s Office filed a Notice of Related Case informing the Superior Court that the CalPERS Case was related to the Attorney General Case. No trial date has been set for this case. Centinela Capital Partners, LLC v. California Public Employees’ Retirement System, et al. Cesar Baez v. California Public Employees’ Retirement System On December 21, 2012, Cesar Baez filed an action against CalPERS and Joe Dear, alleging four causes of action: (1) intentional interference with contractual relations; (2) intentional interference with prospective economic advantage; (3) negligent interference with prospective economic advantage; and, (4) discrimination. These claims all relate to CalPERS’ decision not to invest in Capital Link III, which would have been managed by Centinela.

24

Separately, Centinela filed suit against CalPERS and Joe Dear on March 28, 2013, alleging: (1) breach of contract; (2) promissory estoppel; and (3) discrimination. Like Baez’s complaint, Centinela’s causes of action all relate to CalPERS decision not to invest in Capital Link III. All of the causes of action brought against CalPERS and Joe Dear by Baez and Centinela have been dismissed by the Los Angeles County Superior Court without leave to amend. Both Baez and Centinela filed notices of appeal. A decision from the Court of Appeal regarding Baez is not expected until at least the end of 2014. It is possible that both appeals will not be resolved until sometime in 2015. More recently, Centinela filed suit against CalPERS and the replacement manager of the Capital Link funds (formerly managed by Centinela) for: (1) breach of contract; (2) declaratory relief; and (3) accounting. This action relates to a contractual interpretation as to whether Centinela must continue to fund their percentage interest share in Capital Link I and Capital Link II. Discovery in that matter has just begun. Tribune Company Multi-District Litigation & Related State Court Litigation (Deutsche Bank Trust Company v. CalPERS et al.) CalPERS is subject to several suits relating to the leveraged buyout and subsequent bankruptcy of the Tribune Company, a publicly-traded company in which CalPERS held shares at the time of the buyout. In the first state court action involving CalPERS, plaintiffs, as trustees of certain creditors of the Tribune Company, allege that the buyout unjustifiably enriched CalPERS and others as former shareowners of the Tribune Company. Plaintiffs filed this action in 2011, to avoid and recover, as constructively fraudulent conveyances, all transfers of any proceeds received by CalPERS and other defendants in connection with the buyout. This action is currently stayed, pending certain proceedings in the Tribune Company Multi-District Litigation in the Southern District of New York. The Tribune Company Multi-District Litigation is the consolidation of dozens of other fraudulent conveyance claims filed across the country, including two cases where CalPERS has been named and served as a defendant. Currently, a motion is pending in the multi-district litigation action to determine whether the proceeds of publicly-traded securities provided to shareholders in exchange for their shares re-acquired by issuing companies in leveraged buyouts can be subsequently recaptured by creditors under state law fraudulent transfer theories. A principal focus of this pending motion is whether a bankruptcy code exemption, exempting settled securities transactions from being unwound, should be applied in a non-bankruptcy context.

FUNDING ISSUES ASSSET LIABILITY MANAGEMENT In February 2014, the Board made important decisions regarding the funding of pension benefits at CalPERS. Specifically, the Board adopted relatively modest changes to the current asset allocation that will reduce the expected volatility of investment returns while holding the fund’s long-term assumed rate of return at 7.5 percent. The Board also adopted more significant changes to the actuarial assumptions, most importantly, the inclusion of future mortality improvements. Finally, the Board approved a financing method which determines when and how quickly these changes will impact employer contributions. The actuarial assumptions adopted by the Board are designed to ensure greater sustainability and soundness of the pension fund, and will be better at predicting future experience, resulting in more secure retirement benefits in the decades to come. The current experience study was based on demographic CalPERS data for years 1997 to 2011. The study focused on recent patterns of termination, death, disability, retirement, and salary increases. For the state plans, the new assumptions were implemented in the June 30, 2013 valuation, setting the employer contribution rates for Fiscal Year 2014-15. These new assumptions will apply beginning with the June 30, 2015 valuation for the schools pool, setting employer contribution rate for Fiscal Year 2016-17. For public agencies, the new assumptions will apply

25

in the June 30, 2014 valuations, setting rates for Fiscal Year 2016-17. In April 2013, the CalPERS Board approved new actuarial policies that are aimed at returning the system to fully funded status within 30 years. The new policies include a rate-smoothing method with a 30-year fixed amortization period for gains and losses. The amortization would have a five-year ramp-up of rates at the start and a five-year ramp-down at the end. In addition to closing the funding gap in 30 years, the new method will also help avoid large increases in employer contribution rates in extreme years, while maintaining a reasonable level of change in normal years. Based on investment return simulations performed for the next 30 years, increasing contributions more rapidly in the short term is expected to result in an almost 25 percent improvement in funded status over a 30-year period. These new policies will apply beginning with the June 30, 2014 valuation for the state and schools pools, setting employer contribution rates for Fiscal Year 2015-16. For public agencies, the new policies will apply in the June 30, 2013 valuations, setting rates for Fiscal Year 2015-16. The June 30, 2013, actuarial valuation of the state and schools plans was completed in April 2014. Due to the effects of the 13.2 percent rate of return and the change in assumptions for the state plans, the funded status increased by as much as 1.7 percent for some and declined by as much as 1.4 percent for others. The combined funded status for the state plans remained the same at 66.1 percent and the funded status for the schools pool increased from 75.5 percent to 80.5 percent. CERBT OPEB FUND The Other Post-Employment Benefits (OPEB) fund, administered through the CalPERS-administered California Employers’ Retiree Benefit Trust Fund (CERBT), contracted with 37 new employers through the fiscal year ending June 30, 2013, for a total of 376 participating employers. Funding levels for employer OPEB liability reached 11.8 percent. Since June 30, 2013, the OPEB trust growth has increased, both in terms of newly contracted employers and in total assets. The expansion of portfolio choices from one to three in late 2011 was well received by employers, and some who were more risk averse moved their assets to a less volatile portfolio, despite the impact on their discount rate. LONG-TERM CARE FUND The Long-Term Care Fund The Board continued its efforts to achieve stabilization of the Long-Term Care Fund during the fiscal year, concluding a series of 5 percent premium increases for certain policy types that began in 2011, and continued into 2014. An 85 percent premium increase for policies with certain benefits is planned for implementation in 2015-16. A more conservative asset allocation was adopted to reduce the percentage of equities and the fund discount rate was adjusted to 5.75 percent. The current status of the CalPERS Long-Term Care Program as of June 30, 2013, is a surplus of 19.66 percent and a fund balance of $3.69 billion.

MODEL PRACTICES THOUGHT LEADERSHIP CalPERS created a new division in 2011 to insure it has information to support retirement security, proactively address system issues, and demonstrate retirement industry leadership. This division fulfills its mission, in part, by writing white papers to educate stakeholders about pensions and retirement. During Fiscal Year 2013-14, CalPERS published three white papers. In December 2013, CalPERS released a white paper highlighting the impact of CalPERS investments and pension benefits on the California economy. This paper highlights $20.7 billion of investments in California. In addition,

26

CalPERS pension benefits generate $10.85 in economic activity in California for every taxpayer dollar contributed to the system. To demonstrate the impact at the local level, interactive maps demonstrating the impact of pension benefits on each legislative district have been created and are accessible on our website. In April 2014 CalPERS also published two white papers which focused on the impact of PEPRA: California Public Employee Retirement Benefits – Assessing Compensation Changesand The Emerging Role of Defined Contribution Plans for California Public Employees. These papers assess the impact of PEPRA on a typical public employee and highlight the increased necessity for saving early and consistently during an employee’s working career. The papers estimate that a hypothetical PEPRA employee would receive $435 less per month in retirement income than an employee hired before pension reform who had the same years of service, retiring at age 62, due to the benefit formula changes. The papers also estimate that the PEPRA employee would need to save an additional $483 to $682 per month to make up the difference in pension funds when compared to a non-PEPRA member, depending on the assumed investment return. Alternatively, the member could work an additional 2.5 years to make up the difference. PENSION BELIEFS At its May 2014 Board meeting, the Board of Administration adopted a set of Pension Beliefs that articulates the Board’s views on public pension design, funding, and administration. Set in the context of our mission, vision, and core values, the 11 Pension Beliefs ensure that staff is aligned to and understands the Board’s perspective in areas critical to our external interaction, such as federal policy development and legislation. The Pension Beliefs will be used by the CalPERS Board members, executives, and staff in communications with members, employers, policy makers, other pension systems, the media, and other stakeholders. The Board expresses through the Pension Beliefs its perspectives on how pensions and system operations should be approached for all, not just how CalPERS should operate. Our view is that these beliefs can benefit other pension systems and policy leaders during the ongoing state and national policy debates about pensions and retirement security. Some of the beliefs are:

• Pension benefits are deferred compensation and the responsibility for appropriate funding should be shared between employers and employees.

• A retirement system must meet the needs of members and employers to be successful. • Inadequate financial preparation for retirement is a growing national concern and all employees should have

effective means to pursue retirement security. • As a leader, CalPERS should advocate for retirement security for America’s workers and for the value of

defined benefit plans. • Retirement system decisions must give precedence to the fiduciary duty owed to members, but should also

consider the interests of other stakeholders.

The CalPERS Pension Beliefs can be found at: http://www.calpers.ca.gov/eip-docs/about/pubs/pension-beliefs.pdf LONG-TERM CARE PROGRAM The CalPERS Long-Term Care (LTC) program launched an open application period for new applications in December 2013. The open application period is continuous with no closing date. The LTC program was last open to new applications in 2008. The new fourth generation of long-term care product is designed to provide innovative, contemporary coverage with the flexibility to meet the needs of a wide variety of people. The new product features: more choices of coverage amounts (daily/monthly); benefits that make it easier to stay at home; several affordable options to keep up with rising service costs; limited benefits for covered care outside the United States; and a spousal and domestic partner discount.

http://www.calpers.ca.gov/eip-docs/about/pubs/pension-beliefs.pdf

27

The new LTC product is available to California public employees and retirees, as well as their immediate family members. Eligible family members include spouses, parents, parents-in-law, adult siblings, and adult children. California public employers include, but are not limited to, the state of California and all state departments, state Assembly and Senate, judicial systems, school districts, cities, counties, special districts, public universities, and community colleges. HEALTH PLAN PROCUREMENT To improve its ability to deal with California’s complicated and challenging health care marketplace and begin to lower costs and improve member health outcomes, CalPERS examined its health benefit design and care delivery system. In order to maintain program sustainability and continue to provide quality affordable health care, we solicited proposals from health plans that offer high-quality health benefits and demonstrate the ability to meet the needs of members and their dependents. Contracts were awarded to the following Health Maintenance Organization (HMO) health plans: Kaiser Permanente, Anthem Blue Cross, Blue Shield of California, Health Net, Sharp Health Plan, and United Healthcare. Anthem Blue Cross was also awarded the contract to administer CalPERS’ self-funded Preferred Provider Organization (PPO) health plans. One of the most important aspects of these procurements is to improve CalPERS’ ability to mitigate rate increases over the long term. CalPERS focuses on strategies and services that emphasize the Integrated Healthcare Model: intensive case management; reduction in inappropriate health care, including readmissions and avoidable complications; shared decision-making between patient and physician; incentives for chronic disease management; strong health information technology infrastructure; and financial risk-sharing arrangements between plans and providers. Key elements of this approach also include the new flex-funding process for HMO health plans (full capitation or a hybrid capitated/self-funded fee for service payments), risk adjusting premiums, and multiple service coverage areas. CalPERS | COMPARE In February 2014 the Board formalized a partnership with Anthem Blue Cross and Castlight Health to deliver a consumer-friendly health care shopping platform to members and dependents covered by its PPO basic (non-Medicare) plan. The platform, branded CalPERS | Compare, allows members and dependents of these health plans to shop for doctors, hospitals, medical tests, and procedures based on cost, facility quality, physician quality, patient satisfaction, and convenience. Because PPO plan subscribers can select their health care providers without a referral, they can use CalPERS | Compare information to guide their health care provider choices. An extensive educational outreach effort to members will precede launch of the service in mid-2014. POPULATION HEALTH MANAGEMENT CalPERS expects health plan providers to improve medical practice based on outcomes, develop competitive approaches to purchasing, focus on patient-centered care, improve population health and wellness, and set benchmarks and targets for improvement. As part of the CalPERS strategic goal to improve long-term pension and health benefit sustainability, we consider new or proven approaches in population health management (PHM) that reduce health care costs and improve health outcomes. CalPERS’ approach to PHM considers how health care decisions can be enhanced and powered by the use of integrated analytics, coordination of the multidisciplinary care team, community engagement, and individual empowerment across the continuum of care at every health status level. CalPERS staff surveyed health plans on its current population health models. We are developing a PHM model that incorporates the Triple Aim goals of improving the patient experience of care (improving quality and satisfaction; improving the health of populations; and reducing the per capita cost of health care). Throughout 2015, CalPERS staff will work with each of its health

28

plans to integrate a coordinated evidence-based approach to population health. HEALTH BENEFITS PURCHASING INITIATIVES In January 2011, the Board endorsed the Health Benefits Purchasing Review project to develop a three- to five-year business plan. The project was launched in March 2011, to evaluate health plan benefit design and purchasing strategies for the CalPERS Health Benefits Program to ensure CalPERS meets future needs of employers and members. The year-long evaluation culminated at the January 2012 Board meeting, when the Board approved 21 Health Benefits Purchasing Initiatives related to influencing health care delivery, improving health outcomes, and delivering sustainable programs. CalPERS is committed to procuring future health benefits that: 1) promote more integrated health care models, patient management across the continuum of care, and online real-time health IT infrastructure; 2) provide more quality and cost transparency; and 3) use evidence-based protocols. In April 2012, staff began implementing 15 initiatives, most of which are interwoven in the HMO and PPO plan procurement. These include risk adjustment, evidence-based medicine, integrated health care, and transparency. Dependent Eligibility Verification Project Initiative 16, the Dependent Eligibility Verification (DEV) project, began in spring 2012. Its goal is to verify the eligibility of enrolled dependents receiving CalPERS health benefits. As part of the project, regulations were approved in February 2013 granting the Board authority to provide amnesty to employees and annuitants who voluntarily terminated their ineligible dependent(s) during a three-month amnesty period (March through June 2013). More than 6,700 dependents were voluntarily disenrolled during this period, resulting in more than $41 million in savings to CalPERS and employers. The verification phase of the DEV project requires active and retired members to provide documentation supporting their dependent’s eligibility for CalPERS health coverage. In May 2013, CalPERS awarded a contract to HMS Employer Solutions to conduct the verification phase, which started on July 26, 2013. CalPERS has over 738,000 dependents enrolled in its Health Benefits Program. Verification of these dependents is expected to take 20 months and incorporate nine separate verification cycles. As of June 2014, CalPERS had completed disenrollment activities for three of the nine verification cycles (two for state active members and one for state retiree members) and had disenrolled more than 6,600 ineligible dependents. Removing ineligible dependents from coverage will help CalPERS manage overall plan cost and promote the sustainability of health benefits. Public Agency Health Benefit Design Needs Assessment Originally named “Regulatory Flexibility for Public Agencies” (Initiative 21), this project was renamed Public Agency Health Benefit Design Needs Assessment (PAHBDNA) in the Spring of 2014. The scope of the project was expanded to include a review of health plan regions for contracting agencies and input on the development of a statewide health/wellness management platform. The goal of the PAHBDNA project is to engage employers, members, and member organization in evaluating the current health benefit design and legislative requirements, and to determine how those align with employer and member needs. CalPERS hopes to identify specific areas of need and/or concern pertaining to its health program and benefit design, and solicit input from stakeholders on how CalPERS can better serve them. Health and Wellness Platform The Health and Wellness Platform will use evidence-based programs with measurable outcomes. Its goal is to create a health and wellness platform with flexible options that engage employers, members, and providers. Some of the health and wellness efforts currently underway at CalPERS are:

29

• Partner with offices of the State Controller, the State Treasurer, California Department of Human Resources, and Service Employees’ International Union, Local 1000, to implement a collaboration that improves the health and wellness of employees.

• Gauge employer interest in and determine current implementation efforts of local wellness programs. A survey was conducted in early 2014 as part of the PAHBDNA project. The majority of responding public agencies stated an interest and desire for CalPERS to sponsor a statewide health and wellness platform.

• Promote and administer wellness programs for our members. CalPERS currently has six contracted health plans. Each plan offers a variety of unique services, and members may access the wellness services of the plan in which they are enrolled. The plans are responsible for promoting their wellness programs and utilized their own contracted providers, products, and services with minimal oversight from CalPERS. In plan year 2014, the health plans agreed to work with CalPERS, employers, and retiree groups to implement health and wellness programs for both active and retired employees and will work with employer groups to develop worksite wellness programs.

EMPLOYER GROUP WAIVER PLAN In 2013 CalPERS converted its Blue Shield of California HMO, and PPO Supplement to Medicare prescription plans from the Medicare Part D Retiree Drug Subsidy (RDS) program to the Medicare Part D Employer Group Waiver Plan (EGWP). The Patient Protection and Affordable Care Act provides greater financial reimbursements for EGWP services, and CalPERS has been able to pass on the cost savings to Medicare beneficiaries through lower premiums. The estimated additional savings realized from EGWP is $80 million per year for CalPERS Blue Shield of California HMO and PPO plans combined. Newly contracted health plans also participate in EGWP.

INVESTMENT ACTIVITY/INITIATIVES The CalPERS Pension Fund earned a net 13.2 percent return in the fiscal year ending on June 30, 2013, with the total net position for the fund at $262 billion. The fund outperformed its benchmark by 135 basis points. The positive results during the year also pushed the three-year return to 11.3 percent, exceeding the time period’s benchmark return by 23 basis points, the first time it has outperformed its three-year benchmark since 2007. Strong returns in global equity markets and the real estate portfolio were contributing factors to the performance. Investments in domestic and international stocks returned 19.0 percent, outperforming the global equity benchmark by 73 basis points. Income generating properties in the real assets portfolio, including office, retail, and industrial assets, contributed to a total return of 11.8 percent, outperforming its benchmark by 88 basis points. This is the third consecutive year of positive returns in real assets, continuing the stabilization and recovery in that asset class. The fund has since continued on a positive trend in the current period, earning a 13.1 percent return through the first three quarters of the fiscal year ending March 31, 2014. In September of 2013, the Board adopted a set of 10 Investment Beliefs intended to provide a basis for strategic direction of the investment portfolio, inform organizational priorities, and ensure alignment between the Board and staff.

The CalPERS Investment Beliefs can be found at: http://www.calpers.ca.gov/eip-docs/about/pubs/board-offsite.pdf In February of 2014, the Board also adopted a new strategic asset allocation after undergoing six workshops with staff, external stakeholders, and industry experts as part of the triennial asset liability management review process. As part of an effort to integrate environmental, social, and governance factors into investment decision making across the portfolio, CalPERS launched the Sustainable Investment Research Initiative. This project seeks to drive

http://www.calpers.ca.gov/eip-docs/about/pubs/board-offsite.pdf

30

thought leadership that will inform and advance understanding of sustainability factors and the impact they may have on companies, markets, and the financial services industry from the perspective of a global institutional investor. Reducing costs remains paramount in the Investment Office. Through these efforts, we have established recurring annualized savings of more than $100 million from cost-effectiveness initiatives since 2011. The savings have been driven by increased in-house management of investment portfolios, negotiating more favorable terms with external investment managers, and reducing reliance on consultants. CalPERS remains committed to executing the work outlined in its Emerging Manager Five-Year Plan, designed to detail strategic efforts related to emerging manager investment strategies in the areas of portfolio management and external outreach. In March 2014, Investment Office staff delivered the Year-One Emerging Manager Annual Report. CalPERS is a long-term investor and continues to improve upon its ability to deliver world-class results for years to come. The organization posted 20- and 30-year returns of 7.6 percent and 9.4 percent, respectively, both higher than its assumed long-term average annual return rate of 7.5 percent. CalPERS recognizes that according to research, more than 90 percent of the variation in investment returns of a large well-diversified pool of assets can typically be attributed to asset allocation decisions. The revised strategic asset allocation approved by the Investment Committee in 2014 is shown below. New Asset Allocation Policy Effective 7/1/2014

The Investment Office had a number of other notable achievements during the reporting period. Specifically, the CalPERS’ Investment Office:

• Met with the Honorable Mary Jo White, Chair of the U.S. Securities and Exchange Commission, to express support for the commission's efforts to improve accountability, transparency, and ethical responsibility in the capital marketplace. CalPERS advocated for advancing universal proxy access, enhanced disclosure for board quality and diversity, completion of Dodd-Frank rulemaking tied to executive compensation provisions, climate risk disclosure, and disclosure of policies for corporate board decision making on charitable and political expenditures.

• Launched an engagement of 19 energy sector portfolio companies to address the integration of sustainability performance (environmental, social, and governance) into corporate executive compensation packages and incentive plans.

• Monetized the 2013 Focus List companies. • Completed the annual Principles for Responsible Investment Framework - an Investment Office-wide survey

to report on how CalPERS implements responsible investment. • Voted more than 10,000 company proxies consistent with CalPERS’ Global Principles of Accountable

Corporate Governance.

31





54 % 20 % 9.8 % 10.8 % 4.4 % 2.2 % 0 % 0 %

DEFINED CONTRIBUTION PLANS SUPPLEMENTAL INCOME PLANS The Supplemental Income Plans (SIP) consists of the CalPERS Supplemental Income 457 Plan, State Peace Officers’ and Firefighters’ Supplemental Plan, Supplemental Contributions Plan, and Placer County 401(k) Plan. The CalPERS Supplemental Income 457 Plan is a deferred compensation retirement savings plan that public agency and school employers may adopt and offer to their employees to help them reach their retirement income goals.

Based on information obtained from customers about their supplemental savings preferences, a new SIP investment fund line-up design was developed. The new investment fund lineup offers a diverse range of alternatives with materially different risk and return characteristic with broad market exposures, avoiding and overly complex fund lineup. This was presented and approved by the CalPERS’ Pension and Health Benefits Committee on May 14, 2013. Based on this approval, the fees associated with the SIP investment changes were determined and a process to communicate these changes to participants of the various funds was implemented. The complete transition of the fund and fee changes was completed on October 7, 2013.

The CalPERS 457 Plan has 26,990 participants from 747 contracting agencies for a total of $1.265 million in assets. The State Peace Officers’ and Firefighters’ Supplemental Plan has 33,867 participants with $512 million in total assets. The Supplemental Contributions Plan has 532 participants with assets of $20.5 million.

FUTURE DEVELOPMENTS / OTHER ISSUES INVESTMENT BELIEFS The Board adopted a set of 10 Investment Beliefs in September 2013, to help guide decision making in the Investment Office. The Beliefs provide a basis for strategic management of the CalPERS portfolio, inform organizational priorities, and ensure alignment between the Board and CalPERS staff. This action made CalPERS one of the first U.S. pension funds to adopt investment beliefs. Notable beliefs state that:

• Liabilities must influence the asset structure. • A long-time investment horizon is a responsibility and an advantage. • Long-term value creation requires effective management of three forms of capital: financial, physical, and

human.

The adoption of CalPERS Investment Beliefs marks another step in the system’s work to ensure that CalPERS is sustainable over multiple generations. The development of the Investment Beliefs began in 2012, with participation from the Board, staff, and

32

investment consultants. The process started with detailed interviews with Board members and staff to identify themes and gather information. A series of public workshops were then conducted throughout 2013, to work through unsettled issues, as well as to include input from stakeholders and the public. The 10 CalPERS Investment Beliefs can be found at: http://www.calpers.ca.gov/eip-docs/about/pubs/board-offsite.pdf CalPERS DIVERSITY OUTREACH PROGRAM 2013 CalPERS Commitment to Diversity & Inclusion As the nation’s largest public pension fund within the most ethnically and culturally diverse state, CalPERS believes the combined experiences, perspectives, and talents of all employees and stakeholders strengthen our work culture and organization. We have found time and time again that our differences are our strengths, and are important for serving all Californians. Diversity & Inclusion (D&I) are engrained in everything we do. Our belief and commitment to diversity touches every corner of our enterprise, from our employees to our culture to our relationships with our business partners. Earlier this year, we released a report that powerfully outlines our efforts. The report, CalPERS Commitment to Diversity & Inclusion Report, looks at the three areas we focus on as we integrate D&I into all aspects of our enterprise – workforce, workplace, and marketplace. Diversity & Inclusion Outreach and Awareness The CalPERS Diversity Outreach Program (CDOP) developed, implemented, and participated in various organization-wide initiatives to increase integration of D&I into all aspects of operations. For all levels of staff, CDOP continued to offer a wide range of learning opportunities to help develop the knowledge and skills employees need to cultivate awareness and understand that D&I is a critical business component and individual success factor. The curriculum includes lessons on how D&I impacts individuals and teams in the workplace. Team-building and cohesiveness exercises address potential communication challenges, while other courses explore self-awareness, cultural awareness, and generations in the workplace. This provides a range of resources and information that empowers all employees to promote D&I throughout the organization. In Fiscal Year 2013-14, 86 senior leaders and managers completed the “D&I 101” workshop, which was designed to enhance participants’ understanding of D&I and each leader’s role in increasing diversity and fostering an inclusive work environment. In addition, CDOP launched a monthly email newsletter entitled Cultural Investments. The newsletter is designed to support CalPERS leadership in day-to-day business D&I practices and provide a variety of tools, examples, and exercises to assist in team performance efforts. To deepen employees’ understanding of how to enhance D&I in the workplace, CalPERS invited Steve L. Robbins, Ph.D., as guest speaker for an all-staff presentation. Dr. Robbins is a nationally recognized author and speaker on “unintentional intolerance.” His book, What If? Short Stories to Spark Diversity Dialogue, explores issues that dominate today’s culturally and ethnically diverse workplace. Robbins’ book challenges us to not only be mindful about valuing people for their unique gifts, abilities, and experiences, but also to intentionally incorporate this concept when working with others. His presentation was video conferenced live to the eight CalPERS Regional Offices and recorded for future viewing by employees in a team-building setting. CDOP piloted a D&I assessment service for the organization with teams and divisions across CalPERS. The assessment identified and addressed D&I workplace challenges that may arise. This customized service is administered using survey and focus group exercises to provide personalized solutions for each team or division. CDOP communicates issues of D&I regularly to employees through a variety of avenues. Spotlight ads appear on

http://www.calpers.ca.gov/eip-docs/about/pubs/board-offsite.pdf

http://www.calpers.ca.gov/eip-docs/about/pubs/diversity-report.pdf

http://www.calpers.ca.gov/eip-docs/about/pubs/diversity-report.pdf

33

our Intranet site and articles of interest are featured in the D&I area. Employees see Spotlight ads when they turn on their computers at the beginning of the workday. Intermittently throughout the year, CDOP sends Diversity Matters emails to every employee on specific topics, such as the 32 languages spoken by CalPERS staff. CalPERS Employee Resource Groups Employee Resource Groups are the CalPERS Disability Advisory Council (CDAC) and the CalPERS Diversity & Inclusion Group (CDIG), both under the auspices of CDOP. These groups enable employees to participate in professional and personal growth opportunities through training and education, volunteer projects in the community, networking at events, cultural heritage celebrations, and project management assignments. In August 2013, CDAC and CDIG hosted the CalPERS 7th Annual Diversity & Inclusion Day with the theme of “Putting our Core Values to Work in our Communities.” Representatives from nearly 50 community-based organizations participated in the special event. The purpose of the event was to promote awareness of community needs for volunteers and to spark an interest among CalPERS employees. The event connected employees and organizations with opportunities to work together to build stronger communities. In June 2014, CDAC facilitated 508 Document Accessibility Training, which was taught by an instructor from the California Department of Rehabilitation. This training provided CDAC members with the tools and knowledge to create electronic documents that are accessible to employees, customers, and persons with disabilities. ONE BUDGET The One Budget is an approach debuted with the CalPERS Fiscal Year 2014-15 budget that consolidates the organization’s five separate operating and capital budgets into one master budget. The result is the ability to better understand costs within the organization and to achieve more transparent reporting. Additionally, the expectation is that One Budget will provide a clearer vision of how we manage operating expenses, leading to better cost control and improved efficiencies. Fiscal Year 2013-14 encompassed Phase 1 of the project, which included internal communication and decisions on how One Budget would be presented. CalPERS inaugural One Budget was approved by the Board in April 2014, and will go into effect July 1, 2014. GASB 67 AND 68 IMPLEMENTATION The Governmental Accounting Standards Board (GASB) released new accounting standards in 2012 for public pension plans and participating employers. These standards, GASB Statements No. 67 and No. 68, have substantially revised the accounting requirements. The effective date for GASB 67 is the fiscal year beginning after June 15, 2013. GASB 68 is effective for employer fiscal years beginning after June 15, 2014. CalPERS is implementing the GASB 67 changes into the Comprehensive Annual Financial Report for the fiscal year ending June 30, 2014. We will continue to implement GASB 68 in the following year, initiating a dialogue with our employers to explain these changes and the information provided to them. OFFICE OF ENTERPRISE RISK MANAGEMENT The Office of Enterprise Risk Management led efforts to create a Public Agency Risk and Compliance Network as a forum for state agencies to share best practices in the risk and compliance field. This forum provides an opportunity for like organizations to learn and share information for cultivating risk intelligent operations at both the state and local levels. The network of participants continues to grow as more public agencies identify the need to address the landscape of risk for their organizations and assign staff to build a program. Enterprise Compliance Division CalPERS has embraced the integrated assurance model to promote understanding of the roles and responsibilities

34

for the three lines of defense to ensure compliance with laws, regulations, and policies. This effort is critical to ensure we maximize our limited resources while expanding our capacity to monitor and conduct reviews. To further support this effort, the Enterprise Compliance Division (ECOM) developed a customized compliance training program designed to build knowledge and skills to ensure the appropriate measurements are developed and documented to support findings and recommendations. In 2012, an automated solution was established for the Statement of Economic Interests Form 700 to be filed by CalPERS officials, staff, and designated third parties. For the reporting period of 2013, 80 percent of filers used the automated system for enhanced timely filing pursuant to the regulatory requirements. Enterprise Risk Management Division The Enterprise Risk Management Division (ERMD) facilitates creating and maintaining a risk-intelligent culture at CalPERS by providing risk management training, conducting risk assessments, performing risk dashboard recalibration, and developing tools to assist staff in identifying, monitoring, and responding to risks. ERMD periodically performs risk assessments to update the CalPERS risk environment. A risk assessment is intended to provide management with a view of events that could impact the achievement of goals and objectives, and enhance decision making. As one component of the Risk Management Framework, risk assessments are performed to identify, analyze, evaluate, treat, communicate, and monitor risks on an on-going basis. The process is a collaborative effort involving staff, management, and executive leadership. Enterprise risk management is a continuous process that identifies, evaluates, and prioritizes risks, and assigns resources for risk responses associated with events that could affect the achievement of business objectives. This includes conducting enterprise-wide and business plan risk assessments; recalibrating the enterprise risk management dashboard; developing and implementing key risk indicators; developing the integrated assurance model; and evaluating risk responses and control activities to enhance the management of identified key risk areas. ERMD considers the internal and external environment, enterprise risk dashboard recalibration results, observations from various risk assessment projects, and audit findings as a foundation for its efforts. In Fiscal Year 2013-14, the level of risk intelligence continues to advance across the organization with an increased level of participation by management in developing risk registers supporting the enterprise risk dashboard. Management continues to increase their risk awareness and risk assessment capabilities. ERMD reinforces the direct relationship and critical link connecting CalPERS strategic goals and objectives, initiatives, and outcomes to risk management. Additionally, ERMD integrates the consideration of risk into governance processes, such as strategic planning, budgeting, and asset allocation. Detailed risk assessments were performed on topics such as the Business Plan, SIP Redesign and Conversion, Environmental Scan for Enterprise Risk Management, Information Security, and Cloud Computing. Based on risk assessment results, ERMD coordinates efforts with ECOM and the Office of Audit Services to perform an integrated review of selected key risk areas. The integrated assurance model developed after three lines of defense, improves the overall efficiency of assurance functions in CalPERS, clarifies roles and responsibilities in enterprise risk management, and fosters a more robust enterprise risk management program. Overall, the level of risk intelligence has increased across the organization as demonstrated by the increased level of participation of the Division Chief Council and completion of the risk registers supporting the enterprise risk dashboard. The enterprise risk management process continues to mature with increased involvement of the division chiefs and oversight by the Enterprise Risk Management Committee. The Enterprise Policy Administration Section of ERMD centralizes management of the policy lifecycle. Implementation of a policy governance process facilitates the collection and maintenance of CalPERS current

35

policies. A central policy repository was implemented to improve policy transparency to staff, stakeholders, and the general public. A communication outreach plan was also created to increase awareness of the new enterprise policy administration roles and responsibilities over effective governance and management of CalPERS policies. The Emergency Management Section completed a business impact analysis of the CalPERS business processes to determine the impact of interruptions, and the dependencies on other business processes and organizations. A gap analysis was performed to identify existing risks that may prevent the organization from responding to an incident and recovering from a disaster. Strategies are being implemented that enable the organization to eliminate and/or reduce the impact of incidents and disasters. All of the various divisions were required to update their business continuity plans. The CalPERS Business Continuity General Plan has been updated in an effort to ensure the health and safety of all employees; minimize damage to facilities, equipment, and vital records; minimize business disruption and financial loss; restore critical business functions within a defined time frame; maintain CalPERS positive public image; and assure members, clients, and stakeholders that their interests are protected. Planning for business continuity allows crucial decisions to be made in a non-crisis environment. Other plans updated were the Emergency Center Operations plan and the Pandemic Preparedness and Response Plan. CERBT SERVES 400 PUBLIC AGENCIES The California Employers’ Retiree Benefit Trust (CERBT) topped the 400 mark of participating employers in May 2014, with the decision of the Los Angeles Unified School District to pre-fund health care obligations for retirees through CalPERS. The move added more than 100,000 employees with an initial contribution of an estimated $80 million. CERBT is an optional program administered by CalPERS that helps employers pre-fund Other Post-Employment Benefits (OPEB) such as medical, dental, and vision care insurance for retirees. Now, with more than 400 participating employers and total assets of $3.5 billion, CERBT is the largest OPEB trust in California. In Fiscal Year 2012-13, employers contributed $370 million to CERBT, and as of June 30, 2013, assets under management were $2.7 billion. The fund provided $13 million in reimbursement for OPEB costs. SOCIAL MEDIA In 2009 we launched the CalPERS page on Facebook, and on June 8, 2014 – exactly five years to the day after we launched our page – we reached a significant milestone when the number of people “liking” us hit 10,000. Users of the CalPERS Facebook page can find pension news updates; health and retirement tips and resources; and the latest information on programs, benefits, and events. There are also recurring features such as the Wednesday customer service series, and Friday’s health and wellness series, where CalPERS posts tips for better health and links to healthy living websites. Social media is an important part of CalPERS’ communications efforts to ensure that our members and employers receive all the information they need to make informed decisions. Along with Facebook, up-to-date information on member and employer services is highlighted on outlets such as Twitter, Instagram, LinkedIn, and Google Plus. These channels give us a chance to reach out and talk to our stakeholders and give them chance to reach back and talk to us. In addition, nearly 1,000 people follow @AnneStausboll on Twitter to be kept abreast of CEO insights on thought leadership, corporate governance, sustainability, retirement, and pensions. EMPLOYER RESPONSE TEAM In March 2014, CalPERS established the Employer Response Team (ERT) as a specialized consumer service team to better serve cities, counties, and local governments that participate in CalPERS pension and health benefit programs. The team provides employers with a single point of contact to quickly resolve time-sensitive and complex issues. ERT complements the CalPERS Employee Contact Center, whose staff addresses approximately 85 percent of all employer inquiries on the first call. To ensure quick response, employers can reach ERT through

36

a dedicated telephone line and email address. The largest volume of inquiries has been in the topic areas of enrollment, contracts, and payroll. SECOND SUSTAINABILITY REPORT In May 2014 CalPERS released its second report chronicling the pension fund’s efforts on sustainable investing and leadership at the Ceres Annual Conference in Boston. Anne Stausboll, CalPERS’ CEO, told the global audience of environmental leaders that the work CalPERS does is part of its efforts to help build a sustainable global economy. The report, Towards Sustainable Investment & Operations: Making Progress, focuses on the pension fund’s work to achieve the sustainability goals set forth in its first sustainability report, Towards Sustainable Investment: Taking Responsibility, which was released in 2012. The CalPERS concept of sustainability is grounded in economics and focuses on the three forms of capital that lead to long-term value creation: financial, physical, and human. The second sustainability report focused on a number of initiatives, including Investment Beliefs, the Sustainable Investment Research Initiative, the Cross Asset Class Team on Sustainable Investment, and the Sustainable Operations Program. GROWTH IN PUBLIC AGENCY HEALTH COVERED LIVES CalPERS Health Benefits Program continues to attract large numbers of new public agencies and schools. In 2013, CalPERS Health Account Services brought in 11 new agencies, nine public agencies, and two school districts with a total of 14 employee groups, and added 15 new employee groups from existing agencies, bringing more than 1,164 total covered lives to the program. Public agency and school employers account for more than 40 percent of the membership in the program. HEALTH CARE REFORM UPDATE Patient-Centered Outcomes Research Institute Fee For plan years 2012-18, the Affordable Care Act establishes an annual fee on health insurance issuers and sponsors of self-insured plans. The fee funds the newly established Patient-Centered Outcomes Research Institute (PCORI). PCORI promotes comparative clinical effectiveness research to help patients and providers make more informed decisions. The annual fee was $1 per covered life in 2012, $2 per covered life in 2013 and 2014, and is expected to increase with the rate of national expenditures from 2015-18. CalPERS estimates the total fee for its HMOs and PPOs will be approximately $2.7 million for 2015. Reinsurance Program Fee The Reinsurance Program, beginning in 2014 and ending in 2016, will make payments to plans in the individual market with high-cost enrollees to help mitigate adverse selection as millions of uninsured individuals gain access to health care. The regulations establish a $44 per member per year fee for 2015, and will reduce the fee further for 2016. We estimate that CalPERS HMO and PPO plans will owe approximately $46.5 million to the Reinsurance Program for 2015. Health Insurer Fee The Health Insurer fee is an ongoing, annual fee beginning in 2014. The regulations do not specify a purpose for the fee. The fee applies to CalPERS HMO plans and Medicare Advantage plans, but not to self-funded PPO plans or Medicare Supplement plans. We estimate that for 2015, CalPERS HMO insurers will be liable for approximately $80 million in fees for covering the CalPERS member portion of their market share. Summary of Benefits and Coverage and Uniform Glossary In 2012, the U.S. Departments of Treasury, Labor, and Health and Human Services issued final rules regarding the Summary of Benefits and Coverage (SBC) and Uniform Glossary for group health plans and health insurance coverage in the group and individual markets. The SBC accurately describes the benefits and coverage under the

37

applicable plan in a consistent, easy-to-understand format across all plans. The SBC and Uniform Glossary are intended to help individuals better understand their health coverage and more easily compare health plan options. In addition to other disclosure requirements, the rules require that SBC must be provided:

• At enrollment for a newly eligible employee • At renewal, or if renewal is automatic, no later than 30 days prior to the first day of the new plan year

CalPERS’ open enrollment materials will include information on how members can access the SBCs online or request a paper copy.

38

NASRA - Roll Call of the States State: California Retirement System: California State Teachers' Retirement System Executive Director: Jack Ehnes, CEO Market Value of Assets: $184.8 B Assets as of: 5/31/2014 Number of Active Members: 416,643 Number of Annuitants: 236,487 Participants as of: 6/30/2013

LEGISLATION AB 989 (Mullin) – Electronic Communication Authorization (Chapter 459, Statutes of 2013) Assembly Bill 989 authorizes CalSTRS to provide the annual Retirement Progress Report along with various other retirement communications electronically in lieu of mailing them, unless the member, nonmember spouse, participant, nonparticipant spouse or beneficiary to whom that communication is addressed specifically requests to continue receiving the communication by mail. AB 1469 (Bonta)—CalSTRS Defined Benefit Funding (Signed by the Governor on June 24, 2014) AB 1469 increases state, employer and member contributions to the Teachers’ Retirement Fund in order to eliminate the unfunded actuarial obligation of the Defined Benefit Program by June 30, 2046. Contributions begin rising for all parties on July 1, 2014. Employer contributions will rise up to an additional 10.85 percent in the seventh year on July 1, 2020. The state contribution will rise up to an additional 4.311 percent in the third year on July 1, 2016. The Teachers’ Retirement Board will have a limited ability to adjust employer and state contributions depending upon the system’s financial status. Member contributions will rise up to an additional 2.25 percent for 2% at 60 members and an additional 1.205 percent for 2% at 62 members in the third year on July 1, 2016. The members’ 2 percent annual benefit adjustment becomes vested so that current members’ contributions to the Defined Benefit Program can be increased. This statutory funding plan is based on the financial assumption that CalSTRS will earn 7.5 percent on its investments over the 32-year period. The bill provides that the additional mandated contributions for the employers and the state will cease on July 1, 2046. Creditable Compensation Regulations (Currently moving through the rulemaking process) CalSTRS has proposed creditable compensation regulations that would clarify and make specific the Education Code as it relates to classes of employees, creditable compensation and the appropriate crediting of contributions to either the Defined Benefit Program or the Defined Benefit Supplement Program. Education Code Section 22112.5 defines a class of employees as a number of employees considered as a group because they are employed to perform similar duties, are employed in the same type of program or share other similarities related to the nature of the work being performed. However, the terms used in the statute, “similar duties” and “same type of program,” are not defined. The proposed regulations would promote consistent understanding of those terms by clarifying them through definition. The regulations would additionally specify

39

prohibited classes of employees. Education Code Section 22119.2 defines creditable and noncreditable compensation. It contains terms, including “salary,” “remuneration that is paid in addition to salary,” “fringe benefits,” “expenses paid or reimbursed by an employer” and “not deducted from the member’s salary,” that are not defined in the statute, yet must be understood in order to comply with the statute. The proposed regulations would define and clarify those terms by describing identifying characteristics of each type of compensation to promote consistent understanding and application of each term. Education Code Section 22905 describes the allocation of contributions to the Defined Benefit and Defined Benefit Supplement accounts. The statute contains the phrase “compensation that is paid for a limited number of times as specified by law, a collective bargaining agreement, or an employment agreement.” This phrase is not defined in the statute. The proposed regulations would define and clarify “compensation that is paid for a limited number of times,” providing specific guidance on payments from state Lottery proceeds and parity pay, and describing identifying characteristics of compensation that is paid a limited number of times.

SYSTEM GOVERNANCE

• On September 16, 2013, Ashish Jain was named Chief Technology Officer.

• On December 11, 2013, Sandy Blair was named director of Defined Contribution Solutions.

• On January 27, 2014, Joy Higa was appointed to the Teachers’ Retirement Board.

• On April 3, 2014, the Teachers’ Retirement Board elected Harry Keiley as chair and Sharon Hendricks as vice-chair for the 2014–15 term.

• On June 12, 2014, Larry Jensen was named director of Audit Services.

• On June 19, 2014, Michelle Cunningham was named Deputy Chief Investment Officer.

TECHNOLOGY Structure of CalSTRS Information Systems CalSTRS business areas require extensive support from technology to make pension distributions, track retirement contributions, process disability requests and make financial investments. CalSTRS technology systems currently include large mainframe applications, an enterprise resource planning financial system, web-based applications, document imaging solutions and numerous smaller applications. These applications are housed at the California State Data Center, hosted on the CalSTRS premises, or provided by external sources as a service to CalSTRS. CalSTRS uses an internal governance model to allocate project resources, approve and prioritize both projects and enhancement requests, and ensure technology requests/procurements are consistent with future business and technology architecture direction as well as incorporation of corporate sustainability principles and policies. The CalSTRS technology portfolio is extensive and complex—over 200 information technology professionals are responsible for maintaining, monitoring and enhancing the technology portfolio. Enterprise applications include, but are not limited to:

40

• A mainframe-based Pension Administration System that has extensive online and batch processing capabilities and manages over 600 million records in aggregate.

• An ERP financial system—known internally as BusinessDirect—that processes and manages CalSTRS financial transactions and financial reporting for corporate accounting, procurement, contract management, budgets and travel.

• The myCalSTRS external web application, which serves over 800,000 CalSTRS members by providing them with a range of functions they can access via the Internet, including the ability to electronically submit an online service retirement application.

• The Secure Employer Website, which provides an external web interface for secure electronic transmission of data needed by CalSTRS from the California school districts and county offices of education. The site provides the ability for the school districts and county offices to validate and reduce errors associated with reported data, along with the ability to view reports.

• The Member Information Center internal web application, which provides customer service representatives with member-specific data and access to information that improves their ability to serve CalSTRS members.

• The corporate imaging system, which houses over 38 million electronic documents and 50 million images. This includes a web-based internal application that provides access to the electronic documents and limited routing capabilities. This system incorporates all of CalSTRS corporate documents, providing increased operational efficiencies and supporting the organization’s sustainability objectives.

• An internal, information-based website that provides CalSTRS staff access to CalSTRS-related information.

• An external, information-based website—CalSTRS.com—that provides the general public with information about CalSTRS and general information about the services CalSTRS offers its members. This site is updated daily to provide the most current information and is a starting point for many inquiries received from CalSTRS members. The site has been recently redesigned with a modern look, feel and navigation and includes a mobile website for access via mobile devices.

• 403bCompare.com is a no-cost website administered by CalSTRS that serves as a 403(b) retirement product information bank. It includes information about 403(b) products, such as performance and fees.

Developments Currently Underway

• Priority Management/Project Portfolio Management Tool—an effort to develop and implement enhanced Business IT Governance and enterprise-wide Project Portfolio Management processes to support prioritizing nonoperational work requests and identify resource availability to support the approval of new projects. This will help to ensure that CalSTRS has the resources available to engage in those work efforts that directly support CalSTRS strategic objectives. The Project Portfolio Management Tool project has selected an industry standard software product (CA Clarity) to support the CalSTRS Priority Management processes. Estimated completion of Project Portfolio Management Tool implementation: December 2014.

• BusinessRenew—Involves a transformational change in how CalSTRS operates to be more efficient, effective, and nimble—positioning the organization to adapt to a constantly changing business environment. Expected outcomes include a reduction in operational risk by ensuring CalSTRS has an adequate system for administering benefits and the fiscal management system required to support accounting business processes.

41

This enables CalSTRS to provide accurate and timely payments to our members and provide support staff the systems and tools necessary to do so in an effective and efficient manner.

The initial BusinessRenew projects include:

o Corporate Accounting and Resource Management System (BusinessDirect)—an effort to improve financial reporting, corporate accounting, budgeting, procurement and contract management by implementing policies and an SAP technology system that includes automated internal controls to reduce financial and operational risks. Estimated completion of Phase II (Project and Cost Accounting): TBD.

o Pension Solution—an effort to develop requirements, procure and implement a new pension system solution. This multi-year effort is the largest technology effort in the history of CalSTRS and is the key component to meeting the BusinessRenew objectives. Estimated completion of Procurement: Summer 2014.

o Data Preparation—a supporting effort for Pension Solution in preparation for the implementation of a new pension system. The project is comprised of two distinct and concurrent “phases”—Priority Data Fixes and Data Preparation Discovery. Priority Data Fixes is a cross-functional team assigned to the review of priority accounts, resolving issues as appropriate. The Data Preparation Discovery includes the analysis of CalSTRS pension data and will result in a plan to cleanse the data prior to conversion to a new pension solution. Estimated completion: Summer 2014.

o Enterprise Information Management—a supporting effort to develop a roadmap and business case for the implementation of Enterprise Information Management at CalSTRS that will provide an overall information governance framework incorporating CalSTRS focus on information stewardship and security, retention, reliability, and appropriate transparency. Completed August 2013.

o Centralized Requirements Management—an effort to develop the strategy for managing CalSTRS business and system requirements. The team will develop a requirements management plan, a high-level process for requirements management, and evaluate tools that would help with managing requirements long term. The team will also make a recommendation as to what to do with existing requirements. Upon approval, a second phase of the project will be initiated to implement the plan. Estimated completion: December 2014.

In addition to our internal governance practices, an independent project oversight team has been engaged to support the effective implementation of the BusinessRenew projects. The team independently advises on the projects’ health, supporting the risk management process at the strategic and tactical levels, and making recommendations to improve the projects’ likelihood of success. Developments Completed

• Corporate Accounting and Resource Management System (BusinessDirect) Phase I—an effort to improve financial reporting, corporate accounting, budgeting, procurement and contract management by implementing policies and an SAP technology system that includes automated internal controls to reduce financial and operational risks. Estimated completion of Phase II (Project and Cost Accounting): TBD.

• Enterprise Information Management—a supporting effort to develop a roadmap and business case for the implementation of Enterprise Information Management at CalSTRS that will provide an overall information governance framework incorporating CalSTRS focus on information stewardship and security, retention, reliability, and appropriate transparency. Completed August 2013.

42

LITIGATION / CORPORATE GOVERNANCE Litigation Wal-Mart Lawsuit In May 2012, CalSTRS filed a shareholder derivative action against Wal-Mart Corporation officials alleging bribery and a subsequent cover-up in the corporation’s Mexico expansion. CalSTRS is seeking to remedy the damages sustained by Wal-Mart as a result of alleged gross misconduct by Wal-Mart’s executive officers and directors. The focus of this action is corporate governance reform to ensure that similar misconduct is not repeated in the future. Corporate Governance Top Shareholder Engagement Issues

• Diversity • Environmental Sustainability, including Fossil Fuel Reserves, Hydraulic Fracturing Risk and Energy

Efficiency • Majority Voting • Proxy Access

During the fiscal year 2013–14 proxy season, CalSTRS engaged over 230 companies in its portfolio on issues ranging from diversity to environmental sustainability, majority voting and proxy access. The diversity engagements included only one shareholder proposal, which was withdrawn after successful negotiation with the company. However, we engaged all 130 companies held in the CalSTRS portfolio that were listed in the UC Davis Study “California Women Business Leaders, A Census of Women Directors and Highest Paid Executives, 2013–14,” which identified California public companies that have no women on their boards. This was a joint effort with CalPERS, and the engagement is continuing. Initial contact began with letters, but we have followed up with telephone conferences and intend to have face-to-face meetings as well. At least three women have been appointed to the boards of California companies since the diversity engagement began and at least one company has become a subscriber to the DiverseDirectorDataSource (3D), demonstrating that investors can have an impact on diversity of corporate boards to enhance value. The environmental sustainability engagements were with over 59 U.S.-based companies on the issues of fossil fuel reserves, hydraulic fracturing risk and energy efficiency. Seven shareholder proposals were submitted, but they were all withdrawn after successful negotiations with staff. CalSTRS is also continuing its leadership role on these long-term environmental sustainability issues in its collaboration with PRI, Ceres, 350.org, Carbon Tracker Initiative and CDP, among others. This year, as last year, the number of majority voting shareholder proposals far outweighed the number of shareholder proposals filed on any other issue—this is because CalSTRS’ core objective is to reduce risk to the overall portfolio stemming from lack of proxy access. CalSTRS believes that a true majority vote standard is an important risk mitigation tool that should be used by shareholders to protect and enhance the value of their assets. The campaign was very successful with 83 proposals being withdrawn after reaching agreement with the companies. Six of these proposals that went to a vote passed by a majority of the shareholder votes cast, five are still outstanding, and another majority vote proposal did not pass. We expect to resubmit that proposal next season. One company failed to include our proposal in its proxy statement, and that issue will be addressed in the next season as well. CalSTRS did co-file a proxy access proposal at Walt Disney, but it was withdrawn after negotiations with the

43

company. 30% Coalition-Diversity on Corporate Boards/Director Refreshment During fiscal year 2013–14, CalSTRS continued to engage companies on the issue of board diversity and director refreshment policies. CalSTRS worked with several partners in this area, including Calvert Asset Management, Pax World Asset Management, the AFL-CIO, the 30% Coalition, 2020 Women on Boards, 85 Broads, ION, Catalyst, Re-Gender and CalPERS. Staff led the effort to get $1 trillion in investor assets represented on the letter to the companies in the S&P 500 that had no women on their boards for the last three years and this effort is now an annual event, drawing more institutional investors and representing more assets each year. CalSTRS believes that the issue of diversity on corporate boards is an important shareholder value imperative and that successful integration of the goal will require extensive collaboration and partnerships throughout the marketplace. High Profile Engagements CalSTRS also took a leading role in the engagement of these portfolio companies that have been of concern over the past several years:

• Commonwealth REIT • Hon Hai/Foxconn • Linear Technologies • Monster Beverage • PMC-Sierra • Skechers • VCA-Antech • Walt Disney Company

CalSTRS profile as a long-term, patient investor will be evident in its engagement with these and other companies going forward.

FUNDING ISSUES Defined Benefit Program The June 30, 2013, actuarial valuation of the Defined Benefit Program showed:

• An Unfunded Actuarial Obligation of $73.7 billion, an increase in the UAO of $2.7 billion from the June 30, 2012 valuation, but a decrease of $2.2 billion from what was anticipated as of June 30, 2012, when the prior valuation was adopted.

• A funded ratio of 66.9 percent, a decrease of 0.1 percentage points from last year.

• A Normal Cost of 18.259 percent, a decrease of 0.017 percentage points from the 18.276 percent Normal Cost determined in the prior valuation.

• A UAO of $19.9 billion in the benefits associated with the plan in effect as of July 1, 1990. Therefore, the supplemental General Fund appropriation of 1.274 percent that would be paid quarterly based on this actuarial valuation beginning October 1, 2014 through September 30, 2014 is required pursuant to Education Code Section 22955 subdivision (b).

44

• A Normal Cost surplus of 1.238 percent after increasing the DB Program contribution rate by the equivalent 30-year rate in expected supplemental contributions of 1.285 percent based on the 1990 benefit structure. This is an increase of 0.042 percentage points from the last valuation.

• A depletion date, in which the funded ratio is projected to equal 0 percent, of 2046, a three year extension from 2043 in the June 30, 2012, valuation.

The increase in the UAO was less than expected, but nevertheless the UAO increased by 2.7 billion. This increase was mainly the result of four factors:

• An actuarial loss of $987 million due to the change in the amount of the allocation to the Supplemental Benefit Maintenance Account. This amount is calculated as the increase in the SBMA due to contributions and interest minus SBMA benefit payments.

• Continued unfunded status of the DB Program. The Actuarial Obligation is so much larger than the Actuarial Value of Assets that even if the assets make their assumed rate of return, the dollar amount of the investment earnings is not enough to pay for the interest on the Actuarial Obligation, and the UAO will continue to grow. Interest on the Actuarial Obligation was $15.911 billion whereas earnings on the Actuarial Value of Assets at the assumed rate of return of 7.50 percent was $10.599 billion. This means that even if all actuarial assumptions are met and there are no investment losses, the UAO would increase by $5.312 billion due to the fact the Actuarial Obligation is so much larger than the Actuarial Value of Assets.

• An investment return of 13.9 percent on a market value basis during 2012–13 (net of investment expenses and assuming a uniform cost flow), which is significantly above the assumed investment return of 7.50 percent. Since approximately one-third of the investment gains and losses are recognized this year, $4.0 billion of the approximately $12 billion investment gain was recognized this year. This was offset by the recognition of $4.7 billion of last year’s accumulated losses. If the actual investment return for the fiscal year ended June 30, 2013, had been 7.50 percent, the funding ratio would have been 65 percent.

• The increase in the UAO of the DB Program was partially offset by actuarial gains resulting from creditable earnings by DB Program members during 2012–13 being lower than expected. This resulted in an actuarial gain of $2.8 billion this fiscal year.

The 13.9 percent investment return shown in the valuation report is different from the 13.8 percent investment return shown in the CalSTRS June 30, 2013, financial statements for the 2012–13 fiscal year due to the timing of cash flows. The actuarial valuation assumes that all cash flows occur evenly throughout the year, while the return shown in the financial statements is based on when the cash flows actually occurred. This method is used to simplify asset calculations for the valuation. In any one year the calculated actuarial investment gains and losses are expected to slightly differ under this method. This difference in the calculated investment gains and losses is only reflected in the determination the Actuarial Value of Assets and in any one year this difference is expected to be small. Over the long-term, these small differences are expected to offset one another and do not change the results of the actuarial valuation. The Consulting Actuary’s analysis of the DB Program indicates that, given current assumptions and contribution rates, the $73.7 billion UAO cannot be amortized. In order to be able to amortize the current UAO, the Consulting Actuary indicates that over the next 30 years, which is the funding period normally used by the board to determine the adequacy of resources for benefits, a total contribution rate of 32.879 percent of total membership salaries will be needed (assuming no population growth in the active membership). This is a decrease of 1.213 percentage points from what the June 30, 2012, valuation indicated was necessary. The total contribution rate of the DB Program over the next 30 years is currently projected to be 19.497 percent of total membership salaries.

45

As a result, to eliminate the UAO over 30 years, the total contribution rate would have had to increase by 13.382 percent beginning July 1, 2013, as compared to 14.620 percent beginning July 1, 2012, from the prior valuation. The increase in the contribution rate would be about 14.3 percent if the increased contributions began on July 1, 2015. Under AB 340, the California Public Employees’ Pension Reform Act of 2013 (PEPRA), members first hired on or after January 1, 2013, (known as CalSTRS 2% at 62 members), must contribute at least one-half the Normal Cost of their pension plan. As of the valuation date, June 30, 2013, there were a small number of members subject to this provision. Based on the June 30, 2013, valuation, Milliman recommends that the board adopt a Normal Cost Rate of 16.059 percent of pay for CalSTRS 2% at 62 members. The results of the valuation are based on the annual investment return assumption of 7.50 percent and annual inflation rate assumption of 3.00 percent and the other economic and demographic assumptions adopted by the board as a result of the June 30, 2010, Experience Study in February 2012. AB 1469 (Bonta), signed by the governor on June 24, 2014, increases state, employer and member contributions to the Teachers’ Retirement Fund in order to eliminate the unfunded actuarial obligation of the Defined Benefit Program by June 30, 2046. Defined Benefit Supplement Program The June 30, 2013, actuarial valuation of the Defined Benefit Supplement Program showed that the DBS Program had a surplus as of June 30, 2013, of $788 million, resulting in a funded ratio of 109.61 percent. This is an increase of 8.98 percentage points from the June 30, 2012, valuation. The principal cause of the increase in the surplus was that the actual return for the year was 13.6 percent, assuming uniform cash flow throughout the year and net of investment and administrative expenses compared to the assumed return of 7.5 percent. In addition the actuarial gain was increased the Minimum Interest Rate being credited to the member’s account was 3.75 percent compared to the 7.50 percent assumption. The Consulting Actuary expects that, in the long run, the small surplus will be amortized because any excess earnings will be eventually credited to the member’s account. Cash Balance Benefit Program The June 30, 2012, actuarial valuation of the Cash Balance Benefit Program showed that the CB Benefit Program had a surplus, as of June 30, 2013, of $18 million and a funded ratio of 110.54 percent. This is an increase of 10.52 percentage points from the June 30, 2012 valuation. The principal cause of the increase in the surplus was that the actual return for the year was 13.6 percent, assuming uniform cash flow throughout the year and net of investment and administrative expenses compared to the assumed rate of return of 7.00 percent. In addition the actuarial gain was increased as a result of the Minimum Interest Rate being credited to the member’s account was 3.75 percent compared to the 7.00 percent assumption. The Consulting Actuary expects that, in the long run, the surplus will be amortized because any excess earnings will be eventually credited to the member’s account. Supplemental Benefit Maintenance Account The June 30, 2012, actuarial valuation of the sustainability of the Supplemental Benefit Maintenance Account payments at the level of 85 percent of purchasing power protection showed that based on the current SBMA provisions, and the actuarial assumptions adopted by the board, there are expected to be sufficient funds to pay the SBMA benefits at the 90 percent level through June 30, 2089. Therefore, Milliman recommended that the purchasing power level remain at 85 percent. This level of benefit would continue at least until the results of the next analysis which is scheduled to be the June 30, 2016, analysis.

46

MODEL PRACTICES

• CalSTRS BusinessRenew was born out of the Future State Architecture project and follows the FSA strategic plans, the Solutions Framework and Implementation Roadmap. As the name implies, BusinessRenew is about renewing and transforming CalSTRS' core technologies and business processes. It is also about reducing risks by automating our internal controls and bringing CalSTRS into the age of system and information integration.

BusinessRenew is a multi-year strategic plan and is recognized by the Teachers' Retirement Board as a priority. It is of such significance to CalSTRS that BusinessRenew has now become its own branch led by an executive officer and full-time staff. It is composed of several projects that will change the way we do business. Recently completed milestones include:

o November 2013: Pension Solution RFP published. o January 2014: Pension Solution vendor education session & tours conducted. o April 2014: Confidential discussions for Pension Solution proposers. o April 2014: Pension Solution Employer Readiness Forums.

• Effective January 1, 2014, the CalSTRS Retirement Progress Report is available exclusively online, unless a paper version is requested.

The report is now accessible only through the secure member website, myCalSTRS, where members can view current and past reports. The Retirement Progress Report is distributed annually to more than 628,000 eligible members and contains important member retirement information, including:

o A summary of benefit program transactions during the prior year. o Accumulated service credit. o Contribution and interest balances. o Death benefit recipient and beneficiary information. o Projections of retirement benefits for members at least 45 years of age.

The move to online-only access means lower mailing and administrative costs while also adhering to CalSTRS’ commitment to sustainability efforts to conserve environmental resources.

• The CalSTRS West Sacramento headquarters building received The Outstanding Building of the Year (TOBY) Award in the “Corporate Facility” class for the Pacific Southwest region. CalSTRS won the regional award over entries from Greater Phoenix, Nevada, Hawaii and other commercial buildings in California. The Building Owners and Managers Association’s TOBY Awards honor the best of the best in commercial buildings. Judging is based on a point system and buildings are evaluated in categories including community involvement, site management and green or environmentally sustainable policies and procedures.

• On June 30, 2014, CalSTRS will open the Irvine Member Service Center to serve the approximately 63,000 members living in Orange County. Like the CalSTRS West Sacramento headquarters building, the building that houses the Irvine MSC offers LEED®-certified sustainability features that will save on energy use while offering members state-of-the-art technology and ample space for education and counseling services.

The Irvine Member Service Center is the third full-service member center outside of the CalSTRS headquarters in West Sacramento. (The Glendale Member Service Center opened in January 2012, and the Santa Clara Member Service Center opened in June 2013). The Irvine MSC is staffed by professional state employees and offers members a full range of services, including:

47

o Member education sessions by appointment. o Educational workshops on CalSTRS member benefits. o Acceptance and review of all CalSTRS retirement-related forms. o General walk-in assistance. o Access to all CalSTRS publications and forms.

• CalSTRS is in the process of shifting from a benefits counseling model that uses contracted offices and contracted employees to one that utilizes CalSTRS-operated offices staffed with state employees. To accomplish this shift, CalSTRS is building regional member service centers. Over time, CalSTRS has improved the process by which we determine the appropriate location for the MSCs. Client Outreach and Guidance, the CalSTRS division responsible for delivering benefits counseling services, has introduced greater rigor into its site search and selection procedures.

COG developed a demographic analysis that takes into account where members in a given region live, where the largest employers (school districts) are located, area crime rates, overall area affordability (for employees), and availability of public transportation in the region. The analysis team then weighs each variable to obtain an overall score for the largest communities in that region. Next, CalSTRS conducts an online member survey that is disseminated to both active and retired members via email. Once the survey response period closes, COG compares the recommendations produced by the internal demographic analysis against the survey data to see which locations match.

CalSTRS used this process with great success in determining the appropriate location for our member service center in Orange County, located in Irvine. CalSTRS is repeating the process to determine where in the two-county area comprised of Riverside and San Bernardino counties, known as the Inland Empire, it should locate its next regional office. Engaging members in the site selection process helps obtain buy-in from the members in the service area and gives CalSTRS the opportunity to receive helpful, specific feedback in the form of open-ended comments.

INVESTMENT ACTIVITY/INITIATIVES

• CalSTRS current target rate of investment return is 7.5 percent. There have been no changes to the investment policy in the past year.

• On April 4, 2014, the Teachers’ Retirement Board Investment Committee adopted a dual-consultant arrangement designed to improve research and provide broader opinions on key investment issues and decisions. The committee named Pension Consulting Alliance as lead and Meketa as the co-consultant.

PCA’s duties include full service comprehensive general investment consulting and participation in the tri-annual asset allocation study (due in 2015). Meketa’s duties include research and analysis on two major Investment Committee projects each year, monitoring and commenting on the fund’s strategic asset allocation, and participation in the tri-annual asset allocation study.

48





57.3 % 15.8 % 11.9 % 11.5 % 2 % 1.5 % 65 % 35 %

Invested internally: Passive U.S. Equity and Fixed Income

DEFINED CONTRIBUTION PLANS Pension2 is CalSTRS’ voluntary defined contribution savings plan available to all CalSTRS members and to classified employees of the California public school system. Pension2 offers the opportunity to invest through tax advantaged payroll deductions in low cost, flexible 403(b), Roth 403(b) and 457(b) plans for additional retirement savings. CalSTRS also works with school districts to help them comply with 403(b) regulations promulgated by the IRS. Record Keeping CalSTRS currently partners with TIAA-CREF to provide record keeping services for Pension2. TIAA-CREF is a national financial services organization and the leading provider of retirement services for professionals in the academic field. In early 2014, CalSTRS conducted a Request for Proposal process for record keeping services for Pension2. As a result of that process, CalSTRS has selected ING, soon to be renamed VOYA Financial, to provide record keeping services going forward. CalSTRS is currently working with TIAA-CREF and VOYA Financial on the terms of the transition and we anticipate going live with VOYA Financial as our new record keeper on November 1, 2014. As a result of this transition, there will be some minor fund option changes as well as a reduction in the administrative fees charged to the participants. Number of Participants (as of 3/31/2014)

• 403(b) has 4,132 contributing participants and 3,875 non-contributing participants. • 457(b) has 285 contributing participants and 113 non-contributing participants. • LAUSD 457(b) has 2,637 contributing participants and 886 non-contributing participants.

Total Assets (as of 3/31/2014)

• 403(b) has $501,000,000. • 457(b) has $15,600,000. • LAUSD 457(b) has $64,600,000.

Types of Investment Options (as of 3/31/2014) Pension2 offers 22 core investment options in addition to 15 Easy Choice portfolios. These ready-made, diversified portfolios combine risk tolerance and retirement target dates to simplify investment decisions. The Easy Choice Portfolios include five retirement date options and three risk tolerance levels per date—conservative, moderate, and aggressive.

49

The 22 core investment options are: American Funds American Balanced Fund Dodge & Cox Stock Fund American Funds Capital World Growth and Income Fund PIMCO All Asset Fund

American Funds EuroPacific Growth Fund TIAA Real Estate Account American Funds Growth Fund of America TIAA Traditional Annuity

American Funds SMALLCAP World Fund TIAA-CREF Social Choice Equity Fund

Artisan International Fund Vanguard Inflation-Protected Securities Fund

CREF Money Market Account Vanguard Institutional Index Fund DFA Emerging Markets Portfolio Vanguard Mid-Cap Index Fund

DFA Global Equity Portfolio Vanguard Short-Term Bond Index Fund

DFA International Small Company Portfolio Vanguard Small-Cap Index Fund

Dodge & Cox International Stock Fund Vanguard Total Stock Market Index Fund

The 15 Easy Choice Portfolios are: Conservative 2050+ Moderate 2020 Conservative 2040 Moderate Retired Conservative 2030 Aggressive 2050+ Conservative 2020 Aggressive 2040 Conservative Retired Aggressive 2030 Moderate 2050+ Aggressive 2020 Moderate 2040 Aggressive Retired Moderate 2030

50

NASRA - Roll Call of the States State: Colorado Retirement System: Fire & Police Pension Association of Colorado Executive Director: Dan Slack Market Value of Assets: $4 B Assets as of: 4/30/2014 Number of Active Members: 6,110 Number of Annuitants: 908 Participants as of: 1/1/2014

LEGISLATION FPPA had two items of legislation passed in the 2014 legislative session.

• FPPA has investment and recordkeeping responsibilities for a number of volunteer firefighter pension plans. Legislation was passed allowing for direct distributions to FPPA of state assistance to these plans by the state’s Department of Local Affairs. The legislation also enumerated the responsibilities of FPPA and of the local departments with respect to administration and management of the volunteer plans.

• FPPA also has investment and recordkeeping responsibilities for a number of local plans that were frozen to new members in 1978. Legislation was passed modifying the authority of employers to purchase annuities to wind down such plans; eliminating statutory provisions regarding state assistance to such plans (as the commitment to such assistance was fulfilled); clarifying the amortization period for such plans; and enumerating the responsibilities of FPPA and of the local departments and employers with respect to administration and management of such plans.

Other legislation of interest that was passed in 2013, but not previously in a Roll Call:

• If an employer that is otherwise required to enroll its members under the Statewide Defined Benefit Plan or the Statewide Death and Disability Plan fails to properly enroll a member, neither FPPA nor the defined benefit system fund, as applicable, is obligated or liable for any purpose to any person or employer arising from such failure.

•

• This bill broadens the definition of the required number of members and employers to approve any modification to the Statewide Defined Benefit Plan. The bill specifies that passage of any such modification must be by more than 65% of members who vote and by more than 50% of employers who vote.

SYSTEM GOVERNANCE FPPA now uses Diligent Boardbooks as for all of its material for board and committee meetings. The Resource Center of Diligent Boardbooks is also used as a replacement for the former Trustee Handbook, which contained items such as the board’s Governance Manual, the most recent CAFRs and actuarial valuations, organizational charts, etc.

TECHNOLOGY FPPA has implemented a new ECM system, using OnBase as a replacement for FileNet.

51

LITIGATION / CORPORATE GOVERNANCE FPPA and the Austin (Texas) Police Retirement System jointly sought lead plaintiff status in the Abiomed securities litigation (U.S. District Court for the District of Massachusetts). The trial court granted the defendants’ motion to dismiss on April 10, 2014. Plaintiffs filed a notice of appeal on May 9, 2014.

FUNDING ISSUES FPPA’s primary retirement plan is the Statewide Defined Benefit Plan. It is 100.9% funded as of January 1, 2014. Note that the plan does not has a discretionary COLA, which is not included in the funding calculation. During the period October 2014 – September 2015, the COLA paid will be 0.61%.

FPPA administers a stand-alone disability plan. It is 114.2% funded as of January 1, 2014. Totally disabled individuals receive a 3% COLA. Occupationally disabled individuals receive a discretionary COLA, which will be 0.86% for the period October 2014 – September 2015.

FPPA also administers the Statewide Hybrid Plan, which has both defined benefit and defined contribution components. The defined benefit portion, including funding for a 3% COLA, is funded at 132%. Of a total 16% contribution rate, 12.5% goes to the DB component and 3.5% goes to the DC component.

MODEL PRACTICES Active members in the Statewide Defined Benefit Plan can vote to increase their contribution rate. An election for this purpose is taking place in June 2014, asking the membership to vote to increase their contributions by 4% of pay, or in the alternative by 2% of pay. The results of the election are not known as this is being prepared, but will be known at the time of the annual meeting.

INVESTMENT ACTIVITY/INITIATIVES FPPA manages a little over $4 billion in defined benefit assets. FPPA has moved to conducting an annual asset/liability study. The results of this study, presented to the board in June, resulted in only minor tweaks to the investment allocation. FPPA has moved to a lower volatility, higher risk-adjusted return portfolio. The desire is to improve downside risk performance without sacrificing the ability to meet the actuarial rate of return of 7.5%. However, this results in a portfolio with more alternative investments, higher implementation risk, and more peer risk. New strategies over recent years include absolute return, long/short, managed futures, real assets, and unconstrained fixed income.

ASSET ALLOCATION

The current target allocation is:

Global Equity 40% Long/Short Equity 10% Fixed Income 15% Cash 1% Absolute Return 12% Managed Futures 4% Illiquid Alternatives 18%

52

DEFINED CONTRIBUTION PLANS FPPA manages approximately $375 million in defined contribution assets. Participants can invest among 5 international equity funds, 7 domestic equity funds, an alternative assets fund, a series of target date funds, 4 bond funds, a stable value fund and a money market fund. In addition, a brokerage window is available to participants. Initiatives under consideration are whether to offer plan loans in response to participant demand, implementing a Roth feature, and effective MRD (minimum required distribution) implementation.

FUTURE DEVELOPMENTS / OTHER ISSUES FPPA contemplates incorporating option analysis into its thinking regarding the costs and the benefits of its Statewide Defined Benefit Plan, particularly as it regards intergenerational equity among the members of the plan.

53

NASRA - Roll Call of the States State: Colorado Retirement System: Public Employees' Retirement Association of Colorado Executive Director: Greg Smith Market Value of Assets: $43.9 B Assets as of: 12/31/2013 Number of Active Members: 200,183 Number of Annuitants: 104,021 Participants as of: 12/31/2013

LEGISLATION SENATE BILL 14-214: PERA STUDIES CONDUCTED BY ACTUARIAL FIRM This bill is a Joint Budget Committee-sponsored bill that creates three separate studies:

• The first study changes the State’s annual total compensation survey process performed by the Department of Personnel and Administration to incorporate retirement benefits by January 15, 2015, and to perform the study again including retirement benefits every eighth year thereafter.

• The second study directs the State Auditor’s Office with the concurrence of PERA to contract with an actuarial firm to perform a comprehensive study of the current PERA plan design compared to other alternative retirement plans.

• The third study directs the State Auditor’s Office with the concurrence of PERA to contract with an actuarial firm to perform a sensitivity analysis of actuarial assumptions.

SYSTEM GOVERNANCE In May 2013,PERA members and retirees re-elected Marcus A. Pennell, Scott L. Noller, Maryann Motza, and Carole Wright to the Board. Trustees Pennell and Noller will serve four-year terms in the School Division as two seats were up for election. State Division members re-elected Maryann Motza, who is the current Board Vice Chair, to a four-year term. Current Board Chair, Carole Wright, was re-elected by retirees of the School, Judicial, and Local Government Divisions to serve a four-year term. In August 2013, Governor John Hickenlooper reappointed Susan G. Murphy to the PERA Board and she was confirmed by the State Senate in February 2014.

In February 2013, CH Meili was promoted to Director of Real Estate replacing Jim Lavan who retired in January 2013 after 14 years of service. CH was previously a Senior Real Estate Portfolio Manager for PERA and has been at PERA since January 2006. As Director of Real Estate, CH directs the overall management of PERA’s real estate portfolio in accordance with established investment statutes, policies, and guidelines. In May 2013, Amy McGarrity was promoted to Deputy Chief Investment Officer replacing David Bomberger who left PERA in September 2012. Amy was previously the Senior Investment Officer for PERA and joined PERA in 2010 as a result of the Denver Public Schools Retirement System (DPSRS) merger. As Deputy Chief Investment Officer, Amy manages the investment activities of PERA in accordance with established investment statutes, policies, and guidelines. In June 2013, Adam Franklin was promoted to General Counsel. Adam joined PERA in 2003 as a staff attorney after working at the law firm of Hamilton and Faatz, P.C. He was promoted to Senior Staff Attorney in January 2007. As General Counsel, Adam is responsible for implementing, maintaining and protecting the Association’s legal posture and interests within the scope established by Colorado Statute, PERA’s Board of Trustees, and the Executive Director.

54

In July 2013, Anne Bandy retired as the Director of Customer Service after 11 years at PERA, and Lisa Bishop joined PERA as the new Director of Customer Service. Previously, Lisa was a Quality Manager at Southern California Edison and also worked for TIAA-CREF and Great-West Retirement Services. As Director of Customer Service, Lisa is responsible for the overall management and direction of PERA’s call center.

TECHNOLOGY Colorado PERA’s benefit administration and workflow systems are internally developed and maintained. Core operating systems and technologies at Colorado PERA include Windows based servers, IBM i midrange, virtual infrastructure on VMware, Storage Area Networking from HP and Nimble, and virtual desktops running Windows 7. Key initiatives in the last year include:

• Continued work on modernizing web applications on www.copera.org • In addition to virtualizing desktops, PERA began replacing laptop computers with virtual machines and a new

remote access solution • Implemented a new hybrid storage array that uses a combination of solid state and traditional drive

technology to improve virtual desktop performance • Implemented a new solid state storage tier within server virtualization environment to increase SAN

performance • Migrated backup and recovery product over to a solution that is designed around virtualization • Performed major upgrade to VOIP telephone system • Implemented a new solution for secured file synchronization and sharing • Implemented enhancements to network security and monitoring solutions

LITIGATION / CORPORATE GOVERNANCE Lawsuit Regarding Senate Bill 10-001 Shortly after SB 10-001 was signed into law, a civil action was filed in Denver District Court (Justus, et al. v. State of Colorado, et al.). The plaintiffs, who claim to be acting on behalf of a class of individuals, allege that a portion of SB 10-001 is unconstitutional. The civil action challenges the portion of SB 10-001 which modifies the annual increase payable to existing PERA retirees and in the future to PERA members who were eligible to draw retirement benefits as of the effective date of the bill. On June 29, 2011, the Denver District Court ruled in favor of PERA and the State of Colorado and determined that the plaintiffs do not have a contractual right to a specific annual increase formula for life without change. The District Court’s decision rejected the plaintiffs’ claims based upon failure to establish a contractual relationship. On July 25, 2011, the plaintiffs appealed the District Court’s decision and in October 2012, the Court of Appeals remanded the case to the District Court for further review. In remanding the case to the District Court, the Court of Appeals set forth the legal test for when benefits can be reduced and determined that the plaintiffs are not entitled to a fixed annual increase formula for life without change. The Court determined that the annual increase is a vested contract right but the annual increase percentage can be reduced in certain circumstances. The annual increase can be reduced if the modification was reasonable and necessary to address a legitimate public purpose. On November 21, 2012, PERA and the State of Colorado filed an appeal with the Colorado Supreme Court. The plaintiffs also filed their appeal with the Colorado Supreme Court objecting to the legal standard adopted by the Court of Appeals. On August 5, 2013, the Supreme Court announced that it would accept and hear the case. Specifically, the Court said it would address the following issues: (1) what the proper legal test is for when

http://www.copera.org/

55

benefits can be reduced; (2) whether PERA members have a contract right to the annual increase in place on their date of retirement for life without change; and (3) whether the change to the annual increase in SB 10-001 was constitutional. Oral argument before the Supreme Court took place on June 4, 2014. The Colorado Supreme Court has not yet issued an opinion. Lawsuit Regarding Memorial Health System On October 1, 2012, Memorial Health System (Memorial) terminated its affiliation with PERA. Memorial’s termination results from the 30-year lease of Memorial to University of Colorado Health (UCH) and its related entities. In exchange for the lease, the City of Colorado Springs (the City) received $259 million, of which $185 million is contractually specified as having been paid to the City to put toward the PERA liability associated with Memorial’s termination of affiliation. As of October 1, 2012, employees of Memorial no longer were eligible to participate in PERA since they no longer were employed with a PERA-affiliated employer. On September 6, 2012, the City, UCH, and PERA entered into an agreement by which the parties agreed that the $259 million would be placed in a court-supervised escrow account pending resolution of the litigation between the City, Memorial, and PERA. As part of this agreement, the parties agreed that the City would file its claims in the City and County of Denver. The City filed its Complaint on September 13, 2012, and PERA filed its Answer and Counterclaims on September 26, 2012. PERA’s position is that the termination of affiliation provisions, as outlined in PERA statutes, apply to the Memorial transaction, and that Memorial must pay its share of the current unfunded liability, with interest, in PERA’s Local Government Division and PERA’s Health Care Trust Fund because it terminated its affiliation with PERA. The City and Memorial’s position is that the termination of affiliation provisions in PERA statutes do not apply to this transaction and PERA is not owed anything as a result of the Memorial transaction. The parties filed motions with the Court asking the Court to determine whether the termination of affiliation provisions in the PERA statutes apply to this transaction. On February 10, 2014, the Court found that the termination of affiliation provisions apply, and that Memorial violated the provisions by failing to apply to the PERA Board to withdraw and by failing to comply with all of the statutory termination provisions prior to withdrawing its status as a PERA employer. The Court noted that the mandatory process ensures that a withdrawing employer pays for the accrued, unfunded benefits of its retirees and employees before leaving PERA. The City and Memorial have requested that the District Court allow them to immediately appeal the Court’s February 10, 2014, order to the Court of Appeals. At this time the Court has not issued an order on that matter. If the Court grants the request, then the Court of Appeals will decide whether the appeal will be heard at this time. Stapleton v. PERA Lawsuit In April 2012, Denver District Court Judge Edward D. Bronfin ruled in favor of PERA in the lawsuit (Stapleton v. PERA) brought by Colorado State Treasurer Walker Stapleton in June 2011. In his ruling, Judge Bronfin determined that the PERA Board properly concluded that the Treasurer is not entitled to information he requested regarding the top 20 percent of PERA benefit recipients. Information requested by the Treasurer included: the annual retirement benefit, year of retirement, age at retirement, last five years of salary as a PERA member, employer division, and ZIP code. Judge Bronfin stated “the Treasurer–just like any Trustee of the PERA Board–is not entitled to unlimited, unfettered access to individual PERA member and benefit recipient information which is rendered confidential by statute. Rather, any request for such confidential information must be in furtherance of the Treasurer’s–or other

56

Trustees’–fiduciary duty ‘solely’ to act in the interest of PERA members and benefit recipients…The request for confidential information must reasonably be calculated or designed to further ‘solely’ the interests of PERA members and benefit recipients.” The judge went on to conclude that “here, the Treasurer was unable or unwilling to provide his co-Trustees and co-fiduciaries with any explanation about how the requested information was reasonably designed to further ‘solely’ the interests of PERA members and benefit recipients.” He explained further, “Because the Treasurer was unable to articulate any legitimate explanation for how or why the requested information was needed, or how or why it would further his fiduciary duty ‘solely’ to PERA members and benefit recipients, the Court concludes…the PERA Board acted appropriately in denying the Treasurer’s request for the requested information.” Colorado law requires PERA to maintain the confidentiality of “all information” in PERA’s member records. With this ruling, PERA was able to obtain guidance regarding circumstances under which it can lawfully disclose information regarding its members and benefit recipients to PERA Trustees. In May 2012, Trustee Stapleton filed his Notice of Appeal, indicating that he was appealing the District Court’s decision to the Colorado Court of Appeals. The Court of Appeals heard oral argument on June 11, 2013, and issued its decision on August 1, 2013. The Court of Appeals affirmed the District Court’s decision and found that Trustee Stapleton is not entitled to unfettered access to the PERA records that he requested. The Court wrote: “Thus, while a PERA trustee may need to access PERA records to fulfill his or her statutory duties, such access is guided by the statutory requirements that it be (1) solely in the interest of the members and benefit recipients, and (2) for the exclusive purpose of providing benefits and defraying reasonable expenses incurred in performing such duties as required by law.” The Court supported the Colorado PERA Board of Trustees’ process and stated, “the other trustees also must act in accordance with their fiduciary duties, and if that requires them to place reasonable conditions on, or refuse, a co-trustee’s wholesale request for information, then the trustees must do so….” On November 12, 2013, Trustee Stapleton filed his appeal with the Colorado Supreme Court. PERA opposed the appeal, arguing at the Court of Appeals’ decision was correct. The Colorado Supreme Court has not yet announced whether it will hear the case. Lawsuit Regarding Short-Term Disability Program On March 7, 2011, a civil action was filed in Denver District Court (Tracey Lawless v. Standard Insurance Company, et al.) where the plaintiff, who claims to be acting on behalf of a class of individuals, alleges that PERA has adopted the wrong disability standard under the short-term disability program. The primary claim is that PERA Rule 7.45E, which sets forth the medical standard for short-term disability, conflicts with the medical standard defined in PERA statutes. On January 4, 2012, the Denver District Court ruled in favor of PERA and determined that Rule 7.45E is not in conflict with the medical standard set forth in PERA statutes. On March 22, 2012, the plaintiff filed her Notice of Appeal, and the Court of Appeals heard this matter on January 29, 2013. The Court of Appeals rendered its decision on November 21, 2013, and affirmed the District Court’s decision. On January 13, 2014, the plaintiff filed her appeal with the Colorado Supreme Court. PERA opposed the appeal, arguing that the Court of Appeals’ decision was correct. The Colorado Supreme Court has not yet announced whether it will hear the case.

57

FUNDING ISSUES On December 31, 2013, PERA’s funded ratio was 60.4 percent with an unfunded liability of $27.1 billion based on the actuarial value of assets and an investment rate of return and discount rate assumption of 7.5 percent.

Each year for the past four years, the Board has participated in an actuarial assumption workshop to ensure understanding and to provide for the adoption of all economic assumptions under the guidance provided by Actuarial Standard of Practice (ASOP) No. 27, Selection of Economic Assumptions for Measuring Pension Obligations, as prescribed by the Actuarial Standards Board. Based on the results from the actuarial workshop, the Board reduced the investment return assumption from 8.0 percent to 7.5 percent. The Board also approved a reduction in the price inflation assumption from 3.50 percent to 2.8 percent and a reduction in the wage inflation assumption from 4.25 percent to 3.9 percent. These new rates are used in the 2013 actuarial valuation and are effective January 1, 2014, for administrative purposes.

At the end of 2013, PERA’s investments generated a return of 15.6 percent, or just over $6 billion, net of fees. This return was more than the 12.9 percent rate of return for the year ended December 31, 2012, and was higher than the actuarial assumed rate of 7.5 percent.

SB 10-001, effective February 23, 2010, made a number of changes to the plan to increase funded status to 100% over the next 30 years. Changes include, but are not limited to, a reduction in annual COLA, increase in service credit and retirement age for retirement eligibility, changes to vesting schedule and matching, contributions by working retirees, and gradual increases in employer and employee contribution rates to eventually exceed the ARC.

MODEL PRACTICES In 2013, the PERA Board focused on developing a five-year strategic plan with twenty-seven initiatives to ensure PERA stays a leader. As part of the process, the PERA Board identified strategic issues facing PERA and then approved initiatives in early 2014 to be implemented over the five-year period. The initiatives approved by the Board will center around the following four priorities: PERA’s financial stability and long-term viability; stakeholder communications; organizational efficiency and process improvements; and member services. Staff is already working on several initiatives tied to these priorities.

Another focal point of 2013 has been outreach with key constituents across the state, which is a component of the Strategic Communications Plan. Throughout the year, Executive Director Gregory Smith met with hundreds of business and community leaders, economic development groups, and Kiwanis and Rotary Clubs to help educate the business community about the economic value of PERA in their cities and counties and the effectiveness of the SB 1 reforms. One key message to the business community is that PERA is a stabilizing factor in Colorado’s economy because the retirement distributions we provide do not fluctuate with the market, which is especially critical in times of economic downturn.

The Strategic Communications Plan continues to be vital in the daily operations at PERA. It’s critical to understand what PERA does and the fiscal responsibilities required to be prepared for retirement. PERA is reaching out in many ways to educate our members and all Coloradans about the value of PERA. In addition to communicating through social media channels, such as The Dime blog (www.thedimecolorado.com), Twitter, Facebook, and more traditional methods, we held an inaugural telephone town hall early in 2014 with members and retirees to talk about current issues facing PERA. These calls were a huge success and more will be planned for the future.

We also continue to increase the number of Ambassadors going from 150 to 740 over the past year and expanded their roles and reach. The mission of the Ambassador Program is to ensure that every stakeholder and decision

58

maker who can affect Colorado PERA understands the depth of PERA’s value to Colorado’s economic stability and the full consequences – both individually and broadly – of participating in efforts to place obstacles in the path as PERA pursues its mission. PERA Ambassadors’ primary role is to develop a constituent relationship with their legislators to help educate them about PERA and encourage support.

INVESTMENT ACTIVITY/INITIATIVES For the year ended December 31, 2013, the net-of-fee rate of return on the pooled investment assets was 15.6 percent, which was more than the 12.9 percent rate of return for the year ended December 31, 2012, and was higher than the actuarial assumed rate of 8.0 percent for 2013. The net-of-fee annualized rate of return for the pooled investment assets was 12.2 percent for the past five years and 7.6 percent for the past 10 years. The 30-year annualized gross-of-fee rate of return for the pooled investment assets was 9.5 percent. Sudan Divestment Following the 2007 legislative session, former Governor Ritter signed into law House Bill 07-1184: Sudan Divestment by Public Pension Plans, which imposes targeted divestment from companies with active business operations in Sudan. As a result of this legislation, PERA is required to create a list of scrutinized companies at least every six months and to prohibit investments in these companies going forward. The establishment of the list requires PERA to engage the companies on the list to warn them of potential divestment and to encourage the companies to change their activities in Sudan. PERA must also engage the managers of indirect investments in companies on the list and request removal of scrutinized companies or ask the manager to create a similar fund that does not contain the identified companies. PERA contacts managers in its defined benefit plans as well as managers of funds within the defined contribution plans regarding the Scrutinized Companies List. In 2013, PERA submitted its annual required report to elected officials on June 25, 2013. Iran-Related Investment Policy On January 18, 2008, the Board adopted an Iran-Related Investment Policy. This policy outlines a phased strategy to address PERA’s direct public investments in foreign companies doing business in the Islamic Republic of Iran. The strategy addresses and includes a number of actions, up to and including possible divestment. PERA recognizes the federal government has sole responsibility for the conduct of American foreign policy. PERA is acting out of a fiduciary concern for the welfare of its members’ assets, which requires a broad horizon and sensitivity to the potential risks posed by investment in Iran.





58.4 % 23.4 % 7.1 % 7.8 % 0.8 % 2.5 % 45 % 55 %

Allocation as of 12/31/13. Other: Opportunity Fund asset class has exposure to timber, commodity, risk-parity, and tactical opportunity funds.

DEFINED CONTRIBUTION PLANS PERA administers two defined contribution pension trust funds and a deferred compensation trust fund. The Voluntary Investment Program and the Deferred Compensation Plan provide retirement benefits to members of

59

the Defined Benefit Pension Trust Funds who have voluntarily made contributions during their employment. The Defined Contribution Retirement Plan provides retirement benefits to eligible State of Colorado employees hired on or after January 1, 2006, and eligible community college employees hired on or after January 1, 2008, who selected the PERA DC plan as their retirement plan. The plans offer 17 white label investment choices across a broad selection of risk levels and including nine target date funds. As of 12/31/13: PERAPlus 401(k) Plan: $2.5 billion in assets, 68,691 accounts, representing an increase of 19.2 percent in net assets and a 1.3 percent decrease in the number of participants from December 31, 2012, respectively. PERAPlus 457 Plan: $643.6 million in assets, 17,462 accounts, representing an increase of 18.2 percent in net assets and a .04 percent decrease in the number of participants from December 31, 2012, respectively. Colorado PERA DC Plan: $113.5 million in assets, 4,719 accounts, representing increases of 36.3 percent in net assets and 8.2 percent in the number of participants from December 31, 2012, respectively.

FUTURE DEVELOPMENTS / OTHER ISSUES In 2014, PERA will undertake an actuarial audit, an asset/liability study, and continue in its search for hedge fund consultant. PERA will, also, participate in the three separate studies called for under Senate Bill 14 -214. Vendors will be procured for the State total compensation by the Department of Personnel, and the plan design conversion study and the study of the sensitivity of actuarial assumptions will be overseen by the Office of the State Auditor. In 2014, PERA will implement a Roth option in our 401(k) and 457 plans. We will also update our website.

60

NASRA - Roll Call of the States State: Delaware Retirement System: Delaware Public Employees' Retirement System Executive Director: David Craik Market Value of Assets: $5.1 B Assets as of: 5/31/2014 Number of Active Members: 43,061 Number of Annuitants: 26,180 Participants as of: 6/30/2013

LEGISLATION A 1% post retirement increase was granted effective 1/1/15 for those who were retired prior to 7/1/13. There was no increase for FY14. Legislation to allow Correctional Officers to retire at 25 years of service without a penalty was passed and is effective 1/1/15. The Correctional Officers will pay an additional 2% in employee contributions. Joint and Survivor benefit options were expanded to provide for survivor benefits at the following levels: 50%, 66 2/3%, 75% and 100%.

SYSTEM GOVERNANCE DPERS received favorable determination letters from the IRS in regards to the latest Cycle C filings. DPERS dropped the long term expected return from 7.5% to 7.2%.

TECHNOLOGY During FY15 DPERS will be upgrading the PeopleSoft ERP to version 9.2.

FUNDING ISSUES As of 6/30/13 the State Employees’ plan was at 91% funding. During FY14 there was a contribution as a percentage of payroll of $15 million to the Other Post-Employment Benefits Trust Fund.

INVESTMENT ACTIVITY/INITIATIVES Performance: FY13 ending 6/30/13 11.1% CY 2013 16.9% 12 months ending 5/31/14 14.2% FY14 as of 5/31/14 15.8%

61





55.2 % 21.2 % 0 % 18.2 % 5.4 % 0 % 100 % 0 %

62

NASRA - Roll Call of the States State: District Of Columbia Retirement System: District of Columbia Retirement Board Executive Director: Eric O. Stanchfield Market Value of Assets: $6.4 B Assets as of: 5/31/2014 Number of Active Members: 9,889 Number of Annuitants: 13,861 Participants as of: 5/31/2014

LEGISLATION The Fiscal Year 2013 Budget Support Act of 2012 amended the law to provide that DCRB's enrolled actuary shall use the Entry Age Normal (EAN) funding method, rather than the formerly-used Aggregate Cost method, to calculate the District's contribution requirements to the retirement funds effective October 1, 2012.

SYSTEM GOVERNANCE In fiscal year 2014, DCRB will expand the internal audit function and has established an Audit Committee under the Board of Trustees.

TECHNOLOGY In fiscal year 2013, DCRB launched a multi‐year, Retirement Modernization Program in the areas of benefits administration and information technology. During fiscal years 2014 and 2015, the program will include three main projects: Business Process Re-engineering, Data Reclamation; and other initial activities leading up to the eventual acquisition of a Pension Information System. These initial activities include conducting a feasibility study and developing pension system requirements. The Pension Information System will enable DCRB to provide a full range of retirement services for its members, including producing annual benefits statements, providing member self‐service functions, and integrating member service and contribution data into other pension‐related systems designed to produce pension payrolls.

FUNDING ISSUES As of October 1, 2013, the Plans’ funding status was:

Teachers’ Plan: 90.2% based on actuarial value

Police/Fire Plan: 110.1% based on actuarial value

MODEL PRACTICES In late 2013, DCRB reorganized its Benefits Department to accommodate new work flows and reflect new staff duties intended to make our processes more efficient and accelerate initial pension payments to newly retired members. During 2013, we launched the Data Reclamation Project, a multi-agency effort to reclaim data from the District’s legacy systems and paper files. This effort is scheduled to conclude in September 2014.

63

INVESTMENT ACTIVITY/INITIATIVES The Fund generated an annualized net return of 11.9% for the one-year period ended May 31, 2014, outperforming the Policy Benchmark by .36% and the actuarial return target of 6.5% by 5.4%. During the last twelve month period, the Board reviewed the Fund’s strategic asset allocation structure in collaboration with Meketa Investment Group, its general investment consultant, and approved a new dedicated allocation to senior bank loans and selected new investment managers for international small cap equities, and foreign bond. Also, the Board made several new commitments to private equity and private real asset funds with the assistance of its specialist consultant, Cliffwater. In fiscal year 2014, the Board will consider further changes to its current asset allocation and investment manager structure, as warranted based on the market environment and manager-specific events.





54.2 % 29.4 % 3.9 % 11.9 % 0.7 % 0 % 100 % 0 %

DEFINED CONTRIBUTION PLANS The District of Columbia provides a 401(a) plan for its general employees and a voluntary 457 deferred compensation plan for all of its employees. Those plans are administered by the District’s Office of the Chief Financial Officer and its Human Resources Office. In addition, the public school system offers voluntary 403(b) plans for teachers. DCRB does not have information related to the participants or assets applicable to those plans.

64

NASRA - Roll Call of the States State: Florida Retirement System: Florida Retirement System Executive Director: Dan Drake, Division Director Market Value of Assets: $147 B Assets as of: 5/31/2014 Number of Active Members: 504,530 Number of Annuitants: 412,186 Participants as of: 5/31/2014

LEGISLATION The 2014 legislature passed employer contribution rates requiring the full funding of the UAL as recommended by the July 1, 2013 actuarial valuation of the FRS in addition to the normal cost contribution rates. Other legislation that did not pass would have closed certain classes of the defined benefit plan requiring new members in those plans to join the defined contribution plan, while other legislation would have closed the defined benefit plan completely for new members and moved all new hires to a hybrid or cash balance plan.

SYSTEM GOVERNANCE The Florida Retirement System’s governance is bifurcated into two sections (1) investment, and (2) administrative/actuarial. The system’s investments are handled by the State Board of Administration (SBA). The SBA is governed by a three-member Board of Trustees comprised of the Governor, the Chief Financial Officer, and the Attorney General. While the Board of Trustees has ultimate oversight, the board has delegated authority to the Executive Director/Chief Investment Officer to carry out the strategic direction in the day-to-day financial investments and operations. The SBA also administers the state’s defined contribution plan. The administrative and actuarial functions of the defined benefit system are handled by the Department of Management Services, Division of Retirement (Division). The Division is an executive agency also subject to the Governor’s oversight.

TECHNOLOGY The Division continues to implement new technology (both hardware and software) in support of modernization initiatives, additional membership features, and architectural upgrades. Building on the original foundation of Deloitte’s Pension Administration Solution implemented in 2001, many efforts are currently underway that are aimed at creating better service for constituents and allowing business users to focus on serving members and retirees while having customer service representatives handle the majority of client inquires. For instance, the creation of a contact center and the implementation of a CRM platform are currently underway. Additionally, a legislative budget request to rewrite the internal line-of-business application from PowerBuilder to .NET while keeping the same business processes and functionality is being submitted for consideration by the 2015 legislature. The Division also completed the conversion of outgoing forms to a modern platform, HP Exstream, and an upgrade to the Oracle Database infrastructure enabling fault tolerance by the implementation of an Oracle Real Application Cluster. Other infrastructure upgrades completed include a new VMWare environment and a complete replacement of the Division’s storage area network.

65

LITIGATION / CORPORATE GOVERNANCE Litigation: Two cases were filed challenging the State of Florida’s constitutional and statutory provisions which do not recognize same-sex marriages. Brenner v. Scott, Case No. 4:14-cv-107-RH/CAS (Northern District of Florida); Grimsley v. Scott, Case No. 4:14-cv-138-RH/CAS (Northern District of Florida). Currently, the Florida Retirement System limits joint and survivor benefits to qualifying joint annuitants, one of which is a spouse as defined under Florida law. The outcome of this litigation may impact the Division’s administration of the joint and survivor benefit. Corporate Governance: On behalf of participants and beneficiaries, the SBA emphasizes the fiduciary responsibility to analyze and evaluate all management recommendations very closely. Particular attention is paid to decisions related to director elections, executive compensation structures, various antitakeover measures, and proposed mergers or other corporate restructuring. For the most recent full fiscal year ending June 30, 2013, the SBA filed or co-filed a series of shareowner resolutions on Environmental, Social, or Governance (ESG) issues and executed votes on 9,820 public company proxies covering 89,060 individual voting items, including director elections, audit firm ratifications, executive compensation plans, mergers, acquisitions, and other management and shareowner proposals. The SBA’s proxy votes were cast in 80 countries, with the top five countries comprised of the United States (2,875 votes), Japan (1,175), Hong Kong (645), United Kingdom (443), and Canada (385). The SBA voted “for” 80.4 percent of all proxy issues, “against” 15.9 percent, and abstained or did not vote due to share-blocking on 3.7 percent of issues. Of all votes cast, 18.2 percent were against the management-recommended vote, down from 19 percent during the same period ending in 2012. Among all global proxy votes, the SBA cast at least one dissenting vote at 6,559 annual shareowner meetings, or 66.8 percent of all meetings.

FUNDING ISSUES The FRS was 85.9% funded as of June 30, 2013. In the 2014 legislative session, the legislature passed the system’s rate bill which funded the UAL along with the normal cost contribution rates. A five-year experience study will be completed this summer, and assumptions will be under review this fall by the legislature.

MODEL PRACTICES The system has been moving toward doing more in an electronic medium in an effort to improve efficiencies and save costs. Member annual statements and active member newsletters will be distributed to the membership through the members’ FRS Online accounts, and the Division continues to move toward replacing paper warrants with debit cards. The Division has also converted all outgoing forms to HPExstream, which provides the Division with greater ability to update and create necessary forms. In addition, the Division is establishing a dedicated contact center which will greatly improve the Division’s ability to handle its call volume.

INVESTMENT ACTIVITY/INITIATIVES The FRS Pension Plan has an actuarial rate of return of 7.75% which is set by the Actuarial Estimating Conference. Internally, the long-run target rate of return is 5% after inflation. The latest changes to investment policy came in 2014 when the policy allocation to Fixed Income was reduced 6 percentage points and reallocated to Strategic Investments (1%), Real Estate (3%), Global Equity 1% and Private Equity (1%).

66





53 % 18 % 10 % 18 % 1 % 0 % 57.8 % 42.2 %

Managed internally: Domestic and foreign 37.6% Fixed Income 66.8% Real Estate 50.5% Alternatives Private Equity 3.4% Strategic Investments .8% Cash 100%

DEFINED CONTRIBUTION PLANS The FRS Investment Plan is available as a defined contribution alternative to the FRS defined benefit plan. Both the FRS defined benefit plan and the defined contribution plan are § 401(a), IRC, qualified plans. The defined contribution plan is administered by the State Board of Administration through Aon Hewitt, their third-party administrator. Participation in the defined contribution plan is optional upon first enrollment in the system and all members have a one-time option to change retirement plan choices (DB or DC) before retirement. Active Members as of May 31, 2014 – 113,360 (this represents 17% of overall FRS members). Net Assets as of May 31, 2014 – $8.76 billion Effective July 1, 2014, the FRS Investment Plan will offer its members 21 low-cost institutional and mutual investment funds to choose from that include retirement date funds, domestic stock funds, foreign/global stock funds, fixed income funds, a real assets fund, and a money market fund. A Self-Directed Brokerage Account is also available. The Division of Retirement administers the State University System Optional Retirement Program and the Senior Management System Optional Annuity Program. As of December 2013, these defined contribution plans had combined membership of 18,270 and combined assets of more than $4.13 billion. The Division is currently procuring investment providers to service these plans effective January 2015.

FUTURE DEVELOPMENTS / OTHER ISSUES Projects currently underway include: 1. implementing a CRM platform 2. creating a dedicated contact center 3. replacing paper warrants with debit cards 4. conducting a comprehensive security risk assessment

A rewrite of the internal line-of-business application from PowerBuilder to .NET while keeping the same business processes and functionality is being submitted for consideration to the 2015 legislature. Additionally, the Division has identified several legislative initiatives that would strengthen the funding of the system.

67

NASRA - Roll Call of the States State: Georgia Retirement System: Employees' Retirement System of Georgia Executive Director: James A. Potvin Market Value of Assets: $14.4 B Assets as of: 6/30/2013 Number of Active Members: 129,252 Number of Annuitants: 61,578 Participants as of: 6/30/2013

LEGISLATION At the conclusion of the 2014 Session of the Georgia General Assembly, four bills affecting ERS and the smaller retirement systems administered by ERSGA were passed by the General Assembly and signed by the Governor in 2014. Act No. 497 (HB 477) This bill allows a member of the Employees’ Retirement System of Georgia (ERS) who was previously an active member of the Judicial Retirement System (JRS) to transfer JRS service to ERS. If the member has withdrawn contributions from JRS, the member may establish such amount as the member desires; however, no service shall be granted in excess of the service credited under JRS. No service shall be credited that will create an accrued liability on the system. Act No. 663 (HB 764) The current tier for new hires of the ERS pension system contains both a defined benefit (DB) and a defined contribution (401(k)) component. Membership in the DB plan is mandatory for new hires; membership in the 401(k) plan is optional. Currently, new hires are automatically enrolled in the 401(k) plan with an initial contribution rate of 1% of their salary unless they opt out or otherwise elect to change their contribution rate. This bill changes the initial contribution rate to 5% of the employees’ salary for those hired after July 1, 2014, in order for the member to take advantage of the full state offered match. Employees may continue to opt out or otherwise elect to change their contribution rate.

TECHNOLOGY Operations

• Upgraded Backup Media Servers (Backup Exec 2012) • Installed a CISCO wireless solution with a new dedicated 100MB Internet Connection • Implemented Mobile Device Management (MDM) services (AirWatch) • Implemented new Load Balanced Email SPAM & Virus Firewalls • Implemented a SQL Server 2012 Business Intelligent (BI) \ Reporting Database Server Environment • Increased DR\Data Replication connectivity from 100MB to 1GB • Implemented new Firewall and Boarder routers – double throughput for 3 ISP connections

Development The development team has spent the last 12 months primarily focused on business driven projects and general business alignment:

• Improved On-Line Beneficiary Processing

68

• Created over payment recovery module in the Pension Administration and Retirement System • New Member statements with retirement estimate data included • Enhancements to in-house workflow • Changes to EFT process eliminating most paper checks

Support Center

• Continue planning upgrade to Office 2013 • Implementing Malware Software Application (Malwarebytes Enterprise Edition) • Upgraded to Symantec Endpoint 12.1 • Upgraded to Track-it 11.3.

FUNDING ISSUES The funding status as of June 30, 2013 for our plans is shown below with the prior year in parentheses: Employees’ Retirement System: 71.4% (73.1%)

• Legislative Retirement System: 118.4% (116.1%) • Judicial Retirement System: 104.8% (108.5%) • Public School Employees Retirement System: 79.9% (79.4%) • Georgia Military Pension Fund: 40.4% (35.7%)

The funding ratios are expected to stop declining for FY15, as the market loss in 2008 and 2009 has been fully recognized. To mitigate a further increase in unfunded liabilities in FY15 and FY16, COLAs for all systems were not approved for FY15. Employer rates for all plans increased in FY15 and will increase in FY16. Note: As a result of GASB changes, the Boards adopted a funding policy for each of the seven systems in December 2013. As a result, the amortization period for the systems has been set at a closed 25 year period and the actuarial value of assets was set equal to the market value. A five year smoothing period will commence in fiscal year 2014, with 20% of the gains and losses being recognized each year over the five year period.

MODEL PRACTICES We continue to upgrade the functionality of our web sites to allow our members greater opportunity for self service. For the defined benefit systems, we have expanded the online refund application function to include all of our three largest systems, and approximately half of our applications are now being received via the online process. For the defined contribution systems, we now require that opt-out elections for new members be completed online, and we have added several “quick enrollment” options to assist in their decision-making. We mentioned in the legislation section the passage of a bill to increase the default contribution rate for new hires into the 401(k) plan from 1% to 5%. Previously, too many of our members were staying at the 1% rate, thereby failing to take full advantage of the state’s matching contribution. Our research has indicated that 5% is also a level at which many members will choose to remain; while we might prefer even a higher rate than that, at least at that level they will receive the full employer match. Additionally, we are supplementing the web site tools with additional communication and education for the members, most notably in rolling out a new financial literacy education program that is tailored to members at different stages of their career (i.e. new hires / young employees vs. those approaching retirement age).

69

INVESTMENT ACTIVITY/INITIATIVES Rates of return; social investing initiatives; changes made to your investment policy, etc. Also, interesting or significant challenges you face in the investment area and plans for revisions to your fund’s target allocation, including the use of new asset classes. Legislation was passed in 2012 allowing ERS to invest a small portion of its assets in certain “alternative investments”. Initial investments were made during the second half of CY 2013. The portfolio’s market value for all Systems as of May 31, 2014 was $15.8 billion. Rate of return was 13.33% for FY2013 and approximately 16% for FY2014.





71.4 % 27.4 % 0.1 % 1.1 % 0 % 0 % 13 % 87 %

Alternatives - Private equity 82% of equities and 100% of all other asset classes are managed internally.

DEFINED CONTRIBUTION PLANS Georgia Defined Contribution Plan (GDCP) Plan Governance: Employees’ Retirement System Board of Trustees Plan Type: 401(a)(9) The Georgia Defined Contribution Plan (GDCP) is a defined contribution plan [401(a)(9)] established in 1992 for the purpose of providing retirement allowances for state employees who are not members of a public retirement system (i.e. – temporary, part-time and seasonal employees). The members of this plan are required to contribute 7.5% of their annual salary. There are no employer contributions. Earnings are credited each year as set by the ERS Board of Trustees. Accounts are eligible for distribution upon termination. Total Assets in the Plan as of June 30, 2013 - $109.6 million Active Participants: As of June 30, 2013, approximately 15,511 Terminated Participants w/Balances: As of June 30, 2013, approximately 115,135 Georgia Deferred Compensation Section 457 and 401(k) Plans Plan Governance: Employees' Retirement System Board of Trustees Plan Type: 457 and 401(k) Both plans are voluntary; however the 401(k) plan also functions as a component of the Georgia State Employees’ Pension and Savings Plan (GSEPS), a combination defined benefit/defined contribution retirement program for employees of the State of Georgia hired on or after January 1, 2009. GSEPS was created through legislation passed in the 2008 session of the Georgia General Assembly and includes an automatic 401(k) enrollment feature at a contribution rate of 5% (the 5% goes into effect for new members on or after 7/1/2014; prior to that, the auto enrollment was 1%), with the state matching contributions of 1% dollar for dollar, and matching contributions 2 – 5% at 50¢ on the dollar. Data as of May 31, 2014.

70

Participants: 457 = 8,632 401(k) = 38,210 % of Eligibles: 457 = 9.7% 401(k) = 44% Assets: 457 = $583,402,164.90 401(k) = $596,312,167.60 Administrator: Aon Hewitt Investment Options: 22 Core Options, including the following: 5 Lifecycle funds 1 Money Market 5 Actively-managed Target Maturity Bond Funds 1 Bond Index fund 7 Stock Index funds 3 Actively-managed stock funds Self-Directed Brokerage Option The plans also include investment advice, utilizing Financial Engines® through Aon Hewitt.

FUTURE DEVELOPMENTS / OTHER ISSUES The entire ERS fund pool consists of the following pension plans. Information is as of June 30, 2013:

• The Employees’ Retirement System (ERS) had 61,554 active members and 44,546 retirees with an annual payroll of $1.3 billion

• The Public School Employees Retirement System (PSERS) had 37,919 active members and 15,742 retirees with an annual payroll of $55 million

• The Legislative Retirement System (LRS) had 223 members and 259 retirees with an annual payroll of $1.8 million

• The Georgia Judicial Retirement System (JRS) had 506 active members and 262 retirees with an annual payroll of $16.3 million

• The Georgia Military Pension Fund (GMPF) began operations in July 2002 and has 13,539 active members and 739 retirees with an annual payroll of $772,000

In addition, the system administers a Group Term Life Insurance program (SEAD) within the pension structure. As of June 30, 2013, SEAD had 43,127 active members and 39,636 retired members with a total fund value of $1.1 billion.

71

NASRA - Roll Call of the States State: Georgia Retirement System: Teachers Retirement System of Georgia Executive Director: Jeffrey L. Ezell Market Value of Assets: $65.5 B Assets as of: 5/31/2014 Number of Active Members: 214,567 Number of Annuitants: 104,901 Participants as of: 5/1/2014

Market Value of Assets: $65.5 B Assets as of: 5/31/2014 Number of Active Members: 214,567 Number of Annuitants: 104,901 Participants as of: 5/1/2014

LEGISLATION Two pieces of legislation were passed during the 2014 Georgia General Assembly impacting TRS. IRS compliance legislation aligned Georgia law with federal Internal Revenue code as it relates to qualified pension plans. By replacing detailed IRC 415 language with general language stating that the retirement system will comply with IRC 415 requirements, TRS can retain our favorable determination ruling issued in by the IRS in early 2014. The General Assembly also passed an amendment to Georgia’s Public Retirement Systems Standards Law with updated GASB language. GASB replaced Statements 25 and 27 with Statements 67 and 68. Statements 25 and 27 contained information relating to retirement system funding requirements, as well as financial reporting requirements. GASB Statements 67 and 68 only relate to financial reporting requirements and no longer reference funding requirements. The Standards Law was updated to specify that the funding requirements will be determined based on the GASB Statements No. 25 and 27 that were in effect on June 15, 2013.

TECHNOLOGY TRS’ Pension Administration Services Solution (PASS) was developed over a 3.5 year period, with deployment of its final component, customer web services, in March 2005. Enterprise content imaging and workflow functionality are provided by IBM’s FileNet P8 system, which is integrated into PASS. The FileNet P8 application is hosted in a virtualized environment on an array of Dell PowerEdge R710 servers (Dual Quad Core Intel Xeon E5640 processors) running Windows Server 2008 R2 (x64) Enterprise edition. The FileNet Application services are hosted in WebSphere Application Server and utilize Microsoft Network Load Balancing (NLB) for scalability purposes. The database management system (DBMS) consists of Microsoft’s SQL Server 2012 (x64) for PASS core backend systems hosted on clustered Dell PowerEdge R710 servers (Dual Quad Core Intel Xeon E5649 processors) running Windows Server 2008 R2 (x64) Enterprise edition. The FileNet system utilizes Microsoft’s SQL Server 2008 R2 (x64) hosted on clustered Dell PowerEdge R710 servers (Dual Quad Core Intel Xeon E5649 processors) running Windows Server 2008 R2 (x64) Enterprise edition. All database servers are connected to an EMC CX4-120/NS-120 storage array through redundant pathways via a Brocade-based Storage Array Network (SAN). The PASS customer and employer web portals are constructed using the .NET Framework 4.0, .NET WCF Framework, and Microsoft ASP.NET technologies. The portals are hosted in a virtualized environment on an

72

array of Dell PowerEdge R710 servers (Dual Quad Core Intel Xeon E5640 processors) running Windows Server 2008 R2 Web edition on the front-end web server and Windows Server 2008 R2 Standard edition on the backend web application server. The front-end of the web portals utilize Microsoft Network Load Balancing (NLB) for scalability purposes. For internal accounting functions TRS uses Microsoft Dynamics GP. The Microsoft Dynamics GP implementation includes Microsoft Dynamics GP 2010 (GP), Microsoft Management Reporter 2012 (MMR), Microsoft FRX6.7 (FRX), Microsoft Business Portal 2010 and Microsoft SharePoint 2010. The clients (GP, FRX, MMR), the Business Portal, and the SharePoint applications access a data tier which consists of SQL Server 2008 R2 (x64) running on Windows Server 2008 R2 (x64) Enterprise edition. Planned modifications to TRS’s Pension Administration System include enhancements to the employer web portal to support a paperless retirement process for customers, and enhancements to streamline the employer reporting business processes.

INVESTMENT ACTIVITY/INITIATIVES As of May 31, 2014, the System’s assets were $65.5 billion as compared to

o $58.5 billion on June 30, 2013. o $42.9 billion on June 30, 2009.

The System’s assets have increased 12.0% since July 1, 2013, and 52.7% since July 1, 2009. As of 5/31/14, the fiscal year-to-date rate of return is 15.4%. TRS’ 25-year historical rate of return is 8.9%.





71.04 % 25.19 % 0 % 0 % 3.77 % 0 % 0 % 100 %

Invested internally: 100% Equities and Fixed Income.

73

NASRA - Roll Call of the States State: Hawaii Retirement System: State of Hawaii Employees' Retirement System Executive Director: Wesley K. Machida Market Value of Assets: $13.7 B Assets as of: 3/31/2014 Number of Active Members: 66,226 Number of Annuitants: 44,812 Participants as of: 6/30/2013

LEGISLATION Act 35/SLH 2013: This measure allows the Employees' Retirement System (ERS) to retain or dispose of real estate acquired by the ERS by foreclosure, in the enforcement of security, or in satisfaction of debts in the same manner as the System's other investments in interest in real property. It repeals the limitation on the holding period for these types of real estate transactions and gives the ERS Board the authority to prudently manage the ERS' investment portfolio. Effective: April 23, 2014.

SYSTEM GOVERNANCE As the result of 2013 legislation, the ERS Board of Trustees, through its Executive Director, hired three new Investment Officers for the ERS Investment Office. The three officers will assist the Chief Investment Officer and will be responsible for monitoring Liquid Markets, Illiquid Markets and Risk Management. The Board expects that the new officers will make lasting contributions to the efficiency and effectiveness of the ERS investment strategy and program.

TECHNOLOGY ERS currently used Vitech System Inc.’s V3 Pension System version 8.7 which includes document imaging and workflow. Our Accounting System is Oracle Financials version 11.5 and ERS plans to upgrade to version 12.1 in the near future. Our servers are running Microsoft Windows server 2010; and our desktops are currently running on Microsoft Windows 7 from Windows XP. The ERS maintains its own data center and handles all aspects of Information Technology support.

LITIGATION / CORPORATE GOVERNANCE As noted previously in 2013, the most significant claims involve the definition of compensation for purposes of computing pension benefits and employer’s assessment for significant increases in non-base pay during the final years of employment resulting in inflated retirement benefits (“pension spiking”).

FUNDING ISSUES The Plan’s current funded ratio as of June 30, 2013 is 60%. The UAAL is $8.49 billion as of June 30, 2013 compared to $8.44 billion in 2012. Due to significant changes in the future contribution rates and benefits for employees hired after June 30, 2012, the ERS funding policy uses an open group projection for determining how many years it will take to eliminate the unfunded liabilities of the System. The System is expected to be fully funded in 28 years. The open group projection assumes that the number of active members will remain constant and that there will be no actuarial gains or losses on liabilities or investments.

74

The investment return assumption was decreased from 8.0% to 7.75% effective with the June 30, 2011 actuarial valuation and future changes are subject to the discretion of the Board of Trustees.

MODEL PRACTICES As mentioned previously, the ERS Investment Office is positioned to continue on a path toward best practices in fulfilling our fiduciary responsibilities to manage the investment assets prudently and with a higher standard of care that should ensure the sustainability of the pension plan. In addition, the ERS will continue to introduce proposals that will promote greater stability for our fund, including proposals to change the formula for crediting unused sick leave toward retirement benefits, the forfeiture of retirement benefits for members convicted of work-related felonies and revising the criteria and calculation of cost for purchasing previous service credit.

INVESTMENT ACTIVITY/INITIATIVES The ERS has a Sudan Investment Policy that restricts certain equity and fixed income securities in separately managed accounts per the list provided by the Conflict Risk Network in Washington D.C. Challenges: Lower expected return assumptions; increase market volatility. The ERS is designing a policy and expects to implement a portfolio allocation structure based on broad risk categories such as growth, inflation, and interest rates. The risk based asset allocation structure will be designed to generate more stable returns over a full market cycle.

ASSET ALLOCATION Target Allocation as of December 31, 2013: 34.6% Public US 20.0% Fixed Income 26.0% Public Non-US 6.6% Real Estate 3.6% Private Equity 4.2% Real Return 5.0% Covered Calls Return as of December 31, 2013: 12 months: 16.30% Return as of September 30, 2013: 12 months: 12.57% Actual Allocation as of December 31, 2013: 38.3% Public US 17.0% Global Fixed Income 24.8% Public non-US 6.6% Real Estate 3.6% Private Equity 4.2% Real Return 4.6% Covered Calls .8% Other 100% Assets managed externally

75

DEFINED CONTRIBUTION PLANS The State of Hawaii Deferred Compensation Plan (IRC 457 Plan) is administered by the State Department of Human Resources Development through its Third Party Administrator, Prudential Retirement. It is a voluntary program also known as the Island $avings Plan, and provides over 22 different investment products or options available to Plan participants. There are approximately 27,000 participants and the Plan's total assets amount to approximately $1.8 billion. The overall Plan participation rate is about 26% among the eligible workforce. On July 29, 2013, Third Party Administration of the Plan transferred from ING to Prudential Retirement.

FUTURE DEVELOPMENTS / OTHER ISSUES As mentioned previously, the ERS Investment Office is positioned to continue on a path toward best practices in fulfilling our fiduciary responsibilities to manage the investment assets prudently and with a higher standard of care that should ensure the sustainability of the pension plan. In addition, the ERS will continue to introduce proposals that will promote greater stability for our fund, including proposals to change the formula for crediting unused sick leave toward retirement benefits, the forfeiture of retirement benefits for members convicted of work-related felonies and revising the criteria and calculation of cost for purchasing previous service credit.

76

NASRA - Roll Call of the States State: Idaho Retirement System: Public Employee Retirement System of Idaho Executive Director: Don Drum Market Value of Assets: $14.7 B Assets as of: 6/30/2014 Number of Active Members: 66,703 Number of Annuitants: 41,088 Participants as of: 5/31/2014

LEGISLATION STATUTES HB 397 - Supplemental Retirement

• Repeals title 59, chapter 15 (widows’ supplemental retirement). • Effective July 1, 2014.

The Supplemental system was closed in the late 1970s. With no living beneficiaries, and the leftover funds having been transferred back to the State Controller, the Legislature opted to remove the system from the books. HB 452 – Sick Leave

• Amends Idaho Code § 33-1217 to provide that any person employed by a school district who was employed by a state educational agency during the current or prior school year shall be credited unused sick leave during state employment up to 90 days.

• Amends Idaho Code § 67-5333(1)(c) to provide that a person returning to state employment within 3 years does not get reinstated unused sick leave that was transferred to a school district under Idaho Code § 33-1217 (as amended – described above).

• Amends Idaho Code § 67-5333(2)(b) to add subsection (v) to provide that the credited state service requirements of I.C. § 33-1228(2)(b)(i) – (iv) do not apply to a retiring employee of a state education agency with unused sick leave that includes sick leave transferred under Idaho Code § 33-1217, but that the maximum unused sick leave that may be considered is 600 hours.

• Effective July 1, 2014.

This legislation was meant to make it easier for the State Department of Education to use the transfer of accrued sick leave as a tool for recruiting. So, for example, if an end-of-career teacher goes to the Department of Education for 1 year, transferring 90 days as allowed under Idaho Code § 33-1217 (90 days x 8 hours = 720 hours) and then retires after 1 year, that teacher can use up to 600 hours of the unused sick leave that came over with her from the school district. She is not limited by the credited state service requirements of subsections (1) through (iv). HB 636 – JRF – Supreme Court Appropriations

• Statement of Purpose addresses employee and employer contribution rates as follows: • The increase is to 55.28% Employer and to 10.23% Employee

77

• Effective July 1, 2014.

Starting July 1, 2014, PERSI took over administration of the State Judges’ Retirement Fund (previously administered by the Idaho Supreme Court). The PERSI Retirement Board accepted the transfer of administration on the condition that the Fund is stable, with a sustainable funding mechanism in place. RULES DOCKET 59-0103-1401 – Contribution Rules

• Temporary Rule. • This rule addresses contribution rates. • Delays the effective date of the next scheduled rate increase from July 1, 2014 to July 1, 2015.

Due to improved market performance and improved funded status, the Board postponed rate increases for one year.

SYSTEM GOVERNANCE PERSI is directed by a five-member Retirement Board. The Trustees are appointed by the Governor of the State of Idaho for 5-year terms. These appointments are subject to legislative confirmation. State law requires that two members of the Board be active PERSI members with at least 10 years of service. For Fiscal Year 2015, PERSI currently allocates personnel funds to 64 permanent full time positions operating from the headquarters in Boise (59 employees) and field offices in Coeur d’Alene (2 employees) and Pocatello (3 employees).

TECHNOLOGY Rapidly changing technology challenges PERSI’s ability to meet member needs and expectations. To a large degree, the marketplace shapes member expectations of PERSI’s online services and influences decision-making about the technologies needed to conduct business in the 21st Century. Although PERSI systems have generally kept pace with information technology (IT) advancements, PERSI recognized its current pension administration system was nearing the end of its useful life and not able to integrate well with newer technology. In fiscal year 2009, PERSI engaged a pension system consulting firm to conduct a comprehensive study of the agency’s IT business requirements and recommend a strategy for meeting current and future needs. The recommendation that emerged from the study called for replacing the system with a commercial off-the-shelf (COTS) system customized as necessary to meet business requirements. In fiscal year 2010, PERSI began several initiatives to prepare the agency for the system replacement project. It retained the services of a data quality contractor to analyze the pension data and work with PERSI staff to cleanse the data for presentation to the new system. Other PERSI staff engaged in an effort to review and document business rules for use in designing the new system processes. Additionally, PERSI brought in a project oversight consulting firm to gather business requirements and develop a request for proposals (RFP) for a new pension system. By June 2011, the RFP was ready for release and PERSI had legislative approval to proceed with the project. PERSI released the RFP in August 2011 and selected a vendor in November. The system replacement project, code-named IRIS (Idaho’s Retirement Information System), was kicked-off in January of 2012.

78

The system is being rolled out in three phases beginning with the Employer Reporting program, which went into live production in May of 2013. Since then, PERSI’s Employer Service Center and IT staff have been working with the 764 employers to convert their reporting to the new system. As of June 2014, more than half are reporting with the new system and the remaining employers are expected to make the transition by December of 2014. At the same time, the system vendor and PERSI’s project team have moved on to designing and developing the next phase which will include the member administration and retiree payroll programs, followed by the third phase, Member Self-service. In conjunction with the second phase of the IRIS project, PERSI will implement a new Enterprise Content Management (ECM) system to replace the current imaging system. An RFP for the ECM system was released in January of 2014 and a vendor and system selected in April. The new ECM system will be integrated for imaging with the IRIS system and put into production with the second phase. Once imaging implementation and conversion is complete, future work will be done to configure the ECM system for organization and management of other types of electronic documents. IRIS is a critical component of PERSI’s IT strategic plan. People of all ages are now accustomed to doing business on the internet using home computers and mobile devices. They want and expect to conduct business with PERSI with the same convenience as online banking and bill paying. IRIS will make it possible for PERSI to expand its online services to members and employers, while ensuring confidential information is protected and secure. The system will also benefit PERSI by boosting staff efficiency through well-designed automation of work processes and by giving managers ready access to information and reports for business analytics and decision-making. As the IRIS project progresses, PERSI’s IT strategic plan provides for continued testing and strengthening of security defenses to protect data and systems from unauthorized access, malicious attacks and natural disaster. New threats are constantly emerging, so PERSI’s information technology must be updated or replaced regularly to eliminate vulnerabilities. The plan also includes improvements to PERSI’s business continuity capabilities to enable operations to recover and continue in the event of a disastrous event.

FUNDING ISSUES Current funded status as of June 26, 2014: 93.9% (UNAUDITED) PERSI has made no new changes to key actuarial assumptions. PERSI’S investment return assumption is 7% after fees (3.75% real return and 3.25% inflation assumption).

MODEL PRACTICES CUSTOMER SERVICE PERSI’s #1 priority is “Personalized Customer Service”. In 2014, an independent research firm (CEM) rated PERSI’s business practices against 11 similar public retirement systems. The results help us improve service levels, set goals and manage costs. Here’s some of what they found: PERSI’s service score has significantly increased over the last four years. Only two peer systems outscored PERSI for service, and by a very small margin. Our total service score was 83 out of a possible 100, exceeding the peer median of 77. Higher service scores generally means faster turnaround times, more availability, more choice and higher quality. Key areas that affect our service score include paying benefits on time, processing new retirees, secure website capability, and prompt call center service. Our administrative cost per member was $51 which is $72 less than the peer average of $123 per member. Our cost per member has actually decreased slightly since 2010 due to a decrease in the cost of our support services and an increase in our membership, coupled with having higher productivity per full time employee. This data reflects PERSI’s commitment to providing excellent customer service while controlling costs. Our attention to customer service has always set us apart from our peers and PERSI leadership continues to

79

believe personalized customer service is essential to all generations of members. We cannot afford to have any generation ignore, tune out, or turn off the messages about the PERSI benefit. COMMUNICATION I continue to travel to all corners of our state, meeting with legislators, employers, members, retirees, and constituency groups – discussing issues important to PERSI and its stakeholders. PERSI is committed to ensuring that employers and their governing bodies are prepared and equipped to implement new Governmental Accounting Standards Board (GASB) transparency in pension reporting standards. As effects of the new GASB rules begin to unfold, entities interested in changing public pension systems may set their sights on PERSI. We will continue to educate lawmakers and employers about the changes, and be a trusted resource as the change begins to take effect in 2015. Communication between PERSI and our employers has never been more critical than it is now, amid the IRIS conversion. We continue to make progress implementing this new $13 million pension administration system which may be the largest project ever undertaken by PERSI. With the staggering volume of member data coming into PERSI, IRIS will greatly reduce inconsistencies in payroll reporting and improve the quality of the data used by PERSI. A majority of employers are already using the new system to report payroll information to PERSI. Our Employer Service Center, as well as our Education and Communication Training Unit, continues to work closely with employers, to assist in a smooth transition to the new system. Educational outreach efforts continue to focus on making sure members, employers and lawmakers understand and appreciate the value of the PERSI benefit. This year, we will add a Training and Development Manager position to the staff, continue to expand workshop offerings explaining the value of the PERSI benefit, and produce a new series of educational videos designed to engage and inform younger and newer members. Technology has a place in the process, so long as it is used to enhance but never replace in-person efforts. We will continue to evaluate but only utilize automation if we believe it provides enhanced value. NEW PENSION ADMINSTRATION SYSTEM PERSI is in the second year of a three year project to convert to a new pension administration system. We are using a phased-in approach which started with the Employer Services area, and just went live in May 2013. Once an employer meets PERSI’s certification criteria for submitting data to PERSI through the new system, their payroll staff is trained in utilizing the new system, named IRIS (Idaho Retirement Information System). PERSI staff has been conducting training across the state and via webinars for employers, and is bringing on several new employers each week. We are currently down to a few final employers and vendors to go live. PERSI is using the Tegrit Arrivos platform for the new system, and is working with IKON on data cleansing and Provaliant on project consulting and project oversight. Since last July, we have also been working on the conversion of the member services functions, which involves many detailed processes. At this time, we are on schedule to meet our project deadline. NEW IMAGING SYSTEM PERSI is implementing a new imaging system, OnBase. The Statement of Work is now being finalized and work on this conversion will begin soon as well.

INVESTMENT ACTIVITY/INITIATIVES PERSI has not changed, and does not plan to change at least for the next few years on the investment side—everything has worked and is working as we expected given the markets. We have no social investing biases. Our challenge is to have no challenges, and so far we are rising to the occasion! A combination of investment earnings and contributions from employers and employees fund PERSI. Although,

80

the rise and fall of the stock market can have a profound impact on the PERSI trust fund in the short run, since PERSI was established in 1965 investment earnings have contributed 57% of the plan funding through FY2013. For Fiscal Years ending 2005, 2006, and 2007, the fund experienced phenomenal growth earnings with gross returns of 10.9 percent, 12.3 percent and 20.0 percent respectively. In 2008, with returns of -4.2 percent, PERSI had its first negative fiscal year since 2002. The market collapse continued in Fiscal Year 2009, causing a significant and rapid decline in the value of the fund. Over a seven-month period beginning in September 2008, the fund value dropped nearly 33 percent. The fund began recovering in April 2009, and by June 30th regained nearly half of its losses since September 2008. Still, the net return for Fiscal Year 2009 was -16.0 percent, which matched the worst fiscal year in PERSI’s history (1974). Recovery continued sporadically throughout the following year with more volatility in the markets. The fund ended Fiscal Year 2010 with a net investment return of 12.4 percent. Although the progress was positive, the fund was not fully recovered; so in December of 2009, the Retirement Board approved a series of contribution rate increases to ensure the long-term sustainability of the fund. The first increase of 1.5 percent (1% employer and .5% employee) was scheduled to take effect July 1, 2011, but the fund continued to recover; so in the fall of 2010 and again in 2011, the Board voted to postpone the increases until July 1, 2013. In the fall of 2012, the market volatility market resulted in dropping the funded ratio to 84.7%. Market indicators led the board to believe volatility might continue. Thus, the Board made a decision to allow the 1.5% scheduled rate increase to go into effect on July 1 2013. The PERSI fund ended Fiscal Year 2012 with a net return of 1.16%. Fiscal Year 2013 was a good year – one that, for much of the year, had the potential to be great, with net returns of 9.1%, investment gains of over $1.092 billion, and asset levels that rose from $11.933 billion at the start of the year to $12.756 billion at the close. Cautiously optimistic based on good market returns, the Board voted to postpone for one year the implementation of the next contribution rate increase which was scheduled to take effect July 1, 2014. Fiscal Year 2014 was much better than the previous year, with just days before year end, the fund is hovering near all-time high asset values around $14.5 billion. We have seen our Net Pension Liability reduced by more than 50% to under $1 billion. We are tracking to finish the year with an approximate 16% return for the year. PERSI's objective is to minimize the effect of external influences whenever and wherever possible by diversifying among a wide range of domestic and international asset classes and investment management styles. With billions invested worldwide, PERSI does everything possible to manage risk to the fund. It is, however, impossible to predict or control the rise and fall of world markets; therefore, PERSI funding levels are very much subject to market fluctuations. Regardless of changes in the global economy, PERSI remains steadfast in its investment philosophy: SIMPLE – control liabilities and rely on market returns with 70/30 equity/fixed mix; TRANSPARENT – easy to understand and explain, concentrate on broad structures and strategies, and no black box investing; FOCUSED – look at the big picture over the long term, concentrate on material impacts on overall portfolio, and maintain a small staff and citizen board.





61.5 % 22.5 % 8.1 % 7.3 % 0.6 % 0 % 100 % 0 %

These asset allocation percentages are as of June 30, 2014.

81

DEFINED CONTRIBUTION PLANS The PERSI Choice 401(k) Plan is a voluntary, supplemental 401(k) plan that is available to all active members who are eligible for the PERSI Base Plan (defined benefit plan). Like the Base Plan, it is administered by a Board of Directors. Xerox (formerly ACS HR Solutions) is the plan’s record keeper and BNY Mellon is the funds custodian. The following data is unaudited. Plan assets were $635,083,916 as of May 31, 2014. The default fund option for the plan is the PERSI Total Return Fund, which is invested the same as the Base Plan and is daily valued. Membership statistics as of May 31, 2014: Eligible active participants: 67,897 Active participants with a balance: 42,023 Participants making salary deferrals: 11,717 (17.26% of eligible) Below is the investment fund lineup as of March 31, 2014: Balanced Options: PERSI Total Return Fund Calvert Social Investment (Sudan –Free) Fund Equity Options: Mellon US Equity Market Strategy (Wilshire 4500) Mellon S&P 500 Stock Index Fund Vanguard Growth & Income Fund Mellon Market Completion Stock Index Fund (Wilshire 4500) T. Rowe Price Small Cap Stock Fund Mellon International Stock Index Fund (MSCI EAFE) Brandes International Equity Fund Fixed Income Options: Mellon Aggregate Bond Index Fund Dodge & Cox Income Fund PERSI Short Term Investment Portfolio PERSI continues to work on developing effective educational tools for our members to help them understand the importance of supplementing their retirement savings with a plan like the PERSI CHOICE 401(k) Plan.

FUTURE DEVELOPMENTS / OTHER ISSUES Implementation of our new pension administration system will require some staff reorganization, as certain functions will become automated and new functions will be required. PERSI management is currently working to identify a new working organization chart to be implemented in conjunction with the new system. PERSI is also implementing a new imaging system, OnBase. The Statement of Work is now being finalized and work on this conversion will begin soon as well. We are in the RFP process to identify a records keeper for our DC plan. A new vendor should be identified in July, 2014.

82

NASRA - Roll Call of the States State: Illinois Retirement System: Illinois Municipal Retirement Fund Executive Director: Louis W. Kosiba Market Value of Assets: $33.6 B Assets as of: 4/30/2014 Number of Active Members: 173,826 Number of Annuitants: 107,732 Participants as of: 12/31/2013

LEGISLATION House Bill 4691 would increase the amount transferred from IMRF to a newly formed police pension fund. Currently, when a participating municipality creates a police pension fund and its police officers are transferred from IMRF to the new fund, IMRF only transfers the member contributions without interest. House Bill 5592 would allow members to file a reversionary annuity application prior to retirement, as long as the member was vested and at least the minimum retirement age. Also passed was House Bill 5696, which would no longer require write-in candidates for trustee elections when only one candidate (two candidates when there are two open positions) is certified and eligible for the ballot. Finally, Senate Bill 452 would prohibit contracts for investment or consulting services or commitments to private market funds from being awarded unless the prospective contractor discloses certain information on minority, women, and disabled staff and contracts. That information must be considered by the fund in determining the award, to the extent allowed under fiduciary and financial prudence. It also requires separate goals be established for minority-, female-, and disabled-owned firms and to review those goals annually. A manager who meets the criteria established by the consultant for the search must be invited to present for final consideration. If there are multiple managers who meet this requirement, staff may limit the invitation to only the most qualified firm.

SYSTEM GOVERNANCE The Board conducted its annual self-evaluation in December 2013. It is facilitated by an independent consultant. The Board worked with staff to develop a new Strategic Plan for 2014-2016. The Executive Director’s performance appraisal is now better linked to the success of the Strategic Plan. A wave of senior leaders and long-term employees’ retirements occurred since July 1, 2013. The Chief Financial Officer retired at year end. He was replaced by the Finance Director of a municipality participating in IMRF.

TECHNOLOGY In the 3rd quarter 2013, we continued progress on “Horizon” – our Strategic Modernization initiative. The joint Deloitte Consulting – IMRF team completed the Requirements Traceability Matrix which decomposed the 803 commitments in our RFP into the detailed 3,720 requirements to achieve our service and productivity goals. Over 100 IMRF staff participated in this effort. In the 4th quarter 2013, the Deloitte – IMRF team began the Joint Application Design (JAD) sessions to review each requirement and decide whether the baseline Deloitte system already met that requirement (a “fit”) or not (a “gap”). For “gaps” the team then designed the system changes needed to fulfill that requirement. Progress has continued in 2014:

83

• We completed the JAD sessions for the system components targeted for the first phase implementation. Remaining functionality is planned for a later second phase.

• Deloitte initiated construction and testing of this first phase functionality. • We designed and implemented the technology infrastructure to support the new Horizon system • We developed a comprehensive change management and training plan for this first phase implementation

We also continued our related project to replace our existing website with a goal to coordinate this replacement with the rollout of the new member and employer portals that are part of the Horizon project. In the 1st quarter 2014, we completed phase one of this website replacement project which included:

• Needs Assessment – Identification of website and mobile needs of our members and employers through focus groups and surveys

• Brand Assessment – Review and update of IMRF’s branding and visual identity across the website and all communications channels including a new logo

• Visual Design – Define detailed website structure and visual identity through prototypes • Technical Design – Detailed technical design to populate the phase two RFP to actually build and deploy the

website

In the 2nd quarter of 2014, we published the phase two RFP (Build and Deploy Website). We evaluated responses, selected a vendor, and plan an early 2015 rollout. Finally, we published an RFP to replace our Financial Systems (General Ledger, Accounts Payable, Fixed Assets, Budgeting) since the current software we use has been discontinued by the manufacturer. We will be implementing Microsoft Dynamics GP as our new software, and have selected a vendor to complete this project by January 2015.

LITIGATION / CORPORATE GOVERNANCE

IN RE TRIBUNE CO, ET AL. , THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF TRIBUNE CO, ET AL. VS. FITZSIMONS, ET AL.

The unsecured creditors in the Tribune bankruptcy sued investors who sold their Tribune stock at the time of the leveraged buyout by the group headed by Sam Zell. IMRF sold its stock to the buyout group and is included as a defendant. The plaintiffs’ theory is that the buyout was fraudulent and therefore a portion of the proceeds from the stock sale was based on that fraud and should be returned to the Tribune’s bankruptcy estate. At the time Tribune Company exited from bankruptcy, this lawsuit was assigned to a trustee to continue on behalf of the creditors.

LEHMAN BROS. SPECIAL FINANCING, INC. V. BANK OF AMERICA NATIONAL ASSOC., ET AL.

This case was filed in the Lehman Bros Bankruptcy matter. IMRF owned a bond, purchased by one of the Progress managers, for which we were paid in full at the time Lehman became insolvent. In this case, certain of the parties in the Lehman bankruptcy are attempting to recoup the proceeds of our bond, as well as others. IMRF accepted the plaintiffs’ offer to settle for $200,000.

Olympus Corporation

84

IMRF and other US institutional investors have joined in a lawsuit in Japan against Olympus Corporation based on securities fraud. We are acting through a European company (Deminor International) that manages non-US securities litigation under contract with the owners of the securities.

Trustees of the Mineworkers’ Pension Scheme Limited and Others v

The Royal Bank of Scotland Group plc

IMRF has joined in a lawsuit against the Royal Bank of Scotland, based on securities fraud. We are sharing US counsel with other US public pension funds and British counsel with those funds and other non-US organizations. The plaintiffs’ allegations are that RBS purposely misstated its financial position in connection with a securities offering in 2008.

FUNDING ISSUES As of December 31, 2013, IMRF was, in the aggregate, 87.6% funded on an actuarial basis and 96.7% funded on a market basis. The comparable funded percentages as of December 31, 2012, were 84.3% and 85.9%. The increase in IMRF’s actuarial funded status was due in large to 2013 investment gains which were 20.25% along with 2012 gains of 13.5%, overshadow the 2011 investment losses. IMRF began 2013 with $503 million of unrecognized investment gains for actuarial purposes but ended the year with $3,120 million of unrecognized gains. IMRF’s actuarial return for 2013 was 10.5%, an increase from the 7.8% actuarial return in 2012. The $3.120 million of unrecognized investment gains as of December 31, 2013 will positively impact IMRF’s actuarial funded status over the next four years. As a multi-employer plan with 2,977 employers, individual employer’s funded statuses vary greatly from the overall averages.

The IMRF Board has the authority to set employer contribution rates which are designed to fully fund the plan by recovering the unfunded balance over an appropriate amortization period. Because of the dramatic investment losses in 2008, the IMRF Board in 2008 changed two actuarial techniques and adopted an optional phase-in plan to moderate the impact on employer contribution rates for 2010. The first actuarial change was to increase the corridor for the allowable difference between the actuarial value of assets and market value of assets from 15% to 20%. The second change was to change the amortization method for recovering the unfunded accrued actuarial liability from a closed period (which was at 23 years for 2009 rates) to an open 30-year period. Because of the significant increase in 2010, employers were given the option to base 2010 contributions on a phase-in plan which capped most employers 2010 contribution rates at a 10% increase over 2009 rates. The phase-in option expired as of 12/31/2014. All employers will return to the ARC rate for 2015. The amortization period was again closed in 2012. This year the amortization period is 28 years.

IMRF continues to believe that its 7.5% investment return assumption coupled with its 4% wage inflation growth assumption results in a conservative real return assumption of 3.5%.

MODEL PRACTICES Baldrige Criteria for Performance Excellence IMRF continued our Journey of Excellence program, aligning our organizational improvement programs with the Malcolm Baldrige National Quality Program’s Criteria for Performance Excellence. The criteria include measurements in seven categories: Leadership; Strategic Planning; Customer Focus; Measurement, Analysis, and Knowledge Management; Workforce Focus; Operations Focus; and Results. We completed our third Illinois Performance Excellence (ILPEx) Award application in May 2014 (having been awarded a Silver “Progress toward Excellence” Award in 2012 and a Bronze Award in 2009). We expect a Site Visit from the ILPEx Examiner Team in September 2014.

85

The primary benefit of the award program is derived from the comprehensive Feedback Report received from the Examiner Team. The report provides a summary of IMRF Strengths and Opportunities for Improvement relative to the Baldrige Criteria. Examples of recent improvement initiatives resulting from past feedback reports include:

• Adopting a Formal Leadership System • Adopting a Complaint Management System

Our Complaint Management System standardizes the process used across the organization to address and resolve customer complaints. It allows staff to enter customer complaints into the Universal Help Desk (UHD) for tracking and resolution, and assigns accountability to leadership.

• Strengthening our Strategic Planning Process

We completed our 2011-2013 Strategic Plan, and developed a new Plan for 2014-2016

• Maintain Continuous Process Improvement (CPI) Program • Continued Participation in the Defined Benefit Administration Benchmarking Analysis and Customer

Satisfaction Surveys

IMRF recently received its 2013 analysis report from CEM Benchmarking Inc., marking its 13th year of participation.

• Participation in the Cobalt Community Research satisfaction survey benchmark • Enhanced Scorecarding which measures progress towards achieving strategic goals. • Expanding/Improving the Employee Engagement Survey • Strengthening the Voice of the Customer (VOC) Process • Creation of Individual Learning Plans (Workforce Development)

This was initiated in 2010, and fully deployed in 2013 to all staff except new hires.

INVESTMENT ACTIVITY/INITIATIVES IMRF’s strategic asset allocation targets are as follows: U.S. Equity 38.0% International Equity 17.0% Fixed Income 27.0% Real Estate 8.0% Alternative Investments 9.0% Cash Equivalents 1.0% IMRF returned 20.25% in 2013. Year to date through 4/30/14, the assets returned 1.64%. Investment performance for periods ending 4/30/14 is as follows: One year 13.38% Three years 9.07% Five years 14.14% Ten years 8.20% IMRF is committed to providing opportunities for emerging minority and female owned investment management firms and emerging investment management firms owned by a person with a disability and has established the following goals:

86

Goals for Utilization of Emerging Investment Managers By Emerging Investment Manager Classification

Emerging Investment Manager Classification

Minimum Goal as a Percentage of Total Portfolio

Actual as of 4/30/14

Minority Owned Businesses 9% to 13% 12.2%

Female Owned Businesses 2% to 6% 2.7%

Businesses Owned by a Person with a Disability

0.5% to 1%

0.03%

Goals for the Utilization of Emerging Investment Managers by Asset Class

Asset Class

Minimum Goal as a Percentage of Asset Class

Actual as of 4/30/14

Equities 10% to 12% 12.9%

Fixed-Income 15% to 20% 20.4%

Alternatives 5% to 10% 10.0%

IMRF is also committed to providing opportunities for minority owned and female owned broker/dealers and broker/dealers owned by a person with a disability. (The minimum expectations for the utilization of these broker/dealers by investment managers were increased in 2013 for U.S. Equities, Fixed Income; and U.S. Micro-Cap Equities by 5%, 2%, and 2%, respectively). Minimum expectations by asset class are as follows:

Asset Class Minimum Goal Actual YTD as of 3/31/14

U.S. Equities 25% 37.98%

International Equities 20% 32.59%

Fixed Income 22% 20.79%

High-Yield Bonds 5% 9.74%

U.S. Micro-Cap Equities 7% 13.58%

International Small-Cap Equities 5% 8.26%

Emerging Market Equities 5% n/a

Commingled Accounts Best Efforts 0.21%

We presented the results of the 2013 Asset Liability Modeling Study to the Board in November. The Board

87

approved reducing exposure to the International Equity asset class from 20% to 17%; reducing exposure to the Fixed Income asset class from 29% to 27%; increasing exposure to the Real Estate asset class from 6% to 8%; and, increasing exposure to the Alternative asset class from 6% to 9%. The Board approved a strategic asset allocation, effective as of January 1, 2014, with the following parameters:

• 38% Domestic Equity; • 17% International Equity; • 27% Fixed Income; • 1% Cash; • 8% Real Estate • 9% Alternatives

(The rebalancing range for each asset class is +/- 4%). We revised IMRF’s Statement of Investment Policy, Real Estate Statement of Investment Policy, and Investment Committee Charter. The IMRF Investment Department was restructured based on key functional areas including: Emerging Manager Program and Total Portfolio; Public Markets; Private Markets; and Operations. This new structure creates career paths within the department that should help retain and engage staff as the portfolio grows in complexity.





65.1 % 26.6 % 3.9 % 3.9 % 0.5 % 0 % 99 % 1 %

This is the actual asset allocation as of 04/30/2014. All portions of the portfolio are managed externally except for Cash Equivalents (1% internal; 99% external).

FUTURE DEVELOPMENTS / OTHER ISSUES • Continued to work towards achieving excellence by following the Baldrige Criteria for Performance

Excellence

• Continues to work on development of new business enterprise systems and website

• Launching a new logo in 2015 which emphasizes IMRF’s independence from the State of Illinois

88

NASRA - Roll Call of the States State: Illinois Retirement System: Illinois Teachers' Retirement System Executive Director: Richard W. Ingram Market Value of Assets: $43.59 B Assets as of: 3/31/2014 Number of Active Members: 160,692 Number of Annuitants: 97,899 Participants as of: 6/30/2013

LEGISLATION Legislation implementing major changes to the Illinois Pension Code, affecting both member benefits and funding, was approved in December of 2013 by the Illinois General Assembly and signed into law by Gov. Pat Quinn. The new law was scheduled to take effect on June 1, 2014 and Teachers’ Retirement System was in the process of working to fulfill that requirement. However, challenges to the new law’s constitutionality have indefinitely delayed implementation. Five lawsuits challenging the law, Public Act 98-0599, as a violation of the Illinois Constitution’s pension protection clause were filed in Chicago and Springfield in December of 2013 and January of 2014. The five lawsuits have been consolidated into one case, which is pending in a Sangamon County Circuit Court. In May the court issued a temporary injunction blocking the implementation of the law until the court challenge is resolved. All sides in the case expect the final decision on the act’s constitutionality to come from the Illinois Supreme Court. This process could take many months. The act is designed to fix a systemic financial problem faced by TRS and the state’s other pension systems that jeopardize the future payment of retirement benefits. Over the next 30 years provisions in the law eliminate a growing long-term deficit at TRS by increasing state funding and cutting benefits for all Tier I members in order to reduce future expenditures. The current TRS unfunded liability is $55 billion, out of a total long-term liability of $93.9 billion. Without changes to the System’s overall financial structure, the unfunded liability will continue to grow until TRS has insufficient assets on hand to pay benefits to its members. The principal reason that TRS carries an unfunded liability is that in every year since 1939, legislators have never allocated 100 percent of the money required actuarially to fully fund the System. Money routinely has been diverted from TRS to other government spending priorities. The provisions in the new law that cut future benefits form the basis of the constitutional challenge. The lawsuit contends that any benefit cut violates the pension protection clause of the 1970 Illinois Constitution, which states, “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” As the administrative agency in charge of implementing state pension laws for teachers, TRS is a defendant in the lawsuit. The Illinois Attorney General is defending the constitutionality of the law, and, under state statutes, is representing TRS in the case. Here is a brief description of the provisions of Public Act 98-0599, which currently are enjoined:

89

Active Member Contributions: Active Tier I member contributions decrease from 9.4 percent to 8.4 percent beginning on July 1, 2014 for the 2014-2015 school year. Creditable Earnings Cap: An active member’s annual creditable earnings that eventually are used to determine the member’s final average salary are capped. The baseline cap in 2014 is $110,631. For any member covered by an individual contract or collective bargaining agreement that is in effect prior to the effective date of the law, the cap will be the member’s annualized salary on the day that contract expires, even if the expiration is after June 1, 2014. A contract in force on the day the law takes effect cannot be amended or extended after the law’s effective date to increase the cap. For any member not under contract but with a current salary that equals or exceeds the baseline cap, that member’s salary cap would be set at their salary on the bill’s effective date. Retirement Age: The law gradually increases, over the next 30 years, the retirement age for all teachers by five years. The current minimum of 55 with 20 years of service, for instance, would over time increase to 60 years with 20 years of service. The retirement age for members younger than 46 when the law takes effect is set on a sliding scale that essentially adds four months to the old minimum retirement age of 55 for every year that a member is under age 46 until a total of five years has been added to the minimum retirement age. For members aged 46 and older, the old retirement ages and eligibility remain in force. Reduced COLA: There are two formulas used to determine the size of each year’s cost of living adjustment. The COLA formula to be used is determined each year by the current size of the member’s pension. Each member, upon retirement, multiplies his or her total service credit by a factor that is initially set at $1,000. This “pension threshold” is used to determine the annual COLA. Beginning in 2016 and in every year thereafter, the $1,000 multiplier will be increased by the rate of inflation

• As long as a member’s pension is less than their current threshold, the COLA is 3 percent compounded. • Once a member’s pension equals or exceeds their threshold, the COLA is 3 percent of the member’s current

threshold amount.

COLA Forfeiture: Most Tier I active members will forfeit at least one COLA increase, and as many as five increases, based on a sliding scale tied to the member’s age at the time the law takes effect. Any TRS member eligible to retire that does retire on or before June 30, 2014 will not have to forfeit any COLA increases.

• 50 years and older: Forfeit one COLA increase in a two-year time frame. • 47 to 49: Forfeit three COLA increases staggered every other year over a six-year time frame. • 44 to 46: Forfeit four COLA increases staggered every other year over an eight-year time frame. • 43 and younger: Forfeit five COLA increases staggered every other year over a 10-year time frame.

Supplemental State Payments: When pension obligation bonds sold by the state in the last decade are mostly paid off in 2019, the state will begin to automatically earmark additional payments to TRS until the system’s funding status reaches 100 percent. These payments will be in addition to the state’s regularly set pension contribution. Also, beginning in FY 2016 the state will each year earmark 10 percent of the savings the state will realize from the new law. Mandatory State Payments: The law requires the state to move toward the use of the entry age normal actuarial accounting method for future funding calculations. If the state does not pay its annual contribution to TRS within

90

a set period of time, for the first time TRS can go to court to force the state to pay the contribution in the same way local governments can be forced to pay contributions to the state’s municipal retirement fund. Defined Contribution Plan: Up to 5 percent of Tier I members will be able to freeze their current defined benefit (DB) pension plan benefits and join a new defined contribution (DC) benefit plan that will be in effect until the day they retire. The DC plan is open to active Tier I members only and would begin on July 1, 2015. Once members elect to join the DC plan, they cannot rejoin the DB plan. Upon retirement, members would receive a perpetual DB annuity, plus equal payments from an accumulated DC retirement account until those funds are exhausted.

SYSTEM GOVERNANCE The TRS Board of Trustees established a subcommittee of the Board’s Investment Committee that will provide regular oversight of the System’s efforts to encourage and broaden diversity in the investment program. Through March 31, 2014, TRS met or exceeded key criteria that measures diversity in the investment program. The System’s investments to minority and women-owned companies during the first nine months of fiscal year 2014 totaled $1.025 billion.

• TRS exceeded its goals for total commissions earned by minority and women-owned brokerage firms. Total commissions to minority and women owned brokers are 32.2 percent higher than the goal for U.S. stocks and 17.5 percent higher than the goal set for international stocks. All told, the 34 minority and women-owned firms earned 19.2 percent of the total commissions earned by all TRS-hired brokers.

• In the global bond market, 15.1 percent of the total $9.9 billion invested by the System is transacted by minority or women-owned brokers. The current TRS goal for minority participation in the global bond market is 15 percent.

• TRS had hired 24 minority or women-owned investment managers as of March 31 and those managers administered $6.14 billion in assets, or 14.2 percent of the System’s total $43.58 billion in assets. The TRS goal for assets under the management of minority or women-owned companies is 15 percent.

TECHNOLOGY TRS continues an extensive document imaging project designed to digitize approximately 398,000 hard-copy member records containing an estimated 11 million images. Because TRS was founded in 1939, many of these records obviously pre-date the electronic storage of information. The new record system enhances the disaster recovery capabilities of TRS and helps prevent identity theft and the unintended loss of records. In addition to manually scanning all hard-copy records, this phase of the project includes updating approximately 3 million images housed on microfiche and 2 million images housed on microfilm. Planning has started for the next phase of the project, which will involve digitizing records in the System’s Investment Department and Employer Services Department.

LITIGATION / CORPORATE GOVERNANCE Extensive changes to the Illinois Pension Code enacted early in 2014 are being challenged in court as unconstitutional. Provisions in the new law, Public Act 98-0599, that cut future benefits form the basis of the court case. The lawsuit contends that any benefit cut violates the pension protection clause of the 1970 Illinois Constitution, which states, “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

91

As the administrative agency in charge of implementing state pension laws for teachers, TRS is a defendant in the lawsuit. The Illinois Attorney General is defending the constitutionality of the law, and, under state statutes, is representing TRS in the case.

FUNDING ISSUES The TRS funded ratio as of June 30, 2013 was 40.6 percent using a smoothed value of assets, slightly lower than the 2012 smoothed funded ratio of 42.1 percent. Using the market value of assets, the June 30, 2013 funded ratio was 42.5 percent, slightly higher than the 2012 funded ratio under the market valuation of 40.6 percent. High investment returns in fiscal year 2013 were responsible for the improvement in the market value funded ratio. However, low returns were experienced in 2012, and the 2013 smoothed value of assets includes 40 percent of the 2012 actuarial losses. Compared to the assumed 8.5 percent assumed rate of return, the 2012 actuarial loss on investments was more significant than the 2013 gain on investments, so the 2012 losses affected the funded ratio based on smoothing more than the 2013 gains. After Public Act 98-0599 was enacted in December, 2013 most of the attention focused on how much state contributions would decrease in the fiscal year beginning July 1, 2015 (FY 2016). For TRS, the estimated decrease in fiscal year 2016 was $860 million. Fiscal year 2015 contributions were not affected and will be at the levels required prior to PA 98-0599. However, due to the judicial stay of PA 98-0599 issued in May, 2014, fiscal year 2016 contributions will likely be calculated at pre-PA 98-0599 levels. If the case is settled in the meantime and the law is found constitutional, fiscal year 2016 state contributions will be lower, reflecting the benefit and funding changes of the act. In June 2014, the Board adopted new economic assumptions, including a reduction in the assumed rate of return from 8.0 percent to 7.5 percent. The recommendation to reduce the rate was based on recently conducted asset liability modeling and asset allocation studies. The state actuary also had recommended annual studies of the investment return but the change in assumptions is based on the board’s established practice. The effect on state contribution requirements will be significant, increasing funding requirements beginning in fiscal year 2016, to levels higher than had been projected even before the stay placed on PA 98-0599.

MODEL PRACTICES TRS initiated a program that will gradually convert frequently-requested forms and applications to an interactive, electronic format on the TRS website. This “Self Service” project will enable members and employers to download and print personalized information as needed; without the need for assistance by TRS staff. This program is designed to smooth the administration of member accounts, free up TRS staff time for other duties and member needs, provide around-the-clock “as-needed” access to information for members and re-confirm the System’s dedication to “green” practices. TRS became more active in social media during fiscal year 2014, expanding its presence on Facebook and Twitter, and naming our first “manager of social media.” We are also measuring our presence on the internet using a monitoring service which scans 225,000 online news sources and 300 million blogs. A comprehensive organizational and operational review was initiated, beginning with the Member Services Department. Focus groups met and provided input to a consultant on various issues and staff recommendations were shared with management. The implementation of recommended operational, organizational and cultural changes in Member Services began in fiscal year 2014. The process for other departments will begin in fiscal year 2015.

92

TRS staff and the executive director increased the use of an in-house intranet, with staff documenting work processes and the director regularly communicating with staff through his blog. The director also initiated informal departmental “huddles” designed to improve internal communications, the identification of issues and trends and problem solving. TRS retirees are eligible for subsidized health insurance coverage through another state agency, and TRS is the enrolling agent. This fiscal year, a new Medicare Advantage program was implemented that required Medicare-eligible retirees to select new plans or face losing their insurance. Extraordinary efforts by staff and management under challenging circumstances assisted 42,000 retirees in selecting the appropriate health care plan, retaining coverage or selecting a new insurance carrier.

INVESTMENT ACTIVITY/INITIATIVES During the first nine months of fiscal year 2014 – through March 31, 2014 – total assets in the portfolio grew by 9.3 percent to $43.59 billion. In the first three quarters of the fiscal year, TRS investments recorded a 12.39 percent rate of return, which slightly outperformed the System’s custom benchmark target for the period of 12.22 percent. The state’s fiscal year runs from July 1 to June 30. On June30, 2013, TRS assets totaled $39.86 billion and the 12-month rate of return was 12.8 percent. Long term, The TRS investment rate of return over the last 30 years continues to be above 9 percent, which exceeds the System’s long-term assumed rate of return of 8 percent. Because of uncertainties facing the international economy in the future, the TRS Board of Trustees lowered the System’s assumed rate of return to 7.5 percent from 8.0 percent. Lowering the assumed rate of return automatically increases the size of the System’s unfunded liability and future state funding requirements. The Board of Trustees also updated the allocation of assets in the TRS portfolio to better meet the ebbs and flows of the economy, and updated the way in which the allocation of assets are reported to the public. Instead of seven asset classes defined by traditional measures, the new asset classifications would be based more on overarching themes and strategies. For instance, currently equity investments in businesses – both private and public – are split into three separate asset classes.





43.57 % 16.91 % 12.5 % 28.44 % 1.86 % 0 % 100 % 0 %

DEFINED CONTRIBUTION PLANS Extensive changes to the Illinois Pension Code enacted in 2014 created a first-ever TRS defined contribution option for a limited number of System members. Although the stated effective date for the new DC plan is July 1, 2015, the implementation of this new law is being challenged in court and the development of this program will hinge on the outcome of the court case.

93

Under this program, up to 5 percent of TRS members will be able to freeze their current defined benefit pension plan benefits and join a new DC benefit plan that will be in effect until the day they retire. Under the law a TRS DC plan could accept approximately 7,000 Tier I members. The DC plan is open only to active members who recorded initial TRS service before January 1, 2011. Eligible members would have one opportunity to elect membership in the new DC plan. Once members elect to join the DC plan, they cannot rejoin the DB plan unless the DC plan is ended by the legislature. A member would need to contribute to the DC plan for at least five years in order to be vested in the DC plan. On July 1, 2015, all members that have joined the DC plan would have their creditable service frozen on that date for purposes of determining an eventual DB pension amount. To determine a member’s eligibility for a DB pension after the member switches to the DC plan, TRS would use the member’s service credit accumulated under both the DB plan and the DC plan. Active members in the DC plan pay an 8.4 percent salary contribution to the plan. The state’s contribution would be determined annually. Upon retirement, members would receive a DB annuity, plus equal payments from an accumulated DC retirement account until those funds are exhausted.

FUTURE DEVELOPMENTS / OTHER ISSUES In the coming year TRS will initiate enhancements to its online offerings that will allow members and employers to use smart phones and other devices to access TRS information and services through dedicated applications. The potential development of future issues during the coming year concerning member benefits and the System’s finances hinge primarily on the status or outcome of a court challenge to Illinois’ new pension law, Public Act 98-0599. Until a final ruling is entered, current pension laws remain in effect.

94

NASRA - Roll Call of the States State: Indiana Retirement System: Indiana Public Retirement System Executive Director: Steve Russo Market Value of Assets: $24.2 B Assets as of: 5/31/2014 Number of Active Members: 252,923 Number of Annuitants: 133,128 Participants as of: 6/30/2013

LEGISLATION HEA 1074 – PENSION 13TH CHECKS Provides for a thirteenth check for certain members of the: (1) Indiana state teachers' retirement fund; (2) public employees' retirement fund; (3) state excise police, gaming agent, gaming control officer, and conservation enforcement officers' retirement fund; (4) state police 1987 benefits system; and (5) certain members of the pre-1987 state police benefit system. HEA 1075 - ANNUITY PROGRAM Provides that the internal annuity program of the Indiana Public Retirement System (INPRS) will remain until Jan. 1, 2017. INPRS will begin using a lower rate to provide annuities to PERF and TRF members in the future.

• Oct. 1, 2014 to Sept. 30, 2015: 5.75 percent interest rate • Oct. 1, 2015 to Dec. 31, 2016: market rate or 4.5 percent, whichever is greater • After Dec. 31, 2016: Whenever a third party provider is acquired, the interest rate will be market rate.

The enrolled act also removes language that states the pension benefit for a governor’s surviving spouse will stop if the surviving spouse remarries. SEA 209 – ADDITIONAL CONTRIBUTIONS TO THE ASA ONLY PENSION PLAN ASA Only plan members can make voluntary contributions to their Annuity Savings Accounts (ASAs). Ten percent may be contributed in addition to the required 3 percent contribution. Guidelines for making additional contributions are the same for ASA Only and PERF Hybrid plan members.

SYSTEM GOVERNANCE Restated Board Governance Manual on December 13, 2013 and June 20, 2014 (primary changes were to: add new Enterprise Risk Management Policies, revise Procurement Policy, amend Committee Structures, updates to Board duties and the Board access to the Board Portal to insure compliance to the spirit of Indiana Public Record Laws, revise the descriptions of the Pre-1996 and the 1996 Teacher Retirement Funds to reflect that though the benefits in the two funds are identical, the funding mechanisms are different and that though state law set up these as two accounts in the same trust, the new GASB rules require that they be identified as separate trusts; revise the 1977 Police Officers’ and Firefighters’ Pension and Disability Fund to emphasize that the Pension Relief Fund is separate and distinct; update the Statement of Enterprise Risk Appetite (Appendix C1) reevaluating and revising the risk parameters, and update the Procurement Policy (Appendix D), specifically adding the Managed Services Provider (MSP) as a procurement method for Third Party Contractors and outsourced projects.

95

TECHNOLOGY In December 2013 INPRS completed a 6 year systems modernization program. With that completion, we replaced all of our core application systems. Our financials runs on the Oracle EBusiness Suite, our retirement system runs on Oracle PeopleSoft Pensions, our wage and contribution collection and enrollment is done through a custom application, Employer Reporting and Maintenance (ERM), and our BI is handled with OBIEE. We work in the Oracle Unix based technology stack with our technical services sourced in a private cloud environment.

LITIGATION / CORPORATE GOVERNANCE INPRS is actively monitoring the portfolio for potential securities litigation and is closely following industry wide securities lending and foreign exchange litigation. Currently, INPRS is involved in two notable litigation matters. INPRS is lead plaintiff in securities litigation matter (In re: SAIC, Inc. – US S.NY Class Action 1:12-cv-01353-DAB). INPRS is also a defendant in a LBO clawback (In re: Tribune Company Fraudulent Conveyance Litigation, Case Nos. 11-MD-2296 (WHP).

Also, the INPRS Board of trustees and Executive Director were named in a lawsuit, Lee et. Al v. Pence et. Al, in the US District Court of Southern Indiana. The Judge issued a ruling against the State of Indiana declaring a statute that prohibited same sex marriage as being unconstitutional. The 7th Circuit Appeals Court granted a stay pending the conclusion of the appeals process.

FUNDING ISSUES Current Funded Status (June 30, 2013) o Total INPRS (Excluding TRF Pre-1996 Account): 85.3% o Total INPRS (Including TRF Pre-1996 Account): 64.5%

• TRF Pre-1996: 31.8% Teachers Pay-As-You-Go Plan • TRF Post-1996: 93.8% Teachers Pre-Funded Plan • Total TRF: 45.7% Total Teachers • PERF: 80.2%% Public Employees Retirement Fund • 1977 Fund: 95.2% Police & Fire Fund • Judges: 84.1% Judges Fund • E,G,&C: 83.5% Excise, Gaming, & Conservation Officers Fund • PARF: 78.7% Prosecuting Attorneys Fund • LEDB: 79.8% Legislators Defined Benefit Fund

Recent Trends in Funding Levels o Total INPRS (Excluding TRF Pre-1996 Account)

• June 30, 2013: 85.3% • June 30, 2012: 81.2% • June 30, 2011: 84.9%

o Total INPRS (Including TRF Pre-1996 Account)

• June 30, 2013: 64.5% • June 30, 2012: 60.8% • June 30, 2011: 63.0%

96

INVESTMENT ACTIVITY/INITIATIVES General Consultant RFP – INPRS is currently undergoing a request for proposal for a general consultant. INPRS currently utilizes SIS and expects them to respond. It has been 5 years and per the procurement policy an RFP is to be issued. Asset Allocation Study – Per the INPRS Investment Policy Statement, requires an asset-liability study to be performed every three years. This fall / early spring, INPRS will be conducting the study. INPRS currently employs Risk Parity and has much less equity risk than most of its peers. Internal Management Study – INPRS recently passed the $30 billion mark in AUM. Currently, no assets are managed internally. A study is currently underway to determine whether or not managing assets internally is in the best interest of INPRS. Historical defined-benefit investment pool returns as of May 31, 2014, are: FYTD 1 Yr 3Yr 5Yr 10Yr 12.46% 9.39% 5.97% 10.33% 5.74%

ASSET ALLOCATION Indiana Public Retirement System’s current target allocation was approved by the Board of Trustees in October of 2011. The actual allocation as of May 31 of 2014 is shown below: Public Equity – 23.43% (target of 22.5%) Private Equity – 12.83% (target of 10%) Fixed Income (Ex Inflation Linked) – 20.70% (target of 22%) Fixed Income (Inflation Linked) – 9.49% (target of 10%) Commodities – 7.73% (target of 8%) Real Estate – 5.41% (target of 7.5%) Absolute Return – 8.66% (target of 10%) Risk Parity – 10.13% (target of 10%) Cash – 1.6% (target of 0%) All of the Plan’s assets are managed externally.

DEFINED CONTRIBUTION PLANS Indiana Public Retirement System oversees a mandatory Annuity Savings Account (ASA) plan for its PERF and TRF members. As of May 31, 2014, there were 300,902 active members in the ASA, and its assets totaled $5.7 Billion. The investment options available to members are listed below.

• Large Cap Equity Index Fund • Small/Mid Cap Equity Fund • International Equity Fund • Fixed Income Fund • Inflation Linked Fixed Income Fund • Money Market Fund • Guaranteed Fund • Target Date Funds (target dates span from 2015 to 2055 in five-year increments)

Over 60% of the assets in the ASA plan are currently invested in the Guaranteed Fund, whose rate is reset annually. The current rate is 0.28% and the next guaranteed rate will be set at 0.26% annual return, effective July 1, 2013. Starting on March 31, 2013, newly-hired employees of the State of Indiana are able to choose between the hybrid plan (Defined Benefit and ASA) and an ASA-only program. By electing the ASA-only option, the new

97

employee forgoes participation in the defined-benefit plan in exchange for a higher contribution rate. Besides the Annuity Savings Account, INPRS also manages a 401(a) plan, the Legislators’ Defined Contribution Plan (LEDC) which has investment options similar to those offered in the ASA program. As of May 31, 2014, LEDC had 225 members, with assets totaling $27,725,766.62.

FUTURE DEVELOPMENTS / OTHER ISSUES INPRS is planning a full review and update to our web presence for all stakeholders.

98


State: Iowa Retirement System: Iowa Public Employees' Retirement System Executive Director: Donna Mueller Market Value of Assets: $24.9 B Assets as of: 6/30/2013 Number of Active Members: 165,095 Number of Annuitants: 104,933 Participants as of: 6/30/2013

LEGISLATION Public safety membership class expanded to include “police-type” positions (insurance fraud investigators , warrant officers) in agencies other than police departments.

TECHNOLOGY Accepted delivery of Vitech’s V3 system, version 8.3. Discussing upgrade to version 10.0..

FUNDING ISSUES Funded status as of June 30, 2013 is 81%. Amortization period decreased to 27 years in the 2013 valuation. The amortization period was infinite from 2002 through 2009. Combined employee and employer contributions in FY14 equal the actuarially determined contribution rate for the first time since 2001. Combined employee and employer contributions in FY15 will be slightly greater than the actuarially determined contribution rate. New assumptions were adopted in 2014 in the following areas: rate of inflation lowered from 3.25% to 3.0%, mortality tables adjusted to recognize longevity improvements for males (continue to use RP2000 generational, with varying adjustments based on demographic experience in such factors as sex and by employer group).

MODEL PRACTICES To provide stability in the contribution rates and address the risk of underfunding the benefits, the actuarial amortization method and the contribution rate funding policy were amended. The actuarial amortization method was amended to move to a 30 year closed amortization period. Future experience gains/losses or benefit enhancements will be amortized on layered schedules of no greater than 20 years (may be shorter depending on the nature of the experience or benefit). The contribution rate funding policy requires contributions paid by employees and employers to match increases in the actuarially determined contribution rate (ADCR), within the statutory limit of one percentage point. Declines in the ADCR will not result in a decline in the contribution rate until funding benchmarks are attained: funded ratio of 95% or greater and the difference between the ADCR and the contribution rate is .50 percentage point or greater.

99





38.5 % 33 % 0 % 13 % 1 % 6.5 % 0 % 0 %

Other - TIPS, MLP, Timber, Ag

100

NASRA - Roll Call of the States State: Kansas Retirement System: Kansas Public Employees Retirement System Executive Director: Alan D. Conroy Market Value of Assets: $15.7 B Assets as of: 12/31/2013 Number of Active Members: 155,446 Number of Annuitants: 86,843 Participants as of: 12/31/2013

LEGISLATION The 2014 Kansas Legislature passed legislation amending the cash balance plan design that was initially enacted in 2012 and takes effect January 2015. The changes to the original plan design included:

• Change the guaranteed interest crediting rate from 5.25% to 4.0%; • Strike the provisions pertaining to a discretionary dividend; • Add language establishing a formulaic dividend equal to 75% of the five-year average net compound rate of

return on the market value of the system's assets above 6% on a rolling 5-year average, except that between calendar year 2015 and calendar year 2018, the average return begins in 2015 and includes all years up to the current year, and the dividend is capped at 1.5%. The rolling 5-year average begins 2019, at which point, there is no cap; and

• Change the annuity rate from a set 6% to the actuarially assumed investment rate of return minus 2%. Currently that amount equals 6%.

The current plan design is summarized on the KPERS website at: http://www.kpers.org/pdf/Tier3Plan.pdf In addition, the Legislature increased the authority of the Board to Trustees to create unclassified positions from up to 25% of total staff to up to 100% of staff. Unclassified positions have more flexibility in salary than classified employees, but they also are not afforded the same due process procedures as those provided to classified employees. Unclassified staff are important for positions where education or technical expertise are an imperative and the most qualified candidates must be recruited to best serve the members. The Legislature also enacted legislation providing for retirement, disability, and life insurance benefits to be held harmless for state officers and employees who are placed on a furlough without pay or whose compensation is reduced either pursuant to law or through a voluntary agreement and who subsequently retire, become disabled or die.

SYSTEM GOVERNANCE The Board and executive staff participate in an annual two-day meeting that is reserved exclusively for educational and planning topics. Each year there are presentations by outside experts on governance and fiduciary issues. At this meeting, the Board conducts a self-evaluation session and identifies areas for additional training and emphasis for the next year. The Board annually reviews and updates its Board Policy Handbook.

http://www.kpers.org/pdf/Tier3Plan.pdf

101

TECHNOLOGY KPERS pension administration system was implemented as a multi-phased project during 2005-2008. The vendor on the project was Sagitec and the solution is built on the NeoSpin “Microsoft.Net” framework. KPERS continues to contract with Sagitec to make incremental enhancements to the KITS system. In 2013, KPERS started two major projects; 1) Pay period Reporting allowing employers to report to KPERS on a pay period basis, replacing the annual basis. 2) Tier 3 which added functionality to include a new retirement tier to the existing tiers currently in place. We continue to upgrade our NeoSpin system with the most current build.

KPERS in association with its business continuity partner, has established a hot site which is equipped to resume prioritized business operations in the event of a disaster. The mirroring software which is installed at both sites replicate business critical data to the hot site through a secure site-to-site connection. We have continued to add additional functionality to the disaster recovery site. We conducted two disaster recovery tests this year. We also conducted a table-top incident response exercise to help KPERS develop appropriate responses for different scenarios. KPERS is also in the process of developing a business continuity site to further enhance our disaster recovery capabilities. We also transitioned to paper-less board books by installing Diligent Board Books and provided training to the board. KPERS also implemented a VOIP phone solution which included a replacement of the call center software and phones. We also replaced our authentication software on the external portals and strengthened login credentials required for access into the KPERS web portals. KPERS have continued to improve technology in use by reducing the number of physical servers and increasing virtual servers, upgrading to the most current version of server software. We have upgraded our storage management array with new solid state devices. KPERS also participated in multiple security audits. KPERS generated over 1,500,000 benefit payments and 199,000 Member Annual Statements.

LITIGATION / CORPORATE GOVERNANCE In 2009, KPERS conducted an extensive RFP process to select securities litigation counsel that provides regular monitoring and evaluation services and will act as KPERS counsel for any litigation it pursues. Currently, KPERS is not a plaintiff in any cases.

FUNDING ISSUES As of the 2012 valuation, the KPERS system was 56.4% funded with actuarial assets of $13.3 billion and an accrued liability of $23.5 billion ($10.2 billion UAL). The funded status of the plan was addressed by the Legislature in previous years and the enacted changes are beginning to be implemented including increased employee contributions, a higher cap on the annual increase in employer contributions, and a new cash balance plan for most new members starting in 2015. In addition, KPERS has experienced robust investment returns over the previous two calendar years, beating the 8% investment return assumption in both years (14.0% in 2012, 17.7% in 2013). These changes and positive investment experience, combined with the fact that the 2008 investment losses are no longer being smoothed into the actuarial value of assets, are expected to be reflected in the 2013 valuation with improvements in the funding status of the plan and a reduction in the UAL.

INVESTMENT ACTIVITY/INITIATIVES Investment returns through May 31, 2014 were: 14.2% (1- year); 10.0% (3-year); 13.4% (5-year); and 8.1% (10-year). The Retirement System is in the process of implementing a new short duration high yield/bank loan investment

102

mandate in the Yield Driven asset class. We continue to gradually implement a long term target asset mix which includes a higher allocation to real estate and private equity.





58.2 % 14.9 % 7.6 % 2.7 % 2.6 % 14 % 100 % 0 %

Other - Real Return: TIPS, Infrastructure, Timber, and Global Inflation Linked Bonds; and Yield Driven: MLPs, REIT's, Strategic Fixed Income.

DEFINED CONTRIBUTION PLANS KPERS administers the voluntary State Deferred Compensation (457 Plan), which covers all State employees and more than 250 participating local governments. There are approximately 24,600 participants and assets of $971 million as of March 31, 2014. The plan has 21 investment options, including a number of different equity and bond mutual funds, target date funds, and a stable value fund. The plan was transferred to KPERS in 2008, which provided an opportunity to improve and integrate retirement communication and education efforts for both the KPERS defined benefit plan and the 457 plan. As a part of this effort, the 457 plan was rebranded this last year as “Tandem, a KPERS 457 Savings Plan” to strengthen its identity as a benefit that complements members’ KPERS defined benefit plan. Voya (ING) is currently serving as the record keeper for Tandem under a contract that expires at the end of this year. A request for proposals for a new contract was issued in December 2013. Based on the recommendation of the procurement negotiating committee, the KPERS Board of Trustees directed staff to enter into contract negotiations with Great West.

FUTURE DEVELOPMENTS / OTHER ISSUES A new cash balance plan is scheduled to take effect on January 1, 2015, for most new KPERS members. The cash balance plan design is new for the state of Kansas and has required significant planning and development to prepare for implementation. In conjunction with implementation of the cash balance plan, KPERS also will move from annual reporting of individual member wages and contributions to pay period reporting. This transition is necessary to provide quarterly statement information KPERS 3 members about their cash balance accounts and is expected to facilitate accuracy and timeliness of reconciliation processes. The Board of Trustees will be engaged in the triennial experience study in the fall of 2014 and will be reviewing the actuarial assumptions currently in use and demographic trends of the plan.

103

NASRA - Roll Call of the States State: Kentucky Retirement System: Kentucky Retirement Systems Executive Director: William Thielen Market Value of Assets: $14.67 B Assets as of: 6/30/2013 Number of Active Members: 137,368 Number of Annuitants: 90,796 Participants as of: 6/30/2013

LEGISLATION The 2014 Regular Session of the Kentucky General Assembly adjourned Sine Die on April 15, passing two bills of importance to Kentucky Retirement Systems. The first bill affecting KRS was House Bill 235, the State Executive Branch Budget bill. The budget bill fully funds the Actuarially Required Contribution (ARC) for the next two Fiscal Years in accordance with the statutory changes implemented by Senate Bill 2, the sweeping pension reform bill from the 2013 Regular Session. It also provides General Fund appropriations to Regional Mental Health/Mental Retardation Boards and Local and District Health Departments to assist them with paying their employer contributions to the Kentucky Employees Retirement System, and includes General Fund appropriations for domestic violence shelters, rape crisis centers, and child advocacy centers to fully fund the increase in employer contribution rates for the Kentucky Employees Retirement System. The bill did not contain a Cost of Living Adjustment (COLA) for retirees, which is also in accordance with the changes from Senate Bill 2. Now, COLAs will only be granted if the plans are more than 100% funded and the COLA can be given out of plan surplus without decreasing funding below 100%. The alternative is for the General Assembly to dedicate sufficient funds to pre-fund the COLA. The second bill of importance to KRS is House Bill 364. This bill exempts sheriff’s offices from remitting employer contributions and health insurance premium reimbursements to Kentucky Retirement Systems for certain retired re-employed police officers. These payments had been required by House Bill 1 passed during the 2008 Special Session of the Kentucky General Assembly.

SYSTEM GOVERNANCE A thirteen-member Board of Trustees administers the Systems:

• Two trustees elected by Kentucky Employees Retirement System members • Three trustees elected by County Employees Retirement System members • One trustee elected by State Police Retirement System members • Six trustees appointed by the Governor

- One must be knowledgeable about the pension requirements on local governments - Two must have at least 10 years of investment experience - One each from list of nominees submitted by the Kentucky League of Cities, the Kentucky Association of Counties, and the Kentucky School Boards Association

• The Secretary of the Personnel Cabinet, ex officio

TECHNOLOGY Kentucky Retirement Systems continues to invest in applications and infrastructure to improve member services and increase staff productivity. During 2013-14, our technology team has implemented the following:

104

• Designed, tested, and implemented changes in our Strategic Technology Advancements for the Retirement of Tomorrow (START) to administer the new benefits tier based on requirements under Senate Bill 2 passed by the legislature in April 2013.

• Resigned our KRS web portal to improve communications, transparency, and member retirement self-service.

• Installed video conferencing technology to better communicate with Employers, Investment Services, and Members.

• Continued to refine and enhance the START technology platform. • Improved information security.

LITIGATION / CORPORATE GOVERNANCE Kentucky Retirement Systems is currently litigating one case that we consider to be of vital importance to the future financial viability of the Systems. Over the past several years some member agencies have been concerned with the rising employer contribution rates that they are required to pay to the Systems. These agencies have sought relief from the increasing costs through a number of approaches, including direct appeals to the Board of Trustees and attempts at legislative changes to the statutes. In April 2013 one member agency, Seven Counties Services, Inc., filed for Chapter 11 bankruptcy protection seeking to end its participation in KERS. However, under Kentucky law, once an agency joins Kentucky Retirement Systems it cannot cease participation. In addition, KRS is contesting Seven Counties Services’ decision to file for bankruptcy under Chapter 11 because Seven Counties is a governmental unit (“municipality” in bankruptcy terms) and can only file for bankruptcy under Chapter 9. On May 30, 2014 the United States Bankruptcy Court, Western District of Kentucky, issued an 83 page Opinion in the Seven Counties case (Case 13-31442). The Court held that Seven Counties is not a “governmental unit” as that term is defined in the Bankruptcy Code and Seven Counties is therefore eligible to proceed under Chapter 11 of the Bankruptcy Code. The Bankruptcy Court also held that the relationship between Seven Counties and Kentucky Employees Retirement System (“KERS”) is an “executory contract” and Seven Counties may reject that contract in accordance with the provisions of the Bankruptcy Code, which means that Seven Counties may choose to end its participation in KERS as of April 2013. If it stands, the decision will allow Seven Counties to not pay some or all of its approximately $90 million dollar share of the unfunded liability that exists in KERS. This would mean that the remaining participating employers in the KERS system – principally the Commonwealth of Kentucky – will have to pay additional contributions in order for KERS to have sufficient assets to pay the retirement benefits already earned by KERS nonhazardous retirees, inactive and active members, including the nearly 1,000 Seven Counties employees who will be directly impacted by the decision because their participation ceased in April 2013. On June 11, 2014 the KRS Board of Trustees voted unanimously to appeal the decision.

FUNDING ISSUES In recent years, funding levels for the pension and insurance funds have fallen dramatically, in large part due to failure of state government to fully fund the Actuarially Required Contribution the KERS and SPRS plans for the better part of the last 20 years. However, as a result of Senate Bill 2 from the 2013 Regular Session, state law now requires the General Assembly to pay the full actuarially required contribution rate to KERS and SPRS beginning on July 1, 2014.

105

As of June 30, 2013, the various systems are funded at the following levels (funded ratio based on actuarial value of assets):

SYSTEM PENSION FUND INSURANCE FUND

KERS Nonhazardous 23.2% 23.4%

KERS Hazardous 64.5% 96.2%

CERS Nonhazardous 60.1% 66.6%

CERS Hazardous 57.7% 62.1%

State Police (SPRS) 37.1% 61.3%

MODEL PRACTICES KRS is committed to protecting the security and confidentiality of our members’ information. This commitment is evidenced by our implementation of a pension administration system that is heavily influenced in its design by security and data protection principles. KRS has also developed a secure and resilient IT infrastructure to protect systems and data. This infrastructure utilizes the latest technology and best practices such as multi-factor authentication, email, web and mobile device encryption, and network threat monitoring and detection. KRS’ commitment is further evidenced by the development of internal policies and procedures to foster a security-aware workforce and promote good security practices among employees.

INVESTMENT ACTIVITY/INITIATIVES During FY 2013 the KRS Investment Division completed a Request for Proposal (RFP) for a new custodial bank and prepared for that transition; completed a manager and portfolio structure study for non-U.S. equity asset class; developed new policies regarding the KRS absolute return asset class to allow for the construction of a direct hedge fund program; continued the diversification of its Real Return asset class away from TIPS by adding an agriculture direct lending mandate and a mine finance manager; and continued the development of its Real Estate asset class with several new investment mandates.

ASSET ALLOCATION Actual percentage allocations for each asset class as of June 30, 2013:

Insurance Pension FYE 2013

24.3% 21.5% U.S. Equity

19.4% 19.6% Non-U.S. Equity

3.7% 2.8% Emerging markets

19.5% 19.4% Fixed Income

2.1% 2.9% Real Estate

106

10.4% 10.6% Absolute Return

11.7% 9.8% Real Return

6.1% 11.2% Private Equity

2.7% 2.2% Cash

63.7% 71.7% Actively Managed Assets

36.3% 28.3% Passively Managed Assets

74.7% 82.7% Assets Managed Externally

25.3% 17.3% Assets Managed Internally (Cash, U.S. Equity, TIPS)

DEFINED CONTRIBUTION PLANS Kentucky Retirement Systems does not administer any Defined Contribution plans. There is an optional deferred compensation (401K and 457) plan that is administered by the Kentucky Employees Deferred Compensation Authority.

FUTURE DEVELOPMENTS / OTHER ISSUES Kentucky Retirement Systems will be offering a series of webinars beginning in July 2014 in an effort to better accommodate our membership regardless of their geographic location. Members will be able to ask questions and interact with KRS staff to help them make important decisions about their approaching retirement. We are also continuing to improve our website, www.kyret.ky.gov, to make information more accessible and to meet the increasing service needs of our membership.

http://www.kyret.ky.gov/

107

NASRA - Roll Call of the States State: Louisiana Retirement System: Parochial Employees’ Retirement System of Louisiana Executive Director: Dainna Tully Market Value of Assets: $3.3 B Assets as of: 4/30/2014 Number of Active Members: 16,154 Number of Annuitants: 6,930 Participants as of: 12/31/2013

LEGISLATION Senate Bill 2 of the 2014 Regular Session will allow a participating hospital service district to prospectively terminate an agreement for participation. Under the prospective termination the hospital service district will no longer be required to enroll new employees. Although the Board of Trustees opposed this bill, it was passed by the legislature.

SYSTEM GOVERNANCE The Parochial Employees' Retirement System reports investment returns, expenses and asset allocation to the legislature and to the state and statewide retirement systems in Louisiana on a quarterly basis.

FUNDING ISSUES As a result of the actuarial valuation for the year ending December 31, 2013, employer rates will decrease by 1.5%.

MODEL PRACTICES The Parochial Employees' Retirement System is proud to provide cost effective administration to its multiple employers. Our cost per member was $48 as of the annual audit for the year ending December 31, 2013.

INVESTMENT ACTIVITY/INITIATIVES An investment strategy session and a manager fee structure review were conducted in 2014. For the year ending December 31, 2013, the plan earned a rate of return of 18.19%. The Board of Trustees lowered the assumed rate of return from 7.5% to 7.25%.





63.7 % 28.3 % 4.5 % 3.1 % 0.4 % 0 % 97.7 % 2.3 % A small portion of the fixed income portfolio is managed internally.

108

NASRA - Roll Call of the States State: Louisiana Retirement System: Louisiana State Employees' Retirement System Executive Director: Cindy Rougeou Market Value of Assets: $10.79 B Assets as of: 5/31/2014 Number of Active Members: 44,111 Number of Annuitants: 47,517 Participants as of: 6/30/2013

LEGISLATION Act 399 & Act 102 – Act 399 changes how excess investment returns are used by reducing the amount of funds that may be put into the Experience Account and tying the size and frequency of future COLAs to the funded ratio of the system. The anticipated savings for the system is $2 billion. Act 102 authorizes a 1.5% COLA for retirees who meet the set criteria. Act 226 – Act 226 changes the retirement eligibility to 5 years of service at age 62 for those LASERS members who are first hired on or after July 1, 2015. (Excludes Hazardous Duty Plan members) Act 571 – Act 571 changes the actuarial valuation method from Projected Unit Credit to Entry Age Normal.

SYSTEM GOVERNANCE The LASERS Board of Trustees has continued to follow an adopted Board Resolution expressing that the following matters have reached such a critical state of importance to system members so as to elevate them to the status of significant board issues: 1. Identification and implementation of a legislatively enacted mechanism for the funding and granting of an annual cost-of-living adjustment for eligible system retirees in a reliable and dependable manner; 2. Preservation of the defined benefit plan for current and future LASERS members; 3. Preservation of Board autonomy as well as its primary composition of elected active and retired system members; and 4. While continuing to oppose mandatory social security participation, seek the reduction or elimination of the federal offsets, the Windfall Elimination Provision and the Government Pension Offset.

TECHNOLOGY LASERS continues to run the Oracle JD Edwards Financial suite and IBM’s Content Manager imaging and workflow system on the iSeries platform. LASERS Pension Administration System remains the Windows .Net based SOLARIS package. LASERS is in the process of upgrading the JD Edwards Financial suite to the Windows-based Enterprise One version. LASERS will issue an RFP for the upgrade or replacement of the IBM Content Manager imaging and workflow system in July 2014. LASERS continued incremental applications, infrastructure, and security improvements including the following:

• Correction of defects, development of enhancements, and implementation of required legislative changes in our SOLARIS Pension Administration System.

109

• Migration of all workstations to 64-bit Windows 7, all servers to Windows 2008, and all databases to SQL 2012.

• Completion of a successful disaster recovery test of our iSeries platform at SunGard. A second DR test at SunGard involving the SOLARIS pension administration system was performed and tested remotely from LASERS offices.

• Installation of Microsoft Lync server as the standard for agency messaging client. • Installation of the FireEye security monitoring appliance to detect and remove malware that is not caught by

other detection and prevention measures to provide enhanced security. • Upgrade of key vendor applications including VMWare, NetApp Balance, Lumension Endpoint protection,

Blackberry Enterprise Server, Cisco ASA firewall and VPN clients, Track-IT, Kofax, SourceOne, Diskeeper, Tidal, and VKernel, to the latest versions.

FUNDING ISSUES LASERS active membership dropped by 8,000 due to layoffs; our UAL was reduced by $700 million due to both the decrease in active membership and excellent investment returns. As of June 30, 2013, LASERS funded status was 60.2%. This was 4.3% higher than in 2012, when LASERS funded status was 55.9%. LASERS Board adopted a 7.75% assumed rate of return in June 2014.

MODEL PRACTICES Investments – LASERS has been recognized as one of the top 10 performing public pension systems of the decade based on analysis by Cliffwater, LLC and published in both Pension & Investments and FundFire. The annual investment report produced internally by the Investments Division received a Platinum Award in the 2014 Hermes Creative Awards competition. Public Information - LASERS Public Information Division received an honorable mention in the 2014 Hermes Creative Awards competition for their video production, LASERS: Stay Connected Through Social Media. The award was given in the category of Video/Government. Hermes Creative Awards is an international competition for creative professionals involved in the concept, writing, and design of traditional and emerging media. We have developed several video vignettes that are available on our website. The Public Information Division has also developed and launched a podcast series, Listen LASERS, which is an educational resource for LASERS members covering a variety of retirement topics. Fiscal – LASERS has received notice that The Government Finance Officers Association of the United States and Canada (GFOA) has awarded a Certificate of Achievement for Excellence in Financial Reporting to LASERS for its Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, 2013. This was the seventeenth consecutive year that the System has achieved this prestigious award. The GFOA has also given an Award for Outstanding Achievement in Popular Annual Financial Reporting to LASERS for its Popular Annual Financial Report (PAFR), entitled LASERS Summary Annual Report, for the fiscal year ended June 30, 2013. This prestigious national award recognizes conformance with the highest standards for preparation of state and local government popular reports. This was the fifteenth consecutive year LASERS has received this award. LASERS also received the 2013 Public Pension Standards Award. The Public Pension Coordinating Council presents this award to public employee retirement systems in recognition of their achievement of high

110

professional standards in the areas of plan design and administration, benefits, actuarial valuations, financial reporting, investments and membership communications. This is the tenth consecutive year that LASERS has received this award.

INVESTMENT ACTIVITY/INITIATIVES Investments – as of 5/31/14 Rates of return: FYTD 16.2% 1 year 13.7% 5 year 13.7% 10 year 8.2% Changes to asset allocation: Only a minor change this year –

• Domestic High Yield was decreased from 5% to 4% • Absolute Return Strategies were increased from 7% to 8%





57 % 12 % 0 % 24 % 0 % 7 % 67 % 33 %

Most recent asset allocation approved by Board of Trustees in March 2014. Other (Risk Parity/Global Tactical Asset Allocation)

DEFINED CONTRIBUTION PLANS LASERS administers an optional retirement plan that has been closed to new members since December 2007. Although not administered by LASERS, a voluntary 457 plan is available to state employees.

FUTURE DEVELOPMENTS / OTHER ISSUES On June 28, 2013, the Louisiana Supreme Court struck down the Cash Balance Plan which was created by Act 483 of the 2012 Louisiana Legislative Session, ruling that the legislation did not receive the required two-thirds votes necessary for passage. No new legislation seeking to create a Cash Balance Plan for new hires was filed in the 2014 Regular Legislative Session. Fiscal - LASERS Chief Financial Officer serves on a Task Force that is acting in an advisory capacity for implementing GASB 67 and GASB 68 for the State of Louisiana. Fiscal completed the upgrade of the Q2 investment accounting software. The new platform is cloud based and will eliminate the necessity of purchasing and maintaining hardware to support this software. Also, Fiscal coordinated LASERS issuance of request for information for the upgrade JD Edwards EnterpriseOne XE to the current version of JD Edwards which resulted in a contract with The iConsortium for a six month project to upgrade LASERS accounting system.

111

NASRA - Roll Call of the States State: Louisiana Retirement System: Teachers' Retirement System of Louisiana Executive Director: Maureen H. Westgard Market Value of Assets: $16.6 B Assets as of: 5/31/2014 Number of Active Members: 82,910 Number of Annuitants: 71,031 Participants as of: 6/30/2013

LEGISLATION The 2014 regular legislative session was held March 10 through June 2. Nearly 40 pieces of legislation were filed that impacted TRSL or retirement. The following passed:

• Act 104 grants a 1.5% permanent benefit increase to eligible TRSL retirees and beneficiaries. • Act 226 increases the retirement eligibility age from 60 to 62 for new members hired on or after July 1, 2015. • Act 399 provided for COLAs to be granted on July 1, 2014, but impacts the funding and frequency of future

COLAs as follows: o Requires more of TRSL’s excess investment earnings, which fund COLAs, to be applied to debt the state

owes the retirement system (UAL); o Specifies that the amount of excess earnings applied to the UAL increase each year based upon increases

in the actuarial value of TRSL’s assets; o Ties the amount of future COLAs to the retirement system’s funded percentage; o Stipulates that COLAs can only be granted every other year until the system is 85% funded; o Lowers the retirement benefit cap upon which COLAs are calculated from $70,000 to $60,000 with

annual increases based upon the CPI-U; and o Adjusts the amortization period for TRSL’s gains, losses, and experience account allocations. (These

changes are specific to future valuation years or the system’s funded percentage.) • Act 571 changes the actuarial valuation method to entry age normal (EAN) from the projected unit credit

(PUC) method. • Act 607 establishes a minimum employer contribution rate for the Optional Retirement Plan—a defined

contribution plan for unclassified higher education personnel.

TECHNOLOGY In-house systems: In addition to annual program activities, IT continued its conversion of in-house systems to .NET. P8 workflow: IT continued work on the optimization of workflow processes. User groups met and identified areas where either business processes or system processes could be improved and IT implemented system enhancements where possible. Further optimization and enhancements will continue on a change request basis. P8 Filenet System upgrade: IT is currently upgrading the P8 Filenet systems. This year work began with the Development environment and will continue with an upgrade of the Test and Production environments.

LITIGATION / CORPORATE GOVERNANCE TRSL participates in securities litigation cases that affect system assets and engages in suits relevant to corporate governance issues. Since 2005, TRSL has been in litigation against Pfizer, Inc. involving alleged securities fraud

112

for failure to timely disclose relevant information concerning the defendant’s products. This failure to provide relevant information in a timely manner had an adverse effect on the price of the defendant’s stock.

FUNDING ISSUES TRSL’s funded ratio was 56.4% as of June 30, 2013. The funded ratio is determined using the actuarial value of assets, which gradually recognizes investment gains and losses relative to the assumed rate of return over a five year period. The asset smoothing method was changed from the prior year which recognized unrealized investment gains and losses over a four-year period. TRSL uses an 80% to 120% corridor limit in its actuarial valuation of assets.

The Louisiana Constitution requires full funding of the initial liability (existing as of June 30, 1988) of all state retirement systems by 2029. The UAL payments for certain schedules are increasing payment schedules, per statutory requirements. This resulted in initial payments that were insufficient to pay the principal on these schedules. Beginning in FY 2013-2014, aggregate UAL payments exceeded the aggregate interest due on all schedules. Future UAL schedules will be paid with level payments, as required by current statutes. Therefore, in all future years, the existing aggregate UAL will be reduced by the UAL payments received. This will result in an expected annual improvement in the funded ratio without regard to future experience gains and losses.

The Public Retirement Systems’ Actuarial Committee (PRSAC) annually adopts the TRSL valuation report which includes employer contribution rates. Employer contribution rates must be paid in full. Employee contribution rates are established by statute and can be changed only by legislative act.

By adopting the valuation, PRSAC also approves the system’s actuarial assumptions. At its June 2014 meeting, the TRSL Board voted to reduce the actuarial rate of return from 8.00% to 7.75% for both valuation and GASB purposes, effective FY 2015. All other assumptions were adopted by the Board following an experience study for the period from July 1, 2007 through June 30, 2012.

MODEL PRACTICES Roadmap to Retirement: In an effort to engage young and mid-career members, TRSL launched a social media campaign to provide them with bite-sized bits of information related to retirement planning and personal financial. Prior to launch, TRSL conducted an online survey to gauge member attitudes, beliefs, and behaviors related to retirement and personal finance. This allowed us to tailor content and messages to this audience. TRSL used infographics with simple messages and bold visuals to engage our audience. A second survey will soon be administered to gauge the campaign’s effect and assist TRSL in future communication messaging. Employer-specific training: TRSL conducted employer-specific training this year which entailed holding training sessions for reporting employers based on agency type—higher education, K-12, charter schools, and state agencies. The training was designed to focus on the reporting needs and issues specific to each type of employer. Employers were also encouraged to bring their laptops, so they could log onto TRSL’s secure employer reporting website and engage in hands-on training.

INVESTMENT ACTIVITY/INITIATIVES TRSL negotiated a passive management bundled structure in domestic and international equity asset classes where total investments above $1 billion are managed at an extremely efficient 1.5 bps. The system also achieved lower costs by (1) reducing the custodian base fee by 50%--a $125,000 savings; and (2) negotiating fee reductions in six different asset classes during the solicitation for proposal process saved $837,000. The latest benchmarking results from CEM, Inc. showed that TRSL’s investment program realized a net savings of $7.2 million compared to the median cost of its peers, given the same asset allocation. And, TUCS ranked the

113

system’s investment performance in the top 5th percentile of public pension funds with assets exceeding $1 billion for the four-year period ended March 31, 2014. During FY 2013-14, the TRSL entered into its first separate account private equity relationship with a $100 million venture capital separate account to be managed by Hamilton Lane. TRSL will seek to build on this separate account structure prospectively. The next potential asset class will be private debt. Within the next 12-18 months, TRSL plans to undertake an asset allocation study in which there may be a slight change to add an opportunistic asset class. TRSL’s return for fiscal year to date (July 2013 - May 2014) is 16.3% (net of fees), and assets have grown $1.95 billion since fiscal year ended June 30, 2013.





53 % 20.8 % 8.2 % 0 % 1 % 0 % 99.6 % 0.4 %

All but $71 million (TRSL Terror-Free Index) of the $16.6 billion are managed externally.

DEFINED CONTRIBUTION PLANS Since 1990, higher education personnel have had the option to participate in a 401(a) defined contribution plan, called the Optional Retirement Plan (ORP). Members choosing this option make a one-time, irrevocable election and cannot later join TRSL’s defined benefit plan. TRSL does not maintain any funds for ORP members. Members have the choice of placing their funds with one of three ORP carriers. As plan administrator, the TRSL Board chooses ORP vendors for a five-year contract period. TRSL also works to ensure that participants receive quality products and services as well as competitive pricing from ORP providers. As of 06/30/2013: Members who have elected the ORP – 25,626 Members actively participating – 6,441 Percentage participating of those eligible – 46% Size of assets - $1.7 billion Number of investment options – 73 (across three providers) Recent legislation: Act 607 of the 2014 Regular Legislative Session changed the law relative to the required ORP employer contribution rate for participant accounts. Since ORP’s inception, the portion of the employer contribution transferred to each participant account has been the equivalent of the employer normal cost contribution for the TRSL Regular Plan (a defined benefit plan). Under Act 607, for higher education, the employer contribution transferred to participant accounts will be determined by each higher education board.

114

Each board must establish, by resolution, the transfer amount for ORP participants employed at each institution and agency under its supervision and control. This amount must be set as a percentage of pay. Provisions regarding permissible rates are as follows:

• For FY 2015 through FY 2018, the transfer amount must be equal to or greater than the equivalent of the employer normal cost contribution for the TRSL Regular Plan.

• For FY 2019 and later, the minimum transfer amount must be 6.2%.

Effective July 1, 2014, the transfer amount for non-higher education employers must be the greater of: (1) the equivalent of the employer normal cost contribution for the TRSL Regular Plan; or (2) 6.2%.

FUTURE DEVELOPMENTS / OTHER ISSUES For the first time in six years, eligible TRSL retirees and beneficiaries will receive a COLA. (In 2009, a benefit increase was granted to TRSL retirees living at or below the poverty level.) The TRSL COLA was tied to the successful passage of legislation granting 1.5% COLAs for retirees in Louisiana’s three other state retirement systems for state workers, state police, and school employees. Another prerequisite for the COLA was passage of Act 399 affecting the frequency and funding of future COLAs. Act 399 essentially directs more of TRSL’s excess investment returns toward the UAL and ties the granting and amount future COLAs to TRSL’s funded percentage.

115


State: Maine Retirement System: Maine Public Employees Retirement System Executive Director: Sandy Matheson Market Value of Assets: $11.4 B Assets as of: 3/31/2013 Number of Active Members: 59,400 Number of Annuitants: 38,400 Participants as of: 3/31/2013

LEGISLATION Legislation was enacted in 2013 relating to the MainePERS plan for local government employees in order to maintain the plan’s healthy funding ratio. The legislation included retirement age and early retirement reduction changes for new hires and changes to cost-of-living adjustment provisions for all members and retirees in that Plan.

SYSTEM GOVERNANCE The System’s Executive Director, with the assistance staff and Board Counsel (counsel from the Office of the Attorney General) has completed augmenting and updating many existing Board governance policies and has also developed and documented a number of new administrative policies. Fiduciary counsel provides additional guidance and training to the Board.

TECHNOLOGY MainePERS initiated a number of infrastructure improvements over the past year that include:

• An upgrade to the Active Directory infrastructure. • Implementation of managed security using Security Information and Event Management (SIEM). • Implementation of RSA two factor authentication for Remote Outlook and Citrix access. • Rollout of a paperless Board solution using utilizing iPads and content distribution and sharing software from

BoardDirect. • An upgrade of the virtual infrastructure to VMware 5.5.

Upcoming projects include:

• Rollout of a new VOIP phone system. • An upgrade to the virtual hardware infrastructure including a SAN upgrade. • Rewiring of the main facility with a communications upgrade that includes increased bandwidth capacity. • An upgrade to the line of business application.

LITIGATION / CORPORATE GOVERNANCE The System currently works with three outside securities litigation law firms and with counsel from the Office of the Attorney General to identify investment losses that may be related to actionable corporate behaviors and to

116

determine the System’s role in potential securities litigation. The System’s Board of Trustees is the named defendant in a class action suit filed on February 13, 2012 in the United States District Court for the District of Maine. The action was initially brought by the Maine Association of Retirees and four of its active members. Subsequently, the Court granted the following entities leave to intervene in the action: the Maine Employees Association, the Maine Education Association and the Maine State Troopers Association. Maine Association of Retirees et al. v. Board of Trustees of the Maine Public Employees Retirement System, Docket No.1-12-cv-59-GZS. The Complaint asked the District Court to declare that the 2011 changes to the cost-of-living adjustment (“COLA”) statutes violate either or both the Contract Clause of and the Fifth Amendment to the Federal Constitution. The United States District Court granted MainePERS motion for summary judgment and motion to dismiss. The Plaintiffs filed an appeal with the First Circuit Court of Appeals. On June 27, 2014, the First Circuit affirmed the decision of the District Court finding in favor of the Defendants. The Plaintiffs now have 90 days from June 27 to file a request for certiorari to the United States Supreme Court.

FUNDING ISSUES As of June 30, 2013, the actuarial funding status of the major defined benefit plan for State employees and teachers was 78%. The State of Maine as the major employer is required by the Maine Constitution to maintain an aggressive funding discipline that will retire the unfunded actuarial liability by 2028. Additionally, no new unfunded liabilities may be created. The Consolidated Plan for participating local districts was funded at 87% as of June 30, 2013.

MODEL PRACTICES MainePERS continues to refine its use of the Information Technology Security Council focusing on the application of best practices within its information technology (IT) environment. The council serves as a virtual Chief Information Officer and is comprised of IT personnel, external technology partners, and executives within the organization.

INVESTMENT ACTIVITY/INITIATIVES MainePERS continues to fund the alternatives portion of the portfolio to bring it in line with the strategic asset allocation. In the past year, the total investment in alternatives has seen an increase of 1.6%, while the total investments in equities and fixed income have declined by 1.2% and 2.6%, respectively. The allocation to real estate increased 1.9% over the past twelve months. During the next year, MainePERS plans to further explore ways of stabilizing the fund’s volatility through the introduction of dynamic asset allocation. For the one, three, five, and ten-year annualized periods ending 04/30/14, the fund was up 10.0%, 7.4%, 12.6%, and 6.94% respectively.

117





57.6 % 23.8 % 7.3 % 5.6 % 0.7 % 5 % 100 % 0 % Alternatives: 2.5% private equity, 3.1% infrastructure Other: opportunistic strategies

DEFINED CONTRIBUTION PLANS In addition to offering a defined benefit plan, MainePERS administers IRS Section 401(a), 403(b) and 457 plans for Participating Local District employers. The System’s Board of Trustees oversees the program. The program is comparatively small, but growing steadily, with 63 enrolled employers and 894 participating employees. Assets were at $23.7 million as of March 31, 2014. The plan is designed to be a simple, affordable alternative to other DC plans offered by employers. The program has ten investment options including a domestic stock index fund, an international stock index fund, an actively managed balanced fund, four lifecycle funds, a domestic core bond index fund, and two cash funds. Verisight is the record-keeper and Vanguard is the sole investment manager.

FUTURE DEVELOPMENTS / OTHER ISSUES We have created a special task force with our employee and employer stakeholders to look at best practices in modern disability programs. Upon completion, we will determine if changes to our program would be beneficial, and how best to make those changes. We are also in the process of assembling an external task force to assist us in developing an environmental, social and governance policy for consideration by our Board of Trustees.

118

NASRA - Roll Call of the States State: Maryland Retirement System: Maryland State Retirement and Pension System Executive Director: R. Dean Kenderdine Market Value of Assets: $44.9 B Assets as of: 5/31/2014 Number of Active Members: 192,810 Number of Annuitants: 137,925 Participants as of: 6/30/2013

LEGISLATION Prior to the enactment of major pension reforms in 2011 by the Maryland General Assembly, SRPS was projected to reach the 80% funding level in fiscal 2026. To accelerate the plan’s progress in reaching that threshold, the 2011 pension reform legislation included a requirement that a portion of the savings generated by the restructuring of benefits be reinvested in SRPS, amounting to a supplemental contribution in excess of the actuarially required contribution by the State to the pension system. Beginning in fiscal 2014, the supplemental contribution was $300 million annually, and it was not subject to termination. Under these terms, the system was expected to reach the 80% funding threshold by fiscal 2023, three years earlier than originally projected. Senate Bill 172, the Budget Reconciliation and Financing Act (BRFA) of 2014, modified the amount of supplemental contributions paid to the State Retirement and Pension System (SRPS) beginning in fiscal 2014, and requires that the supplemental contributions terminate when the phase out of the corridor funding method (the current funding methodology employed by the SRPS) is complete and the system is 85% funded on an actuarial basis. Instead of permanently reducing the supplemental contribution, the BRFA of 2014 reduces the supplemental contribution to $100 million in fiscal 2014 and 2015, but also phases it back to the original $300 million supplemental contribution by fiscal 2019. Based on the supplemental contributions required by the bill as passed, SRPS is expected to reach the 80% funding level in fiscal 2025 and the 85% funding level in fiscal 2028. Since the corridor method will be fully phased out in fiscal 2024, the supplemental payments are projected to stop in fiscal 2029.

SYSTEM GOVERNANCE As a result of legislation passed in the 2013 session of the Maryland General Assembly, an additional trustee was added to the Board, bringing to 15 the total number of trustees. The individual appointed represents the interests of all 24 Maryland subdivisions. The addition of this trustee results from statutory changes to the counties’ responsibility for paying teacher pension costs. Up until FY 13, the state had paid 100% of the pension cost for teachers. Now, each county is responsible for payment of teacher normal cost. This obligation is being phased in over four fiscal years. In FY2017, the counties will begin paying 100% of the normal cost.

TECHNOLOGY The Agency’s technology efforts have been focused in several areas: (1) implementing a steady stream of pension administration and tax law changes; (2) eliminating historical anomalies in service credit and member compensation data; (3) further developing a secure member Internet site; (4) automating more data capture and image indexing; (5) upgrading data storage and servers; (6) improving preparedness in the event of business disruption, particularly focusing on voice technology alternatives; and (7) ongoing efforts to enhance information security controls. Baseline daily IT operations, including the Agency’s custom-developed pension administration system, continue to run smoothly.

119

FUNDING ISSUES SCHEDULE OF FUNDING PROGRESS (STATE & MUNICIPAL COMBINED) (IN THOUSANDS)

Actuarial Valuation Date

Actuarial Value of Assets

Actuarial Accrued Liability(AAL)

Unfunded AAL (UAAL) Funded Ratio Payroll

UAAL as a Percentage Of Payroll

June 30, a b (b-a) (a/b) c [(b-a)/c]

2004 33,484,657 36,325,704 2,841,047 92.18% 8,069,481 35%

2005 34,519,500 39,133,450 4,613,949 88.21% 8,603,761 54%

2006 35,795,025 43,243,492 7,448,467 82.78% 9,287,576 80%

2007 37,886,936 47,144,354 9,257,418 80.36% 9,971,012 93%

2008 39,504,284 50,244,047 10,739,763 78.62% 10,542,806 102%

2009 34,284,569 52,729,171 18,444,603 65.02% 10,714,241 172%

2010 34,688,346 54,085,081 19,396,735 64.14% 10,657,944 182%

2011 36,177,656 55,917,543 19,739,887 64.70% 10,478,800 188%

2012 37,248,401 57,869,145 20,620,744 64.37% 10,336,537 199%

2013 39,350,969 60,060,091 20,709,122 65.52% 10,477,544 198%

120

SCHEDULE OF EMPLOYER CONTRIBUTIONS (STATE & MUNICIPAL COMBINED) (IN THOUSANDS)

Fiscal Year Annual Required Actual Percentage

Ended June 30, Contributions Contributions Contributed

2004 710,632 632,462 89%

2005 805,564 668,618 83%

2006 874,079 716,745 82%

2007 1,025,972 831,037 81%

2008 1,183,765 1,053,551 89%

2009 1,313,560 1,109,564 84%

2010 1,519,980 1,308,920 86%

2011 2,035,401 1,512,473 74%

2012 2,146,624 1,521,761 77%

2013 2,149,985 1,643,101 76%

ACTUARIAL METHODS AND ASSUMPTIONS Funding Method The System uses the individual entry age normal cost method to determine the actuarial accrued liability on which future employer contribution rates will be based. The unfunded actuarial accrued liability (UAAL) is being amortized, as a level percentage of payroll, over a closed period of 25 years period. The UAAL that existed as of June 30, 2013 will be amortized over the fiscal years from June 30, 2015 to June 30, 2039. Asset Valuation Method Assets are valued for funding purposes by recognizing investment gains and losses over a five-year period. Each year's investment gain or loss is amortized on a straight-line basis over five years. The final actuarial value is limited to not more than 120% nor less than 80% of the market value of assets. Actuarial Assumptions The assumptions used for the actuarial valuation were recommended by the System's independent actuary, based upon periodic analyses of the System's experience, and adopted by the Board of Trustees. The following significant assumptions were used in the actuarial valuation as of June 30, 2013:

• a rate of return on investments of 7.70% compounded annually; • projected salary increases of 3.40% to 11.95%; • additional projected salary increases ranging from 3.50% to 8.50% per year based on age,10 or more years of

service and plan and;

121

• post-retirement benefit cost of living increases (COLA) ranging from 1.70% to 3.45% per year depending on the system to which the retiree belonged and service period (i.e. pre- or post- 7/1/11);

• aggregate payroll of 3.45% annually.

INVESTMENT ACTIVITY/INITIATIVES ASSET CLASS BY MARKET VALUE AND ALLOCATION March 31, 2014 ASSET CLASS 1 Market Value ($millions) Actual Allocation Long-Term Policy Allocation PUBLIC EQUITY U.S. EQUITY $4,569.61 INTERNATIONAL EQUITY 5,307.53 GLOBAL EQUITY 7,486.52 TOTAL 17,363.66 39.5% 35.0% FIXED INCOME 6,588.96 15.0% 10.0% CREDIT/DEBT STRATEGIES 4,395.23 10.0% 10.0% ALTERNATIVE INVESTMENTS REAL ESTATE 2,818.81 6.4% 10.0% REAL RETURN 5,271.59 12.0% 14.0% PRIVATE EQUITY 3,053.72 6.9% 10.0% ABSOLUTE RETURN 3,826.20 8.7% 10.0% CASH 664.67 1.5% 1.0% TOTAL FUND $43,982.85 100.0% 100.0% * May not add due to rounding. TOTAL PLAN INVESTMENT PERFORMANCE FOR PERIODS ENDED 3/31/2014 Fiscal YTD 10.56% 1 Year 9.84% 3 Years 7.50% 5 Years 13.42% 10 Years 6.09% MARKET VALUE AND INVESTMENT PERFORMANCE FOR 12 MONTH PERIODS ENDED JUNE 30: Market Value Performance June 30, 2013 $40.3 billion 10.57% June 30, 2012 $37.2 billion 0.36% June 30, 2011 $37.5 billion 20.04% June 30, 2010 $31.8 billion 14.03% June 30, 2009 $28.5 billion -20.01% June 30, 2008 $36.6 billion -5.40% June 30, 2007 $39.4 billion 17.64% June 30, 2006 $34.4 billion 10.40% June 30, 2005 $32.2 billion 9.50% June 30, 2004 $30.1 billion 16.20%

122





39.5 % 15 % 6.4 % 37.6 % 1.5 % 0 % 0 % 0 %

DEFINED CONTRIBUTION PLANS The Maryland Teachers and State Employees Supplemental Retirement Plans (MSRP) are administered by a nine-member Board of Trustees whose members are appointed by the Governor of Maryland to staggered four-year terms. The Governor selects three members from certain State government departments, three members who are eligible to participate in the plans, and three members of the general public.

The Plans provide three voluntary, tax-advantaged savings programs to all State employees and elected officials including:

• 457(b) Deferred Compensation Plan (both pre-tax and Roth post-tax accounts);

• 401(k) Savings and Investment Plan (both pre-tax and Roth post-tax accounts); and

• 403(b) Tax-sheltered Annuity Plan (only for employees in State education institutions).

A fourth, the 401(a) Match Plan, is provided most regular State employees who are contributing to an employer-sponsored supplemental retirement plan. The match provides a dollar-for-dollar employer match, up to $600 per fiscal year as authorized in the State budget (currently suspended).

The MSRP Board has approved 17 mutual funds for all plans plus a series of 12 Target Date Retirement funds. In addition, the 403(b) has a money market mutual fund instead of the stable value fund available in the other three plans.

As of 12/31/2013 total assets are $3,207,332,769 (audited):

• 457(b) plan assets total $1,465,381,278 for 29,520 participant accounts

• 401(k) plan assets total $1,485,298,831 for 33,974 participant accounts

• 403(b) plan assets total $82,945,266 for 879 participant accounts

• 401(a) match plan assets total $173,707,394 for 36,776 participant accounts

• MSRP accounts are held by 57,347 participants. 33,952 employees were making contributions to MSRP at the end of 2013—about 44% of those eligible.

Nationwide Retirement Solutions is the current MSRP plan administrator.

123

NASRA - Roll Call of the States State: Michigan Retirement System: Municipal Employees Retirement System of Michigan Executive Director: Chris DeRose Market Value of Assets: $7.7 B Assets as of: 12/31/2013 Number of Participants: 99,680 Participants as of: 12/31/2013

LEGISLATION Public Act 242 of 2014: Amends the regulations that govern self-directed public pension accounts as well as other self-directed retirement accounts like health savings vehicles and 457 supplemental savings accounts to allow for automatic enrollment of employees. PA 252 of 2014: Establishes appropriations for all state departments that are not education related. Makes amendments within the Department of Treasury budget to the revenue sharing program for local units of government by eliminating the requirement that local units establish employee benefit reforms in order to meet eligibility rules. In the past those benefit reforms included caps on the percentage of payroll that local units could spend on pension benefits and limits on pension multipliers and contributions to pension funds. Public Acts 181-190 of 2014: Commonly known as the Detroit Bankruptcy “Grand Bargain” the package establishes fiscal and policy oversight boards for the city government as well as investment oversight and review boards for the city's pension systems. The package also appropriates $1.92 million in state funds to help pay pension shortfalls in order to lessen the amount of reductions that will be made to the pension benefits of current retirees.

TECHNOLOGY We have begun the process of upgrading our eight-year-old pension administration software to the latest release. This will enhance our ability to serve our customers at a lower cost, and positions us to further streamline and enhance our service delivery.

FUNDING ISSUES Our Defined Benefit Plan is a multiple-employer plan meaning that assets are pooled for investment purposes but separate trusts are maintained for each individual employer. As of December 31, 2013, we administer retirement services for 714 municipalities with Defined Benefit Plans and 64 with Hybrid Plans. For this reason, MERS does not have a “funded status”; rather, each municipality has its own funded level*:

• 67% of all MERS’ 711 defined benefit and hybrid municipalities are funded at 70%+ • 108 municipalities are more than 100% funded

124

*As of 12/31/12 actuarial report

MODEL PRACTICES MERS completed a new, three-year Strategic Plan for 2014-2016 that incorporated feedback from our customers. Completing the Strategic Plan took months of significant planning effort and involved all MERS staff. The new plan has a Vision Statement, major goals and targets, objectives, initiatives, and business plan projects that when completed will carry out and help achieve the Vision. To ensure every employee feels connected to the Strategic Plan, each employee also has an individual performance plan with specific goals to achieve, tied to the Strategic Plan. One key initiative in the new Strategic Plan is to conduct re-engineering and process improvement reviews of all MERS core and supporting processes. This work began in 2013 and will continue for the next 18 months. As an outcome of this work, MERS will redesign all its key processes to ensure it is operating efficiently and in a cost-effective manner. This work should also free up capacity and help MERS better control its future costs and manage its growth effectively. We have also began a retirement readiness initiative in 2013, which when fully implemented in 2014-15, will provide participants with resources to understand the full scope of their MERS benefits and how they will work in tandem with other retirement programs such as Social Security. Through general awareness, information and education, participants will learn more about retirement preparedness. Their knowledge will allow them to actions to ensure they are on the path to meeting their post-employment financial goals.

INVESTMENT ACTIVITY/INITIATIVES Investment Returns (gross of fees) as of 12/31/2013: One year 15.0% Three year 9.43% Five year 11.96% Ten year 7.19%

http://www.nasra.org/Files/Roll Call/michmers.jpg

125





56.4 % 25.6 % 2.9 % 9.3 % 5.8 % 0 % 76.5 % 23.5 %

Alternatives (1.3% Timber, 2.9% Infrastructure, 4.4% Commodities, 0.7% Farmland and Agriculture.) *All figures as of 12/31/13 The internally managed assets are: S&P 400, 500 and 600 Indices, Fixed Income Cash Portfolio, and Fixed Income Short Duration Portfolio, and Micro Cap internal portfolio.

DEFINED CONTRIBUTION PLANS The MERS Retirement Board has the fiduciary responsibility for MERS Defined Contribution Plan. As of December 31, 2013, the $472.7 million in defined contribution assets were distributed across four investment categories: 1) Retirement Strategies of Target Date Funds, 2) Diversified Portfolio with a menu of MERS-managed portfolios, 3) Expanded Funds of publicly traded mutual funds, and 4) Self-Directed Brokerage Window for a broader selection of additional funds. MERS launched a 457 Supplemental Retirement Program in November of 2011. As of December 31, 2013, 123 municipalities have joined the fund with $13.9 million in assets. This program uses the four investment categories of the Defined Contribution Plan.

126

NASRA - Roll Call of the States State: Michigan Retirement System: Michigan Office of Retirement Services Executive Director: Phillip Stoddard Market Value of Assets: $51.3 B Assets as of: 9/30/2013 Number of Active Members: 233,057 Number of Annuitants: 261,313 Participants as of: 9/30/2013

LEGISLATION P.A. 32 of 2013 This act amended the Eligible Domestic Relations Order Act to provide a 60-day window to amend a failed domestic relations order (DRO), so long as the initial DRO was submitted to the retirement system for review prior to the participant’s retirement allowance effective date or death (whichever occurs first). This 60-day window begins on the date the retirement system notifies the parties that the DRO does not qualify as an EDRO. This, in effect, freezes the participant’s retirement effective date for 60 days or until the EDRO is approved by the retirement system (whichever occurs first). The act also provides clear obligations and notice provisions to guide parties and the retirement systems to help ensure that the parties timely submit an amended DRO to qualify as an EDRO. P.A. 112 of 2013 The State Employees' Retirement Act requires retirants who have been rehired by the State to suspend retirement allowance during the period of employment. The Act contains three exemptions to this requirement. These three exemptions allow a State employee to concurrently draw a pension while working for the State as a rehired employee after retirement as follows: 1) the retiree provides health care services under the jurisdiction of the Michigan Department of Corrections (MDOC); 2) the retiree was a special assistant attorney general who possesses specialized expertise; or 3) the retiree is hired to provide for the custody of individuals under the jurisdiction of the MDOC, and is limited in term, no benefits are paid, the pay is not more than 80% of the maximum hourly wage for the position, the retiree retired after a bona fide termination of employment, and he or she works no more than 1,040 hours in a 12-month period. This exemption for rehired MDOC custody staff was applicable only until September 30, 2013. This public act postponed by two years the September 30, 2013, sunset provision, which allows retired corrections officers to be rehired under the conditions specified in the Act until September 30, 2015.

TECHNOLOGY The Office of Retirement Services systems were implemented as of April 2008. ORS continues to research new technology and to upgrade existing systems to continue the support and advancement of technology. The ORS solution is a collection of tightly integrated applications. The business applications include: Clarety Clarety is the principal line of business application, written in Java and using MS SQL Server, includes internal Clarety and an external web application used by employers called Employer Self-Service. Siebel/Customer Relationship Management (CRM) Siebel/CRM is the customized call center and customer relationship management software from Siebel. Siebel also includes secure message board functionality for register/logged in users to miAccount as well as email responses for guest users.

127

Telephony Telephony is a variety of third party packages and equipment for services such as Interactive Voice Response (IVR). This includes Genesys products for Computer Telephony Integration and Interactive Voice Response. miAccount The Web Self Service and Web Services Interfaces are components of the member self-service system. The member self-service system is known as miAccount. A separate sub-system called Shared Security Services standardizes authentication and authorization facilities for miAccount. FileNet FileNet is the customized image system and workflow system. It provides scanning, indexing and workflow components. It is tightly integrated with the Clarety application. Genesys Workforce Manager Genesys Workforce Manager is a tool used to manage staffing levels and assignments according to forecasted volumes of customer interactions. NICE NICE is the call recording tool used by the Office of Retirement Services to manage the quality assurance program. This is an enterprise implementation where ORS shares hardware for the NICE application with other NICE users in the state. Virtual Hold Technology (VHT) Virtual Hold was implemented to improve the customer experience in our call center by offering a virtual queue to callers who may be faced with longer wait times. Callers are now able to choose to receive a call back rather than waiting on hold in the queue. Technology Activities Improvement of Financial Reporting Functionality The purpose of this project is to improve the processes and related technologies that support the production of the financial statements and annual CAFRs. Redesign of Insurance Functionality ORS is working a redesign of the functionality that supports insurance enrollment and processing. The redesign includes an architecture approach of a rules based engine solution. A rules based engine would build flexibility into the business rules and allow ORS the ability to update rules to match insurance offerings or requirements more quickly. The enhancement also improves usability for staff in managing insurance for ORS customers and improves ORS’ ability to meet contractual and regulatory requirements. ORS websites feature responsive design As part of a statewide effort to better serve these customers, the ORS website became the 33rd of 141 State of Michigan sites to convert to a responsive design format. A responsive site is able to change the layout, order, and structure of the web content based on the device you view it on. This helps to improve our customers’ web experience regardless of the device they are using to access the website. Usability Improvements to miAccount and the ORS website The Office of Retirement Services has implemented the first phase of usability improvements to its self-service application, miAccount, and to its static website. This implementation focused on unifying the color, layout and style of both miAccount and the static site. Customers will now have a consistent experience when logged into

128

miAccount or reviewing information from the static website. The next phase is currently in developed and that will implement usability enhancements to the online transactions to make them more intuitive to customers.

IVR Enhancements ORS’ enhanced its IVR by adding, removing, and upgrading various features of the IVR to improve ORS customers’ experiences on the phone. Enhancements included a revised script with plain language, simplified menu options, and faster tempo; call routing for Military Retirement System; a second Hot Topic option; improving routing of calls based on application status; and removing unnecessary IVR items (like validation questions for default menu callers and employers). Operations support The Office of Retirement Services is conducting a project to replace its production and technical test/disaster recovery servers. This project includes moving some application servers to virtual servers that are offered by the State of Michigan data center. All ORS desktops have also been updated to Windows 7 from Windows XP. Imaging and Workflow Redesign ORS had initiated a process to review and improve the imaging process and technology as well as to improve the ability to manage, assign and track workflows.

LITIGATION / CORPORATE GOVERNANCE Michigan Coalition SEU, et al v State of Michigan, et al. 2011 P.A. 264 created a 4 percent pension contribution by members of the defined benefit plan. Plaintiffs filed suit alleging that the Act and, in particular, MCL 38.35a and 38.50a, are unconstitutional because they were enacted without the approval of the Civil Service Commission, which has the authority to “fix rates of compensation” and regulate all conditions of employment under Const 1963, art 11, § 5. The trial court granted summary disposition for Plaintiffs finding that P.A. 264 was a violation of art 11 § 5 and that the overtime provisions found in section 1(e) of P.A. 264 also violated art 11 §5. By stipulation of the parties, the 4 percent deduction will continue while the State pursues an appeal in an expedited manner and in the event the appellate courts affirm the trial court decision, Plaintiffs will be made whole. Oral argument in the Court of Appeals took place on June 12, 2013. On August 13, 2013 the COA affirmed the trial court ruling finding that portions of 2011 PA 264 are unconstitutional because they are incompatible with Const 1963, art 11, § 5. See, 302 Mich App 189 (2012). On September 24, 2013 the State of Michigan filed an application for leave to appeal to the Michigan Supreme Court. On October 29, 2013 the Supreme Court allowed the Civil Service Commission’s Amicus Brief that had been filed on October 24, 2013. The State’s Reply to the Coalition’s Response in Opposition to our Application for Leave to Appeal was filed on November 12, 2013. The application for leave was granted on January 29, 2014. All briefs have been filed and we are awaiting oral argument. AFT Michigan v State of Michigan; McMillan, Deborah et al v MPSERS, et al; and Johnson, Timothy, et al v MPSERS, et al. 2010 P.A. 75 created a 3 percent health care contribution for employees who will receive this benefit in retirement. Plaintiffs successfully argued in the trial court and the Court of Appeals (COA) that MCL 38.1343e is unconstitutional as an impairment of contract, a violation of the takings clause, and a violation of Plaintiffs’ substantive due process rights because it required members of the Michigan Public School Employees’ Retirement System to contribute 3 percent of their compensation to help pay for the cost of health care for retirees.

129

Defendants’ application for leave to appeal was filed with the Michigan Supreme Court seeking reversal of the COA ruling. The application also asks the Supreme Court to find recently enacted 2012 P.A. 300, which amends MCL 38.1343e and other provisions of the Public School Employees Retirement Act, constitutional; thus, curing the infirmities found by the COA. The State’s application for leave to appeal in these three files to the Michigan Supreme Court No.14924-25-26 has been stayed while the MSC hears AFT and MEA in the PA 300 case No. 148748. On June 9, 2014, McMillan Plaintiffs/Appellees and Cross-Appellants (MSC No. 14926) filed a Motion for Reconsideration of the Court’s Order holding the state’s application for leave in abeyance asserting, among other things, that the money collected under PA 75 is substantial and if the court does not grant the application for leave the court will not address the refund of the money collected under PA 75. In the meantime, a court-issued stay allows the 3 percent deductions to remain in escrow during appellate review until a final order is issued. AFT MICHIGAN, AFT, AFL-CIO et al and MEA v MPSERS et al. 2012 P.A. 300 created a 52-day period (through October 26, 2012) for public school employees to make health care and pension elections. The Act gave the employees options on future retirement pension calculations and the 3 percent health care deductions, along with other changes to the Public School Employees Retirement Act. The Court of Claims granted AFT a Temporary Restraining Order (TRO) that enjoined the State from enforcing the 52-day election period and granted MEA a TRO providing that all elections made under P.A. 300 may be rescinded or changed if any provisions of the Act are found to be unconstitutional by the trial court or any appellate court. The Court of Appeals granted Defendants’ application for leave to appeal and denied Defendants’ request to stay the TROs. The trial court determined that P.A. 300 is constitutional except for the 52-day election period. The Court of Appeals, in turn, dismissed the appeal as moot. On February 18, 2014 AFT filed an application for leave to appeal the COA decision to the Michigan Supreme Court. On May 21, 2014 the Court granted the application for leave to appeal. The 3 percent deductions continue pending Plaintiffs’ appeal to the Court of Appeals disputing the trial court’s ruling that the Act is constitutional.

FUNDING ISSUES Funding levels (actuarial basis) as of September 30, 2013 for the four systems are:

• Michigan Public School Employees Retirement System: 59.6 percent • State Employees’ Retirement System: 60.3 percent • State Police Retirement System: 62.0 percent • Judges Retirement System: 95.1 percent.

2013 results indicate that the recently-implemented Hybrid plans in both the State Police and Public School Employees’ retirement systems exceed 100%. Funding levels recognize the final year of the 2008 and 2009 investment losses, and are expected to increase due to the asset gains from 2012 and 2013. There were no material assumption actuarial changes in 2013; however, due to the benefit changes in the Michigan Public School Employees’ Retirement System for 2012 and the GASB’s new pension accounting standards, a change to the actuarial cost method has been incorporated. Each member’s normal cost was based upon benefit provisions that are applicable to each member. The Office of Retirement Services administers the post-employment health benefits (health, dental, and vision)

130

offered to public school retirees. An actuarial valuation is completed each year to determine the actuarial accrued liability if the benefits were to be prefunded. This information has been provided in the comprehensive annual financial reports in the past. The actuarial calculations in the valuations are prepared for the purpose of complying with requirements of Statements No. 43 and 45 of the Governmental Accounting Standards Board.

MODEL PRACTICES Partnership efforts ORS hosted a call agents meeting, bringing together call agents from ORS and partner insurance carriers who provide our public school members with the best customer service possible. The purpose of the meeting was to discuss techniques for managing the customer experience in a consistent and respectful manner, to build relationships between ORS and our insurance partners, and networking. Video conference technology was utilized which allowed insurance partners to participate from Las Vegas, NV and Lisle, IL with ORS and in-house partners. The group plans to continue meeting 3-4 times per year to discuss approaches to upcoming business activities. Retirees healthy fit ORS reached out to about 17,000 public school retirees who may save money on their health insurance by switching from an ORS plan to Medicaid under the Michigan expansion, or a plan under the Affordable Care Act Health Insurance Marketplace. ORS began mailing personalized Find your Healthy Fit flyers on January 30. Switching has the potential to save our retirees thousands of dollars a year on their health insurance premiums, and may reduce their out of pocket costs. The project raised awareness about options and helped point customers to information to help them make a decision about their healthcare plan. As of the end of May, 2014, 134 individuals from the target population have dis-enrolled from their pension plan insurance. This has the potential to save ORS approximately $800,000 per year. Social Media ORS successfully launched into Social Media through Facebook. In the first week, ORS reached 13,000 likes and more than 107,000 people saw something about ORS on Facebook through likes on the page, liked posts or comments. This has allowed ORS to answer many questions which may also help others who read the posts. It allows us to build trust with our customers, have an ongoing conversation with them about retirement readiness, and potentially prevent some phone calls. During National Save for Retirement Week, Facebook activities were focused on increasing online interaction with our younger audience and those with a DC component to their retirement. The week culminated in a special noon "Ask Phil" Facebook chat. Phil Stoddard worked with Customer Education staff and subject matter experts to answer questions that our Facebook fans asked. Through this chat ORS demonstrated that it’s innovative and responsive to our members’ needs and questions. Thanks to all who participated and for their enthusiastic attitude. ORS’s social media strategy included creating a page on Wikipedia, a user-generated online encyclopedia. Having our page on Wikipedia provides a high-level overview of our organization and it’s connected to the DTMB Wikipedia page. In April, Customer Education emailed our active members, inviting them to join us on Facebook. This email coincided with National Employee Benefits Day. As a result, we gained more than 1,500 new fans; Currently ORS is past the 20,900 fan mark. ORS believes our responsiveness online demonstrates excellence both to those who post and those who only observe. Retention schedules updated Process Support reviewed and updated the ORS Agency Retention Schedules. Process Support with the assistance from all other processes reviewed 7 agency schedules, totaling 381 individual retention items. PS combined the 7 ‘system specific’ schedules into 1 ORS agency schedule. PS identified 47 items that were associated with a

131

general schedule and applied the GS schedule to those records. PS created 8 new schedules because the data did not fit into an existing agency specific or general schedule. PS obsoleted 313 items from the agency specific schedules and revised 68 items. Insurance Audit ORS performed an insurance dependent audit project. With the help of data from the Department of Treasury, ORS was able to identify accounts where members’ insurance dependents may no longer be eligible for insurances. ORS sent these insurance enrollees letters asking for proof that their dependents are still eligible. By removing ineligible dependents, ORS estimates a first-year saving of $5.24 million.

INVESTMENT ACTIVITY/INITIATIVES The following are the rates of return for each of the Office of Retirement Services’ four retirement systems for the period ending September 30, 2013: Retirement System Pension Plan OPEB State Employees’ Retirement System 12.5 percent 11.4 percent Public School Employees Retirement System 12.5 percent 12.3 percent State Police Retirement System 12.4 percent 11.6 percent Judges Retirement System 12.1 percent 11.1 percent Asset Allocation (BPD – Steve Crippen) Please provide the most recent available percentage allocations for each asset class. In the space following the table, please include comments, including the effective date of the allocation, assets that are managed internally and externally, etc. Use the box below to clarify or specify within each category.

Allocation as of September 30, 2013

State Employees’ Retirement System

Public School Employees' Retirement System

State Police Retirement System

Judges Retirement System

Combined Domestic and Foreign Equities 41.90% 41.80% 41.30% 39.10%

Fixed Income 22.60% 22.60% 22.90% 26.90%

Real Estate 10.90% 10.80% 10.80% 11.90%

Alternatives 19.40% 19.40% 19.40% 17.50%

Cash 5.20% 5.40% 5.60% 4.60%

Other

Total 100.00% 100.00% 100.00% 100.00%

Assets managed externally 62.95% 62.34% 62.45% 61.35%

Assets managed internally 37.05% 37.66% 37.55% 38.65%

132

DEFINED CONTRIBUTION PLANS Effective March 31, 1997, the State of Michigan Defined Benefit (DB) pension was closed to newly hired state employees. All new employees are automatically enrolled in the Defined Contribution Retirement Plan (DCRP) plan, which has 28 investment options plus a self-directed brokerage account. The DCRP provides a 4 percent mandatory employer contribution and additional match of up to 3 percent. 85.5% percent of members in the plan actively defer contributions into the plan. DB members hired prior to March 31, 1997 were offered a one-time opportunity to transfer the actuarial present value of their accrued DB pension benefits to the DCRP plan. Those members remaining in the DB Plan can also defer compensation in the 401(k) and 457 plans, but they receive no matching contributions. Effective July 1, 2010, the State of Michigan offered a hybrid plan called Pension Plus for Michigan public school employees first hired July 1, 2010 or later. Part of this plan is a Defined Contribution (DC) component whereby employees are automatically enrolled at 2 percent of compensation in the 457 plan on which they receive a 50 percent employer match up to a maximum employer contribution of 1 percent of compensation. The Pension Plus plan has approximately 47,500 public school participants with $101 million in assets as of May 31, 2014. Effective January 1, 2012, the State of Michigan no longer offers new employees a retiree healthcare subsidy. In lieu of that subsidy, the State of Michigan now offers an additional 100 percent match of up to 2 percent of compensation on top of the 3 percent match for retirement. DCRP participants who were actively employed as of December 31, 2011 were also given the option to switch to this new retiree healthcare option as of April 1, 2012. Approximately 3,500 participants chose this new option. Also as of April 1, 2012, DB members were given the option to freeze their DB pension benefits and begin participating in the DCRP or stay in the DB Plan either until termination or until they attained 30 years of service. Those staying in the DB Plan would have to contribute 4 percent for their compensation effective April 1, 2012. Approximately 600 members switched (or defaulted into) the DCRP plan. Effective June 10, 2012, new State Police recruits are also offered Pension Plus. Their Defined Contribution component consists of a 50 percent match of the first 2 percent of compensation deferred to the plan and a 100 percent match of the next 2 percent of compensation deferred to the plan for retiree healthcare. 332 new recruits have been placed in this plan since June 10, 2012. Effective September 4, 2012, new public school employees are automatically enrolled into the pension plus plan, but have the option to convert to the DC plan within 75 days of hire. Approximately 4,400 have elected the DC plan option thus far. In addition, DB members were provided the opportunity to switch to the DC plan for future contributions. Approximately 5,100 members elected this option which took effect February 1, 2013. The Education Achievement Authority (EAA) is a statewide school system that will operate the lowest performing 5 percent of schools in Michigan. Created in January 2012 by an inter-local agreement, it is an independent agency whose employees are not members of Michigan’s public school employee retirement plans. The Office of Retirement Services separately manages the EAA’s DC Plan, which provides a 7.5 percent matching contribution to employees of the EAA. The EAA plan currently has approximately 603 participants with $5.5 million in assets. Through May 31, 2013, the 401(k) plan has approximately 131,000 participants with $4.2 billion in assets. The 457 plan has 95,000 participants with $1.8 billion in assets. (Participants include active and retired members of the state employees, judges, legislative employees, and state police who either belong in the DCRP or are taking advantage of the Deferred Compensation plan). Both the 457 plan and 401(k) plan have the same investment structure and asset choices: Tier I investments consists of a short-term investment fund, stable value fund, four index funds, and target date asset allocation funds; Tier II investments consists of mutual funds managed by ten different companies; Tier III is the brokerage

133

window called the Self-Directed Brokerage Account (SDBA) which allows self-directed investment in thousands of mutual funds and individual securities.

FUTURE DEVELOPMENTS / OTHER ISSUES NAGDCA Award ORS has been chosen as a recipient of the 2013 Leadership Recognition Award through the National Association of Government Defined Contribution Administrators' (NAGDCA). This award recognizes defined contribution plans for outstanding achievements in Participant Education and Effective Communication. Only the top five projects in each category receive a Leadership Award, and this is the third year in a row ORS has been recognized. Best in Show Award The State of Michigan 401(k) & 457 Plans have won a Best in Show award from the Insurance and Financial Communicators Association. Chosen from 650 submissions, the award recognizes the creativity, design, and writing in the State of Michigan Match Campaign. PPCC Award ORS has recently been awarded the 2013 Public Pension Coordinating Council Standards Award from the Public Pension Coordinating Councils Standards Program (PPCC) for both funding and administration. ORS has received this award every year since 2004. The PPCC Standards reflect minimum expectations for public retirement system management and administration, and serve as a benchmark for all defined benefit public plans to be measured. Optimas Award Workforce magazine has recognized ORS with their 2013 Optimas Award for its innovative learning and development program, Power of Perspectives. Winners of the award are recognized for identifying a critical issue within their organization and implementing a successful HR solution. Plan Sponsor Award ORS was awarded as a finalist for the 2014 PLAN SPONSOR Plan Sponsor of the Year award in the Public DC category for our 457 plan. The finalists were featured in the March 2014 issue of PLANSPONSOR Magazine. Advantage Award Truven Health Analytics selected ORS to receive a 2014 Advantage Award at the 2014 Truven Health Advantage Conference in Orlando, Florida. This award honors our extraordinary success in the areas of strategy and growth in healthcare solutions while using Truven Health products and services. Pinnacle Award The Central Michigan chapter of the Public Relations Society of America awarded ORS a Pinnacle Award for a public relations tactic, for excellence in a social medium. Customer Education staff submitted the ORS Facebook launch for this competition, sharing details of the planning, implementation and measurement of our page. This is part of the PACE awards, which are mid-Michigan’s highest honor of public relations activities and are awarded annually to those who have successfully addressed a contemporary issue with exemplary professional skill, creativity and resourcefulness. Entries are judged by a peer group in another state and awards are distributed at their awards ceremony in April, which Amy Price and Ian Broughton plan to attend. Training for public school reporting staff Employer Reporting and Customer Education engaged in preparing Michigan public schools for the previous school year by providing webinars focusing on the "hot topics" of reporting. Launched in September, the webinar covered the importance of reporting on time and posting wage reports. It also highlights areas such as updating

134

employee information, new actuarial tables, working after retirement rules under Public Act 464, and TDP transfer rules. Employer Reporting and Customer Education continue to work together on payroll training program. Report training is performed as needed. Integration of Systems The miAccount member self-service Message Board and the internal Siebel system were integrated, consolidating phone and email communication into a single application. Now, staff logged into Siebel can see both email and telephone interactions in one place, rather than having email in a separate tool. Staff responding to message board messages no longer has to log in to a separate account.

MSBO conference ORS representatives from several processes participated in the Michigan School Business Officials (MSBO) Annual Conference and Exhibit. Three ORS presentations provided opportunities to share updates and network with our employer partners. Staff presented an ORS Update to nearly 60 payroll and human resources representatives responsible for reporting to ORS. The presentation covered reportable compensation for DB and DC members, IRS limits, rules and regulations, and other issues. They also announced a new payroll certification and a training outreach program scheduled for this fall. Another session updated attendees on employer reporting process enhancements to be implemented in the coming months, including new hire online elections, pay cycle payments, and a new look for employer statements. The session included how to prepare for these enhancements, and provided a brief legislative update. One presentation was conducted along with staff from Plante Moran and explained the complexities of new requirements from the Governmental Accounting Standard Board (GASB), known as GASB 68. Attendees learned what to expect from ORS in upcoming years regarding required additional information in schools’ financial reports. CEM presentation Three staff participated in the Cost Effective Measurement (CEM) Benchmarking Peer Conference. This year, they delivered two presentations, one on our social media implementation and the other on using data to drive communications. Both presentations were received very well by the group and sparked great conversation. Pillar wraps Each process at ORS plays a vital role in delivering the retirement information our customers need and the retirement benefits they’ve earned. To highlight those roles pillar wraps were created. These visible and attractive banners are wrapped around building pillars in each process displaying what each process does and why the do it. CAPPP certification Nine ORS staff members attended a four day seminar in Chicago the last week of June. The Certificate of Achievement in Public Plan Policy (CAPPP) is an in depth exploration of the building blocks of public employee plan governance. Seminars were comprised of eight consecutive four hour courses. The staff was divided in two groups; one attended training on Pension Plus governance and one attended seminars on health plan governance. The attendees will take certification exams; those who pass will become certified in their area of study (pension or health plan) Process mapping training Orion Development Group, the same organization that helped ORS become processed based back in the late 90s, hosted a process mapping training for ORS staff. The training was approved by the Project Management Institute, and attendees learned to map processes (the natural business activities we perform that produce value and serve customers). This training helped the attendees develop a "blueprint" they could use to identify gaps and remove unnecessary steps in ORS processes.

135

Drug vendor savings The Office of Retirement Services (ORS) manages several contracts that are essential to providing valuable benefits and best-in-class services to its members and retirees. This year, ORS exercised an option year for 2014 with the prescription drug vendor, Catamaran, and through those negotiations achieved a projected $40 million in savings. ACH ER worked with the MPSERS employer to transition to mandatory payment of retirement contributions through ACH and received 100% compliance. ORS no longer accepts paper checks for retirement contributions.

147c monies ORS partnered with Financial Services and Michigan Department of Education to implement a process for receiving 147c monies provided for in PA 300 of 2012. PA 300 of 2012 capped the Unfunded Actuarial Accrued Liability (UAAL) at 20.96%. The rate stabilization amount provided for in the section 147c monies makes up the difference in the rate, funneling $436 million into MPSERS for fiscal year 2014. Actuarial Tables ORS rolled out new actuarial rates for purchasing service. The new rates ensure a sound system with the changes from the 2012 MPSERS reform. The rates take into consideration the different multipliers at retirement.

Media protection policy Process Support implemented and trained ORS staff on the new Media Protection Policy and Standard and the Incident Response Policy, Procedure and Report. Regression testing PS worked with AST to implement a new regression testing checklist. The regression testing checklist formalizes the regression testing process and provides documentation to support the results of each regression testing effort. Business Process Owners (BPOs) are responsible for monitoring the regression testing for their process and then reporting on the passage of the regression testing at the end of the test window. Improved UAT PS worked with AST to improve the User Acceptance Testing (UAT) testing process by updating the design document to include a checklist for ensuring that testing considerations are properly taken into account when planning for UAT. This change also ensures that UAT documentation is completed and attached to the PIR to document UAT test results more appropriately. Process reengineering ORS is starting to plan for two long-term projects that will improve how we handle our financial and insurance processes. Business Process Reengineering (BPR) will improve the processes for producing financial statements and the CAFRs. The Insurance Process Redesign (IPR) will update ORS'S insurance software and processes to allow us to adapt to the demands of a changing insurance market. Website enhancements Together with ING, staff in CE and BPD are enhancing the online experience for participants in the State of Michigan 401(k) and 457 Plans with easier navigation and the creation of e-books. With the addition of so many different groups and variations in the 401(k) and 457 Plans, it was important to update the website so participants can find accurate information that is tailored to their specific plans. The Plan Information dropdown menu has been updated so participants will choose their specific retirement system. They will then navigate the Plan Highlights e-book tailored to their plan.

136

ORS joined forces with the State of Michigan Use Experience (UX) team, a part of the DTMB Shared Services, to find out if our customers found miAccount and the ORS website easy to navigate. ORS has already improved customer service by creating a What Happens Next document that users receive when they apply for retirement in miAccount. The UX team also prepared miAccount prototypes for the processes that caused our customers the most confusion during user experience testing. ORS will use the prototypes to implement further changes in miAccount and the customer website.

137

NASRA - Roll Call of the States State: Minnesota Retirement System: Public Employees Retirement Association of MN Executive Director: Mary Most Vanek Market Value of Assets: $22.7 B Assets as of: 6/30/2013 Number of Active Members: 154,300 Number of Annuitants: 93,300 Participants as of: 6/30/2013

LEGISLATION Contribution rates for the PERA General Plan were increased from 6.25 to 6.50 percent of pay for employees and 7.25 to 7.50 percent of pay for employers effective January 2015. Currently liabilities are projected assuming we will indefinitely pay a 1 percent annual benefit adjustment for our plans if the actuary determines we will not attain 90 percent funded within 15 years- assuming payment of a 2.5 percent annual adjustment. The annual benefit adjustments were lowered for funding stability. The law was changed in 2014 directing the actuary to project a blended measurement of liabilities assuming the payment of the 1 percent annual adjustment until such time as we maintain 90 percent funding paying the 2.5 percent annual adjustment. This will result in our funded ratio declining, but a more accurate measurement of liabilities.

SYSTEM GOVERNANCE The Board will be deciding at its August 2014 meeting the process to fill the position of executive director. The current director will be retiring the end of January 2015. A new Trustee, the Governor appointee representing the public, will be named soon. The member-elected Police and Fire trustee recently resigned and that position will likely remain open until the Board election in January 2015. The member-elected retiree trustee is not seeking reelection, so that means at least 3 of the 11 trustees will be new this coming year. With the departure of the executive director, this will be more change at the top of the organization than PERA has experienced in quite some time.

TECHNOLOGY A system was designed for taking requests for benefit information a few years ago, but that same system was enhanced this past year to automatically prepare benefit estimates if certain requirements are met. The system enhancement has resulted in letters produced in a batch process at the end of each day for about 30 percent of all benefit estimate requests submitted through phone calls to the PERA offices. Data also shows that over 75 percent of all estimates prepared by our system in the past year were completed by members themselves using the secure calculator on the PERA web site. Minnesota law requires employers – over 2200 statewide - to annually report to us those individuals employed by them who have not been reported for participation in our plans with the reason those individuals have been excluded. The reports have been on paper, but this year a system has been developed to allow employers to record this information on-line in a prescribed format through our secure employer reporting web site. The data will be validated by our system against the exclusion criteria, identifying whether the exclusion is correctly applied and flagging any employees for whom the exclusion does not appear to have been properly applied.

138

FUNDING ISSUES There were no assumption changes in the past year. The next experience study is scheduled for 2015. The funded ratios of the PERA plans are:

Market Value Actuarial Value General Plan 77.84% 72.82% Police and Fire Plan 86.89% 81.23% Local Correctional Plan 96.21% 90.98%

INVESTMENT ACTIVITY/INITIATIVES Rates of return (as of 3/31/2014) 1Yr: 15.6% 3 Yr: 10.7% 5 Yr: 16.1% 10 Yr: 8.0%





60.5 % 23.5 % 1.1 % 11.2 % 3.4 % 0 % 100 % 0 %

DEFINED CONTRIBUTION PLANS The PERA Defined Contribution Plan is an optional 401(a) plan for governing body local government elected officials, physicians employed in local government medical facilities; city managers and volunteer ambulance service personnel. The plan has about $55 million in assets in the accounts of over 5100 active participants and another couple thousand inactive accounts. Plan participants invest in 6 accounts managed internally by the State Board of Investment.

FUTURE DEVELOPMENTS / OTHER ISSUES The management team is currently working on the next 3 to 5 year strategic plan. The plan will be submitted for approval to the Board of Trustees later this year. Like all public plans, a lot of time and energy is being devoted to developing education and communication strategies to deal with the roll-out of GASB 67 and 68. The PERA Board of Trustees approved contracting with MMro to administer the disability application and approval process for members of the PERA plans. That contract will go into effect on July 1, 2014, with applications expected to be sent to MMro beginning no later than September 1 under the new processes.

139

NASRA - Roll Call of the States State: Minnesota Retirement System: Minnesota State Retirement System Executive Director: Dave Bergstrom Market Value of Assets: $10 B Assets as of: 6/30/2013 Number of Active Members: 49,121 Number of Annuitants: 33,286 Participants as of: 6/30/2013

LEGISLATION For the MSRS General Plan, both the employee and employer contributions were increased from 5% to 5.5%, effective July 1, 2014. For our Correctional Plan, employee contributions were increased from 8.6% to 9.1% and employer contributions from 12.10% to 12.85%.

SYSTEM GOVERNANCE Due to the upcoming retirements of the Executive Director and Assistant Director of Finance within the next three years, the MSRS Board has begun the Succession Planning process. The Board has retained the services of a consultant to ensure a smooth transition to a new leadership team. MSRS is participating in the Cobalt Community Research program that assists us in surveying our members to measure our customer service effectiveness and identify any weaknesses. The survey results identified that an area requiring improvement is our website, which has been developed and will soon be released. We are currently reviewing investment options for our defined contribution plans.

TECHNOLOGY MSRS is near completion of a three-year conversion project to update all of our main business processes. The project deadline is December 2014, and we have completed four phases that modernized our: payment of ongoing annuities, payment of new annuities, processing of refunds, generating of estimates, and most of our daily routine functions. The final phase will include our financial reporting process and payroll receipt. We hired a firm, CSC, to work with our staff through the project, which included creating the process, developing business rules, testing, and rewriting all functions to a more modernized computer language. We anticipate that the changes will allow us to keep up with the information demand and our growth in services.

FUNDING ISSUES As of June 30, 2013, our funding ratio, using the actuarial value of assets (five-year smoothing), was 82%. Using the market value of assets, our funding ratio was 88%. We will be conducting an experience study to test the validity of our assumptions after this fiscal year, which will be completed in 2015. We recently strengthened mortality tables, which resulted in a greater reduction for those choosing to retire early, but improved benefits for those choosing survivor options. In 2011, our "select and ultimate" investment assumption was set at an 8% (select) rate for five years, and 8.5%

140

rate thereafter (ultimate). We expect this topic will continue to be discussed in conjunction with out other economic and demographic assumptions as our experience study is completed.

MODEL PRACTICES MSRS continues to focus on employee development. This past year, we have engaged our employees in the StrengthsFinder assessment training sessions, which has helped them discover and develop their natural strengths and understand how to deal with others in order to work effectively in team settings, relying on each employee's positive attributes to the organization. To determine the next step, we have hired a consultant to conduct an employee engagement survey to find out what we are doing well and what we can improve.

INVESTMENT ACTIVITY/INITIATIVES Rates of return, as of 3/31/2014: 1 Yr: 15.6% 3 Yr: 10.7% 5 Yr: 16.1% 10 Yr: 8.0%





60.5 % 23.5 % 1.1 % 11.2 % 3.7 % 0 % 0 % 0 %

DEFINED CONTRIBUTION PLANS MSRS administers a voluntary 457 plan with almost 85,000 participants and about $5.6 billion in assets. ING (VOYA) is our record-keeper, and we have 11 investment options. We also administer a Health Care Savings Plan (HCSP) with over 92,000 participants and about $684 million in assets. Membership is set up by union contract or a personnel agreement. We administer a mandated defined contribution plan for 1,400 active employees.

FUTURE DEVELOPMENTS / OTHER ISSUES We are hoping the world slows down a little so we can make further enhancements to our new system described in the Technology section, savor our improved funding status, and allow time to focus on continuing to improve our customer service. Our goal is to reach a score of 90 on the Cobalt Customer Satisfaction Report in the next three years.

141

NASRA - Roll Call of the States State: Minnesota Retirement System: Minnesota Teachers Retirement Association Executive Director: Laurie Fiori Hacking Market Value of Assets: $20 B Assets as of: 6/2/2014 Number of Active Members: 76,765 Number of Annuitants: 57,168 Participants as of: 6/30/2013

LEGISLATION Legislation approved by the 2014 legislature calls for consolidation of the Duluth Teachers Retirement Fund Association (DTRFA) into TRA to be accomplished over the coming year and finalized by June 30, 2015. TRA will receive annual aid of $14.3 million to cover DTRFA’s unfunded liabilities. DTRFA favored consolidation because it faces adverse demographic trends of declining teacher and student populations. Legislation also requires that TRA attain a funded ratio of 90 percent for at least two consecutive years (rather than 1 year as was the case under previous law) before a higher COLA is paid. Currently COLAs are limited to 2 percent and would rise to 2.5 percent if the funding ratio exceeds 90 percent.

SYSTEM GOVERNANCE TRA filled a new position, Deputy Executive Director, as part of succession planning and to fill a need to augment TRA’s leadership team. TRA has a robust Internal Audit department which has begun systematic audits of school district’s payroll data.

TECHNOLOGY TRA is in the midst of a six-year IT project to update its technology infrastructure and software. The project involves the re-development of TRA’s core retirement administration systems, which are programmed in Delphi object Pascal, to Microsoft Visual Studio C#. To ensure optimum return for the re-design effort, all core business processes are being evaluated and, where appropriate, redesigned to provide improved services to members. The new system is being developed in-house with augmentation from outside consultants on an as-needed basis. Phase One (employer reporting, member demographics) is slated to go live in July of this year.

FUNDING ISSUES TRA’s funding ratio improved markedly since 2009 due to 2010 financial sustainability legislation approved by the legislature and due to recent high investment returns. At its low point, on a market value basis, TRA’s funding ratio as of June 30, 2009 stood at 59 percent; by June 30, 2013, it had improved to 77 percent. Given the positive returns in fiscal 2014, we expect the ratio to improve to approximately 83 percent.

MODEL PRACTICES

• High percentages of membership and retirees are registered on-line: over 40% of active membership and 32% of retirees. Over 50,000 estimates annually are done on-line, self-service, upon demand by members which allows us to relieve backlogs and free up resources to work on new systems development and other enhancements.

142

• Communications: Very aggressive about engaging on social media sites (Facebook and Twitter). Have nearly 2,000 Facebook and 550 Twitter followers. We communicate news affecting DB plans on social media and then drive traffic to our website where we cover news more in depth. We respond quickly and effectively to negative press.

• GASB Communications: Have a separate webpage dedicated to GASB information with links to resources. Have begun producing explanatory videos on the website.

INVESTMENT ACTIVITY/INITIATIVES Rates of return – (as of 3/31/2014) 1 Yr: 15.6% 3 Yr: 10.7% 5 Yr: 16.1% 10 Yr: 8.0%





60.5 % 23.5 % 1.1 % 11.2 % 3.4 % 0 % 100 % 0 %

Real Estate – no specific allocation, but represents 2.4 % of total portfolio Alternatives (7.6% in private equity, 2% in resources (oil/gas), 1.6% yield-oriented investments) Mansco Perry is the new CIO, recruited from Macalester College Foundation and previously CIO of the Maryland State Retirement System. Mansco replaces Howard Bicker who with the Minnesota State Board of Investment for over 40 years.

FUTURE DEVELOPMENTS / OTHER ISSUES As part of succession planning, hired a new deputy director, Jay Stoffel who has over 25 years’ experience with public pension fund administration.

143

NASRA - Roll Call of the States State: Mississippi Retirement System: Public Employees' Retirement System of Mississippi Executive Director: Pat Robertson Market Value of Assets: $22 B Assets as of: 6/30/2013 Number of Active Members: 162,455 Number of Annuitants: 93,056 Participants as of: 6/30/2013

SYSTEM GOVERNANCE The PERS Board of Trustees recently changed the process for electing officers and established an official nominating committee. In June of each year, or as otherwise necessary, the Board shall elect one of its members to serve as board vice-chairman, who will automatically become chair the following year. The current chairman and vice-chairman will serve as the nominating committee and will submit the name(s) of the nominee(s) for vice-chairman to the Board for a vote.

In conjunction with IT initiatives a private portal/site was established to provide the PERS Board of Trustees access to reference and resource information, as well as provide secure access to board materials electronically minimizing the need for printing and mailing materials in advance of board meetings.

TECHNOLOGY In September 2010 PERS kicked off a four year project with Sierra-Cedar (formerly Sierra Systems and CedarCrestone) to implement a fully integrated Oracle-based solution replacing our pension administration system, electronic content management (ECM), financial accounting and reporting systems. The solution will be accessible via a web browser and will feature Internet self-service access for employers, members, and retirees. PERS entered into user acceptance testing (UAT) in March 2014, and will go live with the new pension system in the last half of 2014.

DATACENTER

Within our datacenter we have standardized on HP hardware for our server and primary storage systems. The network infrastructure is comprised of switch and firewall/VPN equipment from Cisco Systems. VMware vSphere is our virtualization platform, and we have virtualized the majority of our older servers over the past four years. APC equipment is used for our rack, power, and environment monitoring systems.

RECENTLY COMPLETED PROJECTS

• Migrated pension system project servers to Red Hat Enterprise Linux • Migrated from Microsoft Active Directory 2003 to 2008 • Deployed Windows 7 and Office 2010 to all PCs • Installed a new security camera system • Built a wireless network (WLAN) utilizing Aerohive Networks access points • Implemented a Palo Alto Networks next generation firewall • Implemented a tapeless backup system utilizing EMC Avamar and Data Domain • Converted microfilm and punch cards to PDFs • Transitioned key IT staff to laptops and docking stations • Deployed a new in-house developed HR system • Upgraded AV equipment in board room and conference rooms

144

UPCOMING PROJECTS

• Install backup power generator for building • Implement F5 Networks load balancing of Exchange and PeopleSoft • Plan, design, and implement disaster recovery infrastructure • Decommission Cisco ASA firewall • Rollout PeopleSoft CRM IT helpdesk system • Begin hardware refresh design and planning (server, storage, network) • Network topology redesign

Website As PERS moves forward with our new line of business, we realized the need to update our agency’s website. After a yearlong effort to streamline and reorganize information on our website, a complete redesign project began in May 2013 and was launched in November 2013. The redesign—which changed our URL from www.pers.state.ms.us to www.pers.ms.gov--focuses on improved site navigation by offering three distinct areas for related parties (employers, members and retirees). The launch of the revised site also included two revised microsites, one for the Optional Retirement Plan (www.orp.ms.gov) and a private site for accessing only by the PERS Board of Trustees. As anticipated during the revision, the expanded Board site has allowed us to share information faster with trustees while minimizing the need for printing volumes of materials for the board. The private Board website, the ORP site, and the newly designed agency website use Sharepoint for content management, which moved control of content updates from our technology department to our communications department. This move has allowed flexibility for making content updates more frequently and during off hours. The websites are hosted on a secure server with the state instead of PERS’ own secure servers, which also host all of the agency’s member data. This move to the ITS servers further strengthens the security of our protected member data. Intranet PERS recently launched a revised version of our internal website. The updated Intranet not only features a cleaner look that coordinates with our agency branding, but it has undergone a restructuring of content and been recoded to use .Net technology. The .Net technology brings the site’s coding up to current online standards and allows for assigned end-user updates. Allowing for assigned end-users to update specific pages of the Intranet has reduced the number of requests for technical assistance, which has meant our tech team can focus more on day-to-day operations that benefit our members and staff. The redesigned site has also provided an avenue for giving staff access to a digital bulletin board. This tool will allow for more interaction between staff and for sharing any personal announcements. As this tool is used more and more by staff, we anticipate less use of agency e-mails for personal announcements.

LITIGATION / CORPORATE GOVERNANCE As of June 2014, PERS is involved in 9 securities litigation cases. The Attorney General is PERS’ legal representative and initiates litigation on behalf of PERS. We are currently co-lead plaintiff in six cases and sole lead plaintiff in two cases. There are currently 14 firms providing monitoring services. PERS, with other public funds, has also been named a defendant in two avoidance actions. PERS covered employer, Natchez Regional Medical Center (NMRC), filed for Chapter 9 bankruptcy protection for a second time in five years. NMRC has delinquent employer contributions that are part of bankruptcy proceedings; however, they are current on contributions which post-date the filing of the bankruptcy petition. The intent is to sale NRMC to a private entity. PERS anticipates recovering delinquent contributions once the NRMC comes out of bankruptcy.

145

FUNDING ISSUES The Board of Trustees adopted a revised funding policy to position PERS at more than 80 percent funded by 2042 and stabilize contribution rates with a focus on a declining amortization period. Based on the revised funding policy, the Board approved an employer contribution rate of 15.75 percent for PERS. Employee contributions remain constant at 9.0 percent for PERS. As of June 30, 2013, PERS was 57.7 percent funded on an actuarial basis. This percentage has held steady for the past two years. The employer contribution rate is currently 15.75 percent and will remain at that level until the funded ratio reaches 100% and is projected to remain at 100%. As of June 30, 2013 PERS funded ratio is 61% on a market value basis and is projected to exceed 90% in 2042.

MODEL PRACTICES Digital Employer Newsletter PERS has changed the format of our employer newsletter from a printed document to a digital document. Since November 2010, we have encouraged our employers to sign up for e-mailed updates from PERS with the long-range plan of eliminating the printed edition of the newsletter. The last printed edition was mailed the first week of October 2013. This change not only saves on printing and mailing costs, but also allows for a quicker distribution of information. Retirement Guides Building on the success of the three retirement guides created in 2013 (i.e., The PERS Service Retirement Guide, The PERS Disability Retirement Guide, and The PERS Survivor Retirement Guide), PERS has created two new guides and is working to complete a third guide, all of which live or will live online on our Publications page. The PERS Pre-Retirement Guide targets mid-career and retirement-eligible members and focuses on the planning and preparation these individuals need at this point in their careers. Welcome to PERS is the guide we created specifically for new members of PERS. This guide gives an introductory overview of being a part of a defined benefit plan. The Purchase-of-Service Guide (currently being developed) delves into the various service credits available for purchase to our members and steps them through the process of applying for and paying for this credit. PERS also created a new guide to help employers better understand the process of certifying leave to PERS for the purpose of calculating an employee's retirement benefits. Questions concerning the appropriate type of leave to certify and the process for handling leave in excess of the amount offered to state employees are explained in the Employer Guide to Certifying Leave to PERS. PERS Handbooks and Retirement Guides Handout With the development of the new retirement guides and with the update of our URL address when we launched our revised website, we felt we needed a reference sheet to help members and retirees easily find our online tools. The reference sheet we designed lists our new URL and provides an image of and synopsis of the PERS Member and Retiree handbooks, as well as each existing retirement guide. Alongside each listing, we have included a QR code so that members with a smart phone can quickly scan the page and be taken directly to the desired resource. PERS Pop Quiz In researching member education tools in the spring of 2014, we were impressed by the Public Pension Pop Quiz published online by the New York State Teachers’ Retirement System. We took the idea and developed our own PERS Pop Quiz, which has already become a popular piece. The colorful tri-fold brochure, which will be posted on our website by this fall, is useful as a presentation tool that provides us with a fun and engaging way to talk with members, retirees and legislators about common PERS questions.

146

Emergency Procedures The PERS Internal Emergency Procedures Guide was created in the wake of 2005’s Hurricane Katrina. We revised the entire guide in early 2014, streamlining procedures, clarifying roles, and updating resources. While this 28-page guide lives on our Intranet, we wanted to provide staff with extremely condensed tools that they could reference easily without need of a computer and for times when they are away from the office.

• The PERS Quick Reference Emergency Guide is a tri-fold brochure that can be kept at each person’s work station. It provides helpful, high-level information for handling such in-office crises as a fire, bomb threat, heart attack, natural disaster, etc.

• The PERS Emergency Information Card is a business-card sized reference piece for employees to keep on their person at all times so that, in times of emergency during off hours, they have quick access to the highest level of emergency procedure instruction, PERS’ contact information, and other helpful numbers and social media references.

For years, PERS has offered an emergency call-in line for employees to reference in times of emergencies so as to ascertain whether the office is open during a crisis period. This year, we added an additional tool for keeping staff updated on PERS’ emergency status. This tool is PERS Emergency Text Alerts. Using Mozeo (an online service) we were able to have employees voluntarily sign up for this service so that we can send one text to all participants instead of trying to call each person individually or rely on each person to call the emergency phone line. So far, 92 employees out of 157 have signed up for this low-cost and easy-to-use service.

INVESTMENT ACTIVITY/INITIATIVES No significant activity/initiatives have occurred in the area of investments this year, however, PERS revised its manager presentation schedule allowing the opportunity for more educational sessions. PERS continues to monitor its investment policy. The PERS rate of return was 13.4 percent in 2013.





63 % 24 % 9 % 3 % 1 % 0 % 99 % 1 %

Investment Asset Allocation as of June 30, 2013.

Alternatives are Private Equity

DEFINED CONTRIBUTION PLANS PERS of Mississippi administers a Section 457(b) voluntary deferred compensation plan with over 39,000 participants and a total value of $1.4 billion in assets as of June 30, 2013. During the fiscal year, more than $76.3 million was contributed to the plan.

The PERS Board of Trustees selected Great-West Financial as third-party administrator for the Mississippi Deferred Compensation (MDC), replacing Systematized Benefits Administrators, Inc. (SBA), an ING affiliate effective January 2014. The current investment options will remain the same.

In addition to the 457 plan, PERS also administers a 401(a) Optional Retirement Plan for certain employees of the Institutions of Higher Learning. As of June 30, 2013, the plan had 5,027 active participants and assets totaling

147

$563.8 million. Within this plan, participants choose from VALIC, ING and TIAA-CREF, each offering 16 investment options.

FUTURE DEVELOPMENTS / OTHER ISSUES PERS is currently evaluating its legislative packet for the 2015 legislative session and will be working on institutionalizing governance practices over the course of the next year.

148

NASRA - Roll Call of the States State: Missouri Retirement System: MoDOT & Patrol Employees' Retirement System Executive Director: Scott Simon Market Value of Assets: $1.8 B Assets as of: 3/31/2014 Number of Active Members: 7,417 Number of Annuitants: 8,268 Participants as of: 5/31/2014

LEGISLATION Only two proposals were passed during our last legislative session. Both are expected to be signed by the Governor. Summaries of each are noted below: SCS for HCS for HB 1217 Affects Public Plans This bill prohibits transfer or assignment of public pension benefits. The bill was amended to also include the provisions originally found under both SB 550 and SB 823 that require forfeiture of a public pension by any employee who is convicted of certain crimes directly in connection with such employee’s job. Our statutes already have a similar assignment provision, so that portion has almost no implications for MPERS. The burden of the employee convicted of certain crimes falls on the courts to notify us leaving little for MPERS until such notification would come through. HCS for HB 1882 Affects Public Plans This proposal updates or modifies the role public pension plans in Missouri have with regard to the Joint Committee on Public Employee Retirement and updates certain other provisions governing how public plans operate. There are several very minor changes that I will itemize during our Board meeting. The most significant modifications include: 1) Expanded fiscal notes requiring actuarial projections for at least ten years; 2) Clarified educational requirements for trustees; and 3) Refined provisions governing whether plans can implement updates to plan provisions.

SYSTEM GOVERNANCE MPERS recently hired a new general counsel, Greta Bassett-Seymour

TECHNOLOGY Since the inception of our system in 1955, our IT resources have come from one or both of our covered employers. This last year we finally moved away from that arrangement to our own hosting platform provided by our pension database provider with desktop maintenance coming from a local IT organization. We have operated in the new environment for a couple months with considerable frustration but now are seeing the benefit of the arrangement as the kinks work out. We have already witnessed improved response from dedicated resources and should be much better positioned from a disaster recovery and business continuity perspective going forward.

FUNDING ISSUES Our current funded status is 46.2% down ever so slightly from a year ago due to actuarial assumption changes noted below. The good news is these changes with our relatively new funding policies, we are making progress and making up for the sins of our past.

149

Actuarial Assumptions: 2013 Investment Rate of Return:....7.75% Projected Salary Increase:.....3.50% to 11.00% Cost-of-Living Adjustments:...2.40% Compound Includes Wage Inflation at:.....3.50% Actuarial Assumptions: 2012 Investment Rate of Return:....8.25% Projected Salary Increase:.....3.75% to 12.25% Cost-of-Living Adjustments:...2.6% Compound Includes Wage Inflation at:.....3.75%

MODEL PRACTICES This spring we debuted our new electronic trustee voting platform. Historically, we have used a traditional paper balloting approach. The new process allows members to login to our website (their personal portion) and vote for the applicable election. Voter turnout was very low, which is a typical problem, but the costs associated with the election were negligible compared to the material printing and postage of the past.

INVESTMENT ACTIVITY/INITIATIVES Estimated FY14 return 15.8%. During the last legislative session, a proposal surfaced mandating public plans in Missouri to allocate 3-5% of assets to Missouri based venture capital. The proposal ultimately died but is expected to surface again next year. It would be helpful to hear from other systems that have successfully dealt with similar proposals.





32.73 % 21.87 % 12.46 % 31.82 % 1.12 % 0 % 88.51 % 11.49 %

Asset allocation as of March 31, 2014. Two fixed income accounts are managed internally. One is a long duration fixed income account that is benchmarked to the BS U.S. Agg and the other is a cash collateral account that has shorter duration securities and that is benchmarked against the BC US Agg Gov/Credit. The alternatives noted above include: 4.49% Real Assets, 16.68% Private Equity and 10.65% Hedge Funds (in the box below, please specify type, e.g. private equity, hedge funds, etc.)

FUTURE DEVELOPMENTS / OTHER ISSUES We are in the midst of a mock implementation of GASB 67/68 where the preliminary results reflected figures very similar to our traditional results. That is, the figures coinciding with the new terminology were very close to our traditional actuarial results. That reality may make our story a little less confusing for interested stakeholders. Nonetheless, we are modifying our funding policy to explain the new facts and figures to be sure everyone is operating from the same page.

150

NASRA - Roll Call of the States State: Missouri Retirement System: MO Local Government Employees Retirement System Executive Director: Keith E. Hughes Market Value of Assets: $5.8 B Assets as of: 12/31/2013 Number of Active Members: 33,333 Number of Annuitants: 17,139 Participants as of: 12/31/2013

LEGISLATION New legislation permits LAGERS to administer existing legacy pension plans for departments that place new hires into the LAGERS system. The legislation is voluntary in nature and permits the local government and LAGERS to enter into an agreement to administer the legacy plan; otherwise, administration resides with the local government. All operational duties would pass to the LAGERS Board and staff and the legacy plan would be operated as frozen plan, under the existing plan document. Administration of the legacy plan mandates full funding of the actuarial required contributions. This legislation permits local governments to take advantage of LAGERS administrative and investment structure and scale.

SYSTEM GOVERNANCE The Board changed its 2014 meeting agenda to quarterly meetings, rather than 6 times a year. In addition, the Board gave the Chief Investment Officer full authority to hire, terminate, or amend investment manager’s assignments or allocations, with subsequent reporting to the Board of Trustees. The Board of Trustees adopted a ‘Manager Selection Checklist’ which must be reviewed by the Compliance Officer/Internal Auditor for each manager selection.

TECHNOLOGY The LAGERS network infrastructure consists of 4 Dell/HP VMware ESXi servers connected to a 15 Terabyte SAN running 61 Microsoft Windows virtual servers. The system maintains an offsite hot backup DR location with mirrored copies of all production servers.

FUNDING ISSUES LAGERS funded status as of February 28, 2014 was 92% based upon the Actuarial Value of Assets (97% using the Market Value of Assets). The funded status of the system has continued to improve since February 2009 when the system had a funded ratio of 80.0%. The last change in investment and demographic assumptions was 2011.

MODEL PRACTICES The system has archived all active, retired, and deferred member files moving toward a paperless office. New documents are archived at the end of each month rather than going to a fully automated workflow process. As part of its progressive business plan, LAGERS enacted a long-term objective to promote and support defined benefit pension plans in the state of Missouri by implementing and providing professional administration of such plans for local governments. LAGERS will be the “THE ADVOCATE” for secure monthly benefits provided to Missouri local government employees.

151

The system implemented a pension administration system beginning in 2011 that provided for on-line applications and ACH receipts. Currently, 20% of benefit applications (retirement, disability, refunds) are filed electronically and 40% of all contributions are received via ACH.

INVESTMENT ACTIVITY/INITIATIVES Rates of Return: (thru March 2014, net rate of return) 1 year – 13.9% 10 year – 8.1% 3 year – 10.9% 20 year – 9.1% 5 year – 16.1% Investment policy was changed to delete the verbiage of alternative investments. The four major asset classes are: equities, fixed income, real assets/real return, and strategic assets.





48 % 23 % 8 % 11 % 1 % 9 % 100 % 0 %

152

NASRA - Roll Call of the States State: Missouri Retirement System: Public School Retirement System of Missouri Executive Director: M. Steve Yoakum Market Value of Assets: $37.3 B Assets as of: 5/31/2014 Number of Active Members: 152,873 Number of Annuitants: 75,980 Participants as of: 6/30/2013

LEGISLATION SCS HCS HB 1217 was passed during the 2014 Missouri General Assembly. It has not been signed by the Governor as of June 30, 2014. HB 1217 makes the following changes to the Systems.

• Requires that benefits be forfeited by any PSRS/PEERS member who is convicted of a felony stealing (over $5,000) in the course of official duties. o The member is able to request a refund of their contributions and interest earned.

• Prohibits pension advances, which are financial agreement promising access to up-front cash in exchange for a portion of the individual’s pension plan. The bill specifies that the right of a person to a public employment retirement benefit cannot be transferred or assigned, at law or in equity.

HCS HB 1882 was passed during the 2014 Missouri General Assembly. It has not been signed by the Governor as of June 30, 2014

HB 1882 makes several changes to the administrative requirements of public employee retirement plans including PSRS/PEERS. CCS HCS SCS SB 17 was passed during the 2013 Missouri General Assembly. It was signed by the Governor on July 11, 2013.

This bill allowed teachers with thirty-one or more years of service to receive a higher multiplier to be used in the calculation of his or her retirement benefits. SB 17 extends this provision until July 1, 2014. As of July 1, 2014, members with 31 or more years of service will not receive the higher multiplier.

TECHNOLOGY In January of 2014 we implemented phase 1 of our new Line Of Business application. This phase deals strictly with employer reporting and any data received is bridged back into our legacy AS400 system. We continue to move forward testing the Sagitec application and are looking forward to implementing the remainder of the system functionality this November. We have selected a new Business Intelligence / reporting tool called QlikView and hope to begin rolling this product out to our user community sometime in the fall of 2014. This will enable dashboards containing relevant information targeted to specific user groups or executives. We have also completed the transition to VDI (Virtual Desktop Infrastructure) and have 90% of our serves virtualized as well.

153

The 14 year old Audio/Visual equipment in our board room was replaced with newer equipment that affords much greater integration capabilities.

LITIGATION / CORPORATE GOVERNANCE PSRS/PEERS is still involved in a lawsuit against State Street regarding securities lending.

FUNDING ISSUES The funded status of PSRS at 6/30/2013 was 80.1% and the funded status of PEERS was 81.6%. No changes to assumptions were made over the past year.

INVESTMENT ACTIVITY/INITIATIVES The one-year, three-year, five- year and 30-year annualized returns for the period ending May 31, 2014 were 13.5%, 9.4%, 12.5% and 9.8%, respectively. The strategic asset allocation is: Safe Assets 20%, Public Risk Assets (liquid) 60%, Private Risk Assets illiquid) 20%





46.2 % 23.5 % 7 % 21.5 % 1.8 % 0 % 100 % 0 %

154

NASRA - Roll Call of the States State: Missouri Retirement System: Missouri State Employees' Retirement System Executive Director: Gary Findlay Market Value of Assets: $8.1 B Assets as of: 6/30/2013 Number of Active Members: 51,233 Number of Annuitants: 39,636 Participants as of: 6/30/2013

LEGISLATION HB 1217, passed this year, prohibits pension advances and further prohibits employees convicted of a felony offense in connection with their job duties, valued at $5,000 or more, from being eligible for retirement benefits. While not material in terms of fiscal impact, HB 1882 was passed during the recent legislative session which changed several administrative provisions affecting public employee retirement plans in Missouri and also amended certain provisions affecting the reporting requirements stipulated by the Missouri General Assembly’s Joint Committee on Public Employee Retirement (JCPER).

SYSTEM GOVERNANCE As it relates to the education of board members, HB 1882:

• Changes the current requirement of at least two continuing education programs each year (for board members who have served one or more years) to a total of six hours of continuing education each year.

• Prohibits routine annual presentations by outside plan service providers from being used to satisfy board member education or continuing education requirements; however, such service providers can be utilized to perform education programs with such programs being separate and apart from routine annual presentations.

• Requires system staff to maintain records of board member education including, but not limited to, date, time length, location, education material, and any facilitator utilized. In addition, the record must be signed and attested to by the attending board member or board chairman or designee. Such information must be maintained for public record and disclosure for at least three years or until the expiration of such board member’s term, whichever occurs first.

• Allows the board, by majority vote, to remove any board member, excluding ex-officio members, who knowingly does not participate in the required education programs, which will result in a vacancy to be filled in accordance with the plan’s provisions.

TECHNOLOGY The foundation of our information systems environment is an IBM System i, which hosts our custom-built, pension administration system (PAS). This system is augmented by a virtual server/SAN environment utilizing VMware and Microsoft Windows Server. Our PAS was originally written in 1986 using RPG with a DB2 database and has been diligently updated since its original rollout. It is enhanced by a compliment of Microsoft Windows and browser-based applications written in .NET with a Microsoft SQL Server database. We have a FileNet-based document imaging system with custom workflow processing that was developed with Visual Basic. This existing system is currently being migrated from FileNet to docSTAR Eclipse. Our telephone infrastructure is voice over IP (VoIP) with CAT-6a cabling and power over Ethernet (PoE). We use

155

Interactive Intelligence’s Customer Interaction Center as our unified communication system. It provides voice, faxing, voicemail, call center management, call recording, and automated surveys. We have developed an enhanced, online retirement application process that is available on our secure member site. It provides a one-stop shop where members may obtain information about their benefits and complete the forms required at the time of retirement. In the future, members will be allowed to upload retirement documents and complete retirement election and BackDROP distribution forms online. We are also working with other state agencies to coordinate activities and allow single sign on access where possible. We have entered into the second phase of an internal feasibility study of our pension administration system. The current system has been in use for 25+ years. Although it is still viable and well maintained, we believe it’s time to perform a structured review of the system to ensure that it will be able to handle future requirements. We are currently weighing options regarding in-house development versus purchasing an off-the shelf customizable solution.

FUNDING ISSUES Funded status on an actuarial basis as of June 30, 2013: MSEP 72.7% Judicial Plan * 25.5% * Prior to 1998, the Judicial Plan was funded on a pay-as-you-go basis. Effective July, 1998, funding on an actuarial basis was initiated for the plan. Contribution rates as of June 30, 2013: MSEP Contribution Rate: 14.45% Judicial Plan Contribution Rate: 56.92% Based on an asset/liability study conducted by the system’s investment staff, asset consultant, and retained actuary, the MOSERS board of trustees reduced the nominal investment return assumption from 8.5% to 8.0%, and adopted assumptions for wage inflation and price inflation of 3.0% and 2.5% respectively, (decreases from 4.0% and 3.2%, respectively). Also, in connection with an actuarial experience study, the board adopted strengthened mortality tables and revised rates of withdrawal and retirement to better reflect recent experience. Other minor changes in demographic assumptions were also adopted but their collective impact is expected to be negligible. The actuarial value of assets is based on a rolling smoothed market method that recognizes expected investment gains and losses over a three-year period. In order to mitigate the impact of short-term market volatility on the system’s funded status and on the contribution rate in connection with any one year’s actuarial valuation, investment gains or losses (relative to what would have been earned at the assumed rate on the actuarial value of assets) would be combined with any previously unrecognized investment gains or losses. One third of that total amount would then be recognized in the current year with two-thirds deferred for future recognition. In no event would the actuarial value of assets as of the valuation date be more than 125% or less than 80% of the market value of assets. These changes were incorporated in the actuarial valuation dated June 30, 2013.

156

MODEL PRACTICES MOSERS has recently embarked on a Business Processes Initiative (BPI). The responsibilities of staff in this initiative include business process mapping and analysis to identify process efficiencies and mitigate risk. We strive to deliver quality products to internal stakeholders, and to provide a systematic examination and improvement of MOSERS’ business processes to add value and improve the effectiveness, efficiencies, and adaptability of MOSERS’ operations. A new business process analyst position was approved in the FY14 budget, and one staff member was reassigned to this endeavor part-time. After meeting internally as well as with local contacts to gain knowledge and insight into various mechanisms used for process review and mapping, a systematic process for identifying and prioritizing work processes for review was developed, with immediate attention focused on records processes due to office reorganization and the dissolving of that section into our benefits and accounting sections. Additionally, among others, staff reviewed the business process for managing the records of terminated-vested members. This particular business process addresses the calculation of a member’s initial hire date, which determines the plan for which a member is eligible, as well as the calculation of the member’s cost-of-living-adjustment. This is an example of a high-risk area that we are addressing through a systematic review, which will result in a more efficient documentation and implementation of the process. The methodology for identifying MOSERS’ baseline business processes has identified over 600 business processes. Documenting our processes is one of our highest priorities for two reasons: 1) we will continue to see staff turnover at a fairly high level due to retirements; and 2) documenting can help identify gaps in what we are doing and plug holes that can lead to errors. Moving forward we will be adding to the list and refining our processes along the way.

INVESTMENT ACTIVITY/INITIATIVES MOSERS believes that economic growth and inflation are the two most significant drivers of asset returns. However, we do not know what the economic future holds regarding growth and inflation. What we do know is which assets classes should be expected to perform well or poorly given the economic environment playing out at the time. History has provided us a guide in this regard and more importantly, there are underlying fundamental reasons that allow us to correlate actual performance with expected performance in these various regimes. The importance of this knowledge when allocating capital is to structure a beta (market) portfolio that is balanced across regimes, which in turn should produce a more stable portfolio return through time.

With this knowledge as our foundation, in mid-2012, MOSERS board, with advice from staff and the asset consultant, developed a risk-based allocation design that is expected to achieve the actuarially assumed long-term return of 8% per annum. The risk based allocation is built upon five broad market betas, (Global Equities, Long Duration Nominal Bonds, Short Duration Real Bonds, Commodities and Alternative Beta) having unique fundamental return characteristics. We call this portfolio Beta Balanced. Eighty percent (80%) of our capital is invested in the Beta Balanced portfolio, while the other 20% is invested in illiquid, private market investments expected to capture what has become known in the industry as the illiquidity risk premium.

157

MOSERS’ risk-based allocation is illustrated in the following table:

Asset Class % of Notional % of Capital % of Risk

Global Equities 19% 9% 16%

Nominal Bonds 37% 18% 16%

Real Bonds 64% 30% 16%

Commodities 17% 8% 16%

Alternative Beta 31% 15% 16%

Illiquid Investments 20% 20% 20%

188%* 100% 100%

* In order to balance risk and at the same time achieve our return objectives a modest amount of portfolio leverage is utilized. The use of leverage accounts for the notional percentage equaling 188%. MOSERS – Investment Return. The table below presents the annualized investment returns for various periods ending June 30, 2014.

Annual Rates of Return for Periods Ended June 30, 2014

Years Return (%)

1 18.7

3 10.2

5 13.1

10 8.6

15 7.1

20 9.3

DEFINED CONTRIBUTION PLANS MOSERS is responsible for oversight of the State of Missouri Deferred Compensation Plan which includes but is not limited to all aspects of communication, contracting with the record keeper and investment managers, as well as ensuring that the plan is in compliance with federal and state law. Plan participation is voluntary. As of May 31, 2014, there were 58,490 participants (37,024 active and 21,466 terminated/retired). Of all eligible employees, over 59% participate in the plan. Plan assets total $1,790,372,359. ICMA-RC is the current plan record keeper. The plan investment options consist of 13 custom-designed target-date investment options, a stable income fund, a brokerage window option, the MIP Fund (offering participants

158

the ability to purchase units of MOSERS’ investment portfolio), and 26 closed legacy mutual fund options (consisting of a variety of domestic equity, international equity, fixed income, and lifestyle/balanced mutual funds). In the fall of 2013, the plan took steps to remove some of the lower balance, lower participation closed mutual funds. The assets in four of those funds totaling $7.3 million were mapped to custom date target date funds based on the participant’s date of birth. Participants also had the opportunity to choose a different fund option or invest the assets in the brokerage window. The plan has an automatic enrollment provision that commenced July 1, 2012, for new permanent full-time or part-time employees. The default contribution is 1% of pay. New employees have the option to opt out of the enrollment within 30 days of hire and receive a refund. As of May 31, 2014, the plan has automatically enrolled 7,920 new employees. Of those automatically enrolled, 1,195 have increased their contribution while 1,006 opted out by reducing their contribution to zero, making the rate of opt-out to date approximately 12.7%. The plan has also had a voluntary automatic increase option in place since March 2013. Since that time, 257 employees have opted into this function that automatically increases their contribution by a chosen percentage on an annual anniversary date of their choice. The board also has responsibility for oversight of a 401(a) defined contribution plan for education employees hired after June 30, 2002, by the regional colleges and universities that participate in MOSERS. The employer contribution rate is 1% of payroll less than the normal cost of the plan for general state employees. TIAA-CREF is responsible for third party administration and for providing investment products. Current plan assets total $55,378,018 with 2,203 participants.

FUTURE DEVELOPMENTS / OTHER ISSUES MOSERS is gearing up for its 2014-2016 strategic planning cycle. The key initiative areas for this cycle are: customer service, leadership, staff, business processes, and technology. Central to all our strategic planning efforts is ensuring that we continue to provide the highest levels of customer service. We are striving to capture institutional knowledge and leveraging technology to enhance efficiency and effectiveness in our processes even as we experience increasing rates of retirement among members and internal staff.

159

NASRA - Roll Call of the States State: Montana Retirement System: Montana Public Employee Retirement Association Executive Director: Dore Schwinden Market Value of Assets: $5.7 B Assets as of: 6/30/2013 Number of Active Members: 34,366 Number of Annuitants: 23,091 Participants as of: 6/30/2013

LEGISLATION The Montana Legislature meets on a biennial basis and will convene in January 2015. The Montana Public Employee Retirement Administration is working with the State Administration and Veterans’ Affairs Interim Committee on cleanup language providing contribution triggers in the Defined Benefit Retirement Plan. We are discussing legislation to fund the Game Wardens’ and Peace Officers’ Retirement System (GWPORS) and Sheriffs’ Retirement System (SRS) with the Governor’s Office and stakeholders in anticipation of bringing legislation to the upcoming legislative session addressing the lack of actuarial soundness in both plans.

SYSTEM GOVERNANCE The Montana Public Employees’ Retirement Board hired Dore Schwinden as Executive Director on May 5, 2014. Mr. Schwinden has served in the Montana Legislature, as Deputy Commissioner of the Montana Department of Labor & Industry, and as Director of the Montana Department of Commerce. Governor Steve Bullock appointed two members to the Montana Public Employees’ Retirement Board in June, 2014. Warren Dupuis was appointed to fill the statutory Defined Contribution Retirement Plan member. Maggie Peterson fills the financial background position.

TECHNOLOGY Our information systems are comprised of mainframe IDMS applications and Oracle web based applications. These databases are hosted by the Montana Department of Administration. We maintain one Microsoft 2008 server for file and print functions and hosting of our data cleansing efforts. Our Line of Business development environment is hosted by the Department of Administration. Our MPERAtiv program which is comprised of multiple projects is progressing swiftly.

• We completed our Business Process Modification project in September, 2011. • We implemented our new Laserfiche Imaging system in May, 2012. MPERA hosts this in house. • Ventura Corporation was awarded the contract for our Data Cleansing project in August, 2011 and the project

kick off was September 6, 2011. We have completed the inception and data profiling phases and are currently working on data cleansing, data mapping and data reconciliation. The project is due to be completed concurrently with our new Line of Business project.

• Sagitec Solutions LLC was awarded the contract for our Line of Business (LOB) information system project in April, 2012 and the project kick off was July 9, 2012. We have named this project PERIS, Public Employee Retirement Information System. We have completed the first two phases and are currently working on design, construction and testing of the third phase. Training documentation is in progress and User Acceptance Testing is scheduled to begin in January of 2015 with implementation of the system planned for July of 2015.

160

Both the data cleansing project and the LOB project are scheduled for completion in 2016 after the project support phase is complete. Provaliant Retirement, LLC continues to provide MPERA with ongoing project oversight and quality assurance for these projects.

LITIGATION / CORPORATE GOVERNANCE

1. Defined contribution members are seeking a declaratory judgment instructing MPERA that the 2.64% of employer contributions on their compensation currently directed to address the DC plan’s portion of the DB plan’s unfunded liability should be directed to the DC members’ DC account instead. The lawsuit was amended to include the 1% additional employer contributions passed by the 2013 legislature. The additional 1% employer contributions for DC members are directed to the DB UAL. Cross motions for summary judgment have been filed by plaintiffs and defendants and will be completely briefed the end of the summer. The Montana Attorney General is defending MPERA with assistance from MPERA’s attorneys.

2. A retiree association has hired an attorney to file a contract impairment action against MPERA and possibly the State as a result of the Governor’s legislation which decreases all retirees and member’s guaranteed annual benefit adjustment from 3% to 1.5%. A preliminary injunction issued the end of December 2013 maintaining the GABA at the previous 3% rate pending conclusion of the lawsuit. Discovery is on-going. Plaintiffs’ motion for summary judgment is expected the end of the summer or early fall.

3. A federal lawsuit challenging the constitutionality of Montana’s Marriage Act has been filed in federal court. Statutory beneficiary requirements in the Highway Patrol, Municipal Police and Firefighters retirement systems might be discriminatory with respect to same-sex couples.

4. A 457(b) plan’s widow is suing the plan and its TPA regarding payment of the deceased member’s account on the basis of a previous TPA’s designated beneficiary form despite representations by the current TPA that there was no designated beneficiary form on file and the account would be paid to the participant’s estate in the event of no updated beneficiary form.

FUNDING ISSUES MPERA Funding Status as of June 30, 2013 - Actuarial Retirement System % Funded Public Employees’ Retirement System (PERS) 80% Judges’ Retirement System (JRS) 143% Highway Patrol Officers’ Retirement System (HPORS) 60% Sheriffs’ Retirement System (SRS) 77% Game Wardens’ and Peace Officers’ Retirement System (GWPORS) 80% Municipal Police Officers’ Retirement System (MPORS) 58% Firefighters’ Unified Retirement System (FURS) 66% Volunteer Firefighters’ Compensation Act (VFCA) 75%

MPERA Funding Status as of June 30, 2013 – Market Retirement System % Funded Public Employees’ Retirement System (PERS) 83% Judges’ Retirement System (JRS) 148% Highway Patrol Officers’ Retirement System (HPORS) 62% Sheriffs’ Retirement System (SRS) 80% Game Wardens’ and Peace Officers’ Retirement System (GWPORS) 83% Municipal Police Officers’ Retirement System (MPORS) 60% Firefighters’ Unified Retirement System (FURS) 69%

161

Volunteer Firefighters’ Compensation Act (VFCA) 77%

MPERA Funding Status as of June 30, 2013 – Amortization Period Retirement System Yrs Public Employees’ Retirement System (PERS) 14.5 Judges’ Retirement System (JRS) 0 Highway Patrol Officers’ Retirement System (HPORS) 44.6 Sheriffs’ Retirement System (SRS) infinite Game Wardens’ and Peace Officers’ Retirement System (GWPORS) infinite Municipal Police Officers’ Retirement System (MPORS) 23.8 Firefighters’ Unified Retirement System (FURS) 13.9 Volunteer Firefighters’ Compensation Act (VFCA) 8.5

INVESTMENT ACTIVITY/INITIATIVES Overall Rate of Return for the 12 months ended June 30, 2013 Retirement System Rate of Return PERS 13.04% JRS 13.01% HPORS 13.05% SRS 13.00% GWPORS 12.99% MPORS 13.03% FURS 13.02% VFCA 13.04%

ASSET ALLOCATION

Asset Allocation as of 6/30/2013 PERS JRS HPORS SRS GWPORS MPORS FURS VFCA Combined Domestic and Foreign Equities 67.4% 67.3% 67.4% 67.1% 67.1% 67.5% 67.4% 63.7%

Domestic Fixed Income 22.2% 22.1% 22.2% 22.1% 22.1% 22.2% 22.2% 21.0%

Foreign Fixed Income 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Real Estate 9.2% 9.1% 9.2% 9.1% 9.2% 9.2% 9.2% 8.6%

Alternatives (specify type, e.g., private equity, hedge funds, etc.)

0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Cash 1.3% 1.5% 1.3% 1.7% 1.7% 1.1% 1.2% 6.8% 100% 100% 100% 100% 100% 100% 100% 100% Assets are 100% managed externally

162

DEFINED CONTRIBUTION PLANS The PERS-Defined Contribution Retirement Plan (DCRP) was implemented July 1, 2002. It is a 401(a) plan. PERS membership is mandatory in all covered positions; new hires have a choice to belong to the PERS-DBRP or the PERS-DCRP. They have a twelve-month window to file an election. Members who choose the DCRP have their 6.9% of compensation credited to an individual account and a portion of ER contributions. Within the individual accounts, they may invest in one or all of 18 different available investment options which cover all standard asset classes and categories including Target Date Funds. The 457 Deferred Compensation Plan is voluntary and available to employees of the state and university system, and to local political subdivisions that contract for the plan. Participants may choose the amount to defer from salary, up to IRC limits, and invest in one or all of 21 different investment options which cover all standard asset classes and categories including Target Date funds. Assets and Membership Assets as of 06/30/2013: DC Net Assets $105,482,942 457 Net Assets $398,856,172 Number of active members as of 06/30/13:

Plan Active Withdrawn Inactive

PERS-DCRP 2087 641

457 4514 3,701

Number of annuitants: PERS-DCRP – 20 457 - N/A

163

NASRA - Roll Call of the States State: Nebraska Retirement System: Nebraska Public Employees Retirement Systems Executive Director: Phyllis G. Chambers Market Value of Assets: $12.01 B Assets as of: 12/31/2013 Number of Active Members: 66,252 Number of Annuitants: 22,605 Participants as of: 12/31/2013

LEGISLATION LB1042 removes the refund plus regular interest based purchase for the School plan effective April 17, 2014. Refund repayments will be calculated using the refund plus the actuarial assumed rate of return (as of the date of repayment) and must be submitted within five years after returning to employment. Requests to repay a refund will be allowed on a one-time basis. Members must be actively employed and participating in the plan in order to repay a refund. All refund repayments must be completed within five years of reemployment or prior to termination. Service credit will be restored in proportion to the amount repaid. Members currently employed and participating in the plan will have an extended time frame to submit a one-time application for repayment. These applications must be received within six years from the effective date of the bill, and repayment completed within six years from the effective date of the bill or prior to termination. The repayment will be calculated using the original amount of the refund plus the actuarial assumed rate of return. In addition, LB1042 clarifies individuals reemployed on or after July 1, 2013 who were previously participating under Tier 1 provisions and took a refund, will return to plan participation under Tier 2 status. These members may return to Tier 1 status only after repaying the refund in full thereby restoring all Tier 1 service credit. The law now requires individuals who initially join the plan on or after July 1, 2014, to acquire a minimum of ten years of service credit prior to purchasing additional years of service under the 12-month preretirement service purchase.

TECHNOLOGY NPERS' information technology system is a Java-based, jClarety platform utilizing IBM's FileNet imaging software. This year, our backup systems were moved to the Office of the Chief Information Officer, the state technology agency. We are in the process of changing our imaging software from FileNet to OnBase.

LITIGATION / CORPORATE GOVERNANCE In 2011, over 400 active and retired members of the State Patrol filed a federal lawsuit against the State for continuously increasing contributions they are required to pay into their pensions, alleging the increases are unconstitutional. In 2013, the suit was refilled in district court as seven separate suits. The suits are currently pending.

164

FUNDING ISSUES Defined Benefit Plans as of 6/30/13: School - 77% Patrol - 76% Judges - 88% Cash Balance Plans as of 12/31/13: State - 99% County - 100% The actuarial assumed rate for the Defined Benefit plans is 8.0%. The actuarial assumed rate for the Cash Balance plans is 7.75%.

INVESTMENT ACTIVITY/INITIATIVES The Nebraska Investment Council (NIC) manages the investments for the Nebraska Public Employees Retirement Systems. The NIC increased our asset Real Estate allocation from 5.0% to 7.5% effective April, 2014. The NIC focused on its core fixed income portfolio this year. A bank loan allocation and value-added fixed income strategies were approved.





57.5 % 30 % 7.5 % 5 % 0 % 0 % 99.9 % 0.1 %

Asset allocation as of April, 2014. The alternatives are invested in Private Equity.

DEFINED CONTRIBUTION PLANS The State and County Plans were established as Defined Contribution plans in the 1960's. In 2003, the DC plans were closed to new hires and Legislature established Cash Balance plans for State and County employees. DC plan members were given the opportunity to convert to Cash Balance in 2003, 2007 and 2012. Currently, 20% of State and County plan members remain in the DC plans. As of December 31, 2013, there were approximately 6,627 members with assets of $786 million. NPERS' DC plan offers 13 investment choices which are managed by the Nebraska Investment Council. NPERS uses an outside record keeper for the member accounts.

165

NASRA - Roll Call of the States State: Nevada Retirement System: Public Employees' Retirement System of Nevada Executive Director: Tina Leiss Market Value of Assets: $33.1 B Assets as of: 5/31/2014 Number of Active Members: 99,038 Number of Annuitants: 52,430 Participants as of: 6/30/2013

SYSTEM GOVERNANCE Last year, PERS commissioned an independent review of the System in conjunction with the Governor’s Office. The review was designed to provide a review of System plan practices, statistics and policies and compare the System to other large public pension plans. The study was completed by an independent consultant and presented to the Board in November. 126 other systems were compared to PERS in areas such as funded status, retirement eligibility, actuarial funding method, and discount rate (investment return assumption). The review provided the System with a valuable tool to communicate with stakeholders regarding the management of the System.

TECHNOLOGY The Board recently engaged an independent IT vendor to conduct a review of the System’s internal technology function. We anticipate the review will be presented to the Board in the next few months and will lead to enhancements of the management of our IT department.

LITIGATION / CORPORATE GOVERNANCE The System was involved in a public records case regarding retiree data. The Retirement Act specifies that the member and beneficiary files are not public records and can only by reviewed and copied by specified parties. Based on these provisions, the System had denied the newspaper access to the retiree’s benefit amount, employer, date of hire, date of termination, date of retirement, and salary. The District Court ordered the System to release the requested retiree information but that all other information in the retiree file was confidential. The Nevada Supreme Court affirmed in part and vacated in part holding that the member and retiree files were confidential, but if the System had an existing report in a separate medium that contained the requested information, these reports may need to be released pursuant to a public records request.

FUNDING ISSUES The June 30, 2013 funded ratio of the regular fund is 68.1% and the police/fire fund is 71.1%. The System conducted an experience study in 2013 and modified a number of actuarial assumptions. The demographic assumptions that were modified include retirement rates, percent of participants with survivor benefits, mortality, withdrawal, and disability. Economic assumptions that were modified include individual salary increases and active member payroll.

MODEL PRACTICES The Retirement Board continues to participate in a self-assessment process on an annual basis with the assistance of an outside vendor. The System, in conjunction with the governance consultant, also reviews compliance with the governance charters and policies on an annual basis, alternating between the charters and policies each year. This last year, the System verified substantial compliance with the governance policies.

166

INVESTMENT ACTIVITY/INITIATIVES Through May 31, 2014, PERS’ fiscal year to date investment return was 16.2%. PERS’ investment philosophy is to maintain diversified exposure to the global capital markets and systematically buy assets low and sell them high by using a disciplined rebalancing program. Our approach is a simple and conservative one that emphasizes high quality assets, index management, low turnover and low cost. Since inception, 99% of PERS’ returns are explained by asset allocation and over 100% of value added above the fund’s strategic benchmark has come from rebalancing. Therefore, we focus on these two factors in our management of the program. PERS’ portfolio is primarily comprised of liquid, traditional assets such as large capitalization stocks and investment grade bonds. The stock and bond portfolios are 100% indexed. We do not invest in emerging markets, high yield bonds, small cap stocks, hedge funds or derivatives. In addition, commingled funds are not permitted in the program. This high quality, liquid structure enhances flexibility and keeps costs low (management fees total less than 0.10% of assets annually). During the fiscal year we eliminated a 5% allocation to international bonds and rolled those assets into high quality U.S. bonds. We also completed the transition of the stock and bond portfolios to 100% index management. Going forward, we expect to increase the diversification potential of our bond portfolio by increasing our allocation to U.S. treasury bonds.





63 % 30 % 4 % 3 % 0 % 0 % 100 % 0 %

Alternative investments are private equity

DEFINED CONTRIBUTION PLANS Defined contribution plans are sponsored in Nevada at the employer level. The State and participating employers sponsor 457, 403(b) and 401(k) plans for public employees, depending on the appropriate type for each governmental unit and the date the governmental unit implemented the program.

FUTURE DEVELOPMENTS / OTHER ISSUES The Nevada legislature meets for 120 days beginning in February 2015. We are currently focusing on preparing the System’s proposed administrative budget and managing the System’s overall legislative process.

167

NASRA - Roll Call of the States State: New Hampshire Retirement System: New Hampshire Retirement System Executive Director: George P. Lagos Market Value of Assets: $7.1 B Assets as of: 4/30/2014 Number of Active Members: 48,688 Number of Annuitants: 29,729 Participants as of: 6/30/2013

LEGISLATION None; however, NHRS presented a 15-item legislative agenda to policymakers this session seeking minor clarifications/improvements to the statute to allow for more efficient administration of the plan. Thirteen of those items were adopted.

TECHNOLOGY NHRS has successfully completed the migration of Windows XP to Windows 7, the upgrade of Microsoft SQL 2000 to 2008, and added a number of enhancements to the pension application (PensionGold, an LRS product). In addition to the software upgrades, a centralized storage server was purchased to consolidate the data stored on the network. The NHRS website is in the process of getting updated to a newer, easier-to-use and more mobile-friendly design.

LITIGATION / CORPORATE GOVERNANCE The Board of Trustees adopted an actuarial funding policy in March. Two cases involving 2011 legislative changes to the plan advanced to the state Supreme Court this year. Oral arguments were held in May and no decisions have been announced as of this writing. One case dealt with member contribution increases affecting all members. The other case dealt with the applicability of the statutory definition of “part-time” employment for members who retired prior to the enactment of the definition. The claims made in both cases center on whether the petitioners had vested contract rights that were unconstitutionally impaired. There are also two other constitutional cases challenging legislative enactments in 2009 and 2011, one of which has been stayed; the other case is likely to be heard by the NH Supreme Court later this year.

FUNDING ISSUES 56.7% funded as of 6/30/13. No actions that would impact the funded status occurred in the past 12 months. However, the NHRS has a statutory plan in place to pay down the unfunded liability by 2039. Pending litigation relating to contribution rates and benefits as noted above could impact the system’s unfunded liability.

MODEL PRACTICES

• Initiated a project to upgrade the retirement application process from just a manual paper process to an automated online process, thereby giving members more options.

• Created and implemented an automated process to upload insurance rate changes from numerous vendors so they don’t have to be manually input, saving substantial time and reducing the opportunities for errors.

168

• Launched a direct deposit initiative to reduce the number of paper checks issued each month, resulting in a 30%-plus reduction in paper checks issued in a 60-day period.

• Implemented improved process for assessment and collection of employer penalties for late payments. • Successfully developed and coordinated introduction of NHRS legislative agenda for 2014 session to address

current statutory ambiguities. • Implementing process improvements across the organization as phase II of a process improvement project

initiated in 2012.

INVESTMENT ACTIVITY/INITIATIVES The total fund returned 12.7% for the nine months ending March 31, 2014. The marketable assets, approximately 90% of total assets, returned 15.6% for the eleven months ending May 31, 2014. No changes are contemplated to the investment policy or target asset allocations. However, the Investment Committee continues to discuss the structure of the fixed income portfolio in anticipation of changes in Federal Reserve Board policies.





64.9 % 21.8 % 8.6 % 4.2 % 0.4 % 0 % 100 % 0 %

FUTURE DEVELOPMENTS / OTHER ISSUES

• Outcomes of pending court cases concerning legislative changes to plan design. • Website redesign project launched in July 2014. • Working with participating employers on GASB 68 implementation. • The existing switch and wireless network infrastructure will be replaced this fall.

The installation of a VOIP phone system will begin after the network infrastructure upgrade.

169


State: New Mexico Retirement System: New Mexico Educational Retirement Board Executive Director: Jan Goodwin Market Value of Assets: $10.9 B Assets as of: 3/31/2014 Number of Active Members: 61,177 Number of Annuitants: 40,310 Participants as of: 6/30/2013

SYSTEM GOVERNANCE The Educational Retirement Board (ERB) is responsible for administration of the Educational Retirement Act, Sections 22-11-1 through 22-11-52 NMSA 1978. The board manages the retirement program for employees of public schools, public institutions of higher learning, and selected state agencies. The agency is governed by a seven-member board composed of the secretary of public education and state treasurer (both ex officio), one member elected by the New Mexico members of the American Association of Educational Retirees, one member elected by the members of the National Education Association of New Mexico, one member elected by the New Mexico members of the American Association of University Professors, and two members appointed by the governor.

TECHNOLOGY ERB currently uses Vitech’s V3 benefits administration software. ERB implemented the system in March 2006 and is in the process of upgrading to V3 Browser. The upgrade is scheduled to be complete this Fall. The current Classic Vitech runs on Windows 2003 Server Enterprise edition, uses Oracle 11g for the database, and has integrated IBM Filenet P8 as the imaging solution. The new V3 Browser application will operate on Windows 2008 R2 Server Enterprise edition, and continue to use Oracle 11g for the database. ERB will also begin using the V3 Imaging module as a replacement for its current IBM Filenet P* imaging solution. Both applications run in a VMWare environment.

LITIGATION / CORPORATE GOVERNANCE NMERB continues to conduct discovery in our breach of fiduciary duty action against a former private equity consultant.

FUNDING ISSUES As of June 30, 2013, NMERB’s funding ratio is 60.1% and our funding period is 95.1 years. The Unfunded Actuarial Accrued Liability is $6.5 billion.

INVESTMENT ACTIVITY/INITIATIVES We recently updated our asset allocation targets.

• Reduce Large Cap Equities from 20 percent to 18 percent

170

• Reduce Core Bonds from 7 percent to 6 percent • Increase Private Equity from 8 percent to 11 percent • Increase Private Real Assets from 7 percent to 8 percent • Increase Real Estate from 5 percent to 7 percent • Reduce Hedge Funds from 3 percent to 0 percent

Over the one-year period ending March 31, 2014, the Fund experienced a net investment gain of $1.03 billion, which includes a net investment gain of $246.2 million during the first calendar quarter. Assets increased from $10.2 billion twelve months ago to $10.9 billion on March 31, 2014, with $315.5 million in net distributions during the year. Over the past five years, the Fund returned 15% per annum, outperforming the policy index by 1.9% and ranking in the 30th percentile of the InvestorForce Public Funds > $1 Billion universe. The Fund's volatility was 8.2%, which ranks in the 38th percentile of its peers over this period. The Fund's risk-adjusted performance, as measured by the Sharpe Ratio, ranks in the 13th percentile of its peers. Therefore, the Fund has produced more return per unit of risk taken over this period than 87% of its peers. Over the past three years, the Fund returned 8.1% per annum, outperforming the policy index by 0.3% and ranking in the 76th percentile of its peer group. Over the past three years, the Fund has reduced its volatility on both an absolute and relative basis, resulting in a three-year Sharpe Ratio of 1.2, which ranks in the 29th percentile. Over the past year, the Fund returned 10.0%, outperforming the policy index by 0.2% and ranking in the 73rd percentile of its peers. The Fund's volatility over the last year was 5.3%, ranking in the 12th percentile of its peer group, resulting in a Sharpe Ratio of 1.9, which ranks in the 50th percentile. All asset classes were within policy ranges as of March 31, 2014.





37.7 % 33.7 % 5.2 % 19.1 % 1 % 3.3 % 78 % 22 % Other = absolute return S&P 500 Index (20.2%) and REIT (1.6%) are managed internally.

DEFINED CONTRIBUTION PLANS Membership in NMERB’s 401 (a) tax-qualified defined benefit pension plan is required of all members except certain faculty and professional employees employed at the State of New Mexico’s four and two year higher educational institutions. For those eligible employees NMERB offers the option of choosing between joining the defined benefit plan or electing to participate in NMERB’s Alternative Retirement Plan (“ARP”). The ARP is not available to employees of New Mexico’s regular public schools.

171

NMERB’s Alternative Retirement Plan is a money purchase defined contribution plan and a governmental plan within the meaning of Internal Revenue Code section 414(d) and ERISA section 3(32). The ARP was created and is governed pursuant to Sections 22-11-47 through 22-11-52 NMSA 1978. Fourteen (14) state educational institutions of higher learning including the University of New Mexico, New Mexico State University and eight (8) junior colleges participate in the ARP. Faculty and professional employees eligible to participate in the ARP include, but are not limited to: Instructors, Professors, Assistant Professors, Associate Professors, University Presidents, University Vice Presidents, Provosts, Deans, medical doctors, intercollegiate athletic coaches and senior institutional developers and fund raisers. NMERB currently has two service providers supplying investment vehicles and related administrative services under the ARP. Contributions to the ARP by employers and employees are calculated based on the same percentages indicated by statute under the tax-qualified defined benefit plan. Three percent (3%) of the stated employer contribution rate is contributed to the Fund and used to satisfy the unfunded actuarial liability of the defined benefit plan.

172

NASRA - Roll Call of the States State: New Mexico Retirement System: Public Employees Retirement Association of New Mexico Executive Director: Wayne Propst Market Value of Assets: $14.6 B Assets as of: 6/30/2014 Number of Active Members: 55,000 Number of Annuitants: 35,000 Participants as of: 6/30/2014

LEGISLATION The NM Legislature passed comprehensive reform of NM PERA's Magistrate and Judicial Plans. The reforms included reductions in COLA's for current and future retirees, increases in the employer and employee contributions, and reductions in future service credit factors for current Judges and Magistrates. The changes also included longer vesting periods, longer final average salary calculation periods and changes to beneficiary options. With passage of the reforms, both plans are expected to achieve 100% funded ratio's within 30 years based on FY13 projections. Without the reforms both plans were projected to be insolvent.

SYSTEM GOVERNANCE NM PERA hired Jonathan Grabel as its CIO in January. Previously, Jon had served as the CIO of the Montgomery County Maryland Public School District and also worked at Baker Capital, NYC. He has a masters from the University of Chicago Booth School and his undergraduate degree in Economics from the University of Pennsylvania. NM PERA hired Natalie Cordova as its CFO in June. Previously, Natalie had worked for the Office of the State Auditor. She is a CPA and has two undergraduate degrees from New Mexico State University.

TECHNOLOGY NM PERA concluded a $2.8 million upgrade of its IT systems that included replacement of all servers.

FUNDING ISSUES The NM PERA funded status is approximately 80%. The Board of Trustees adopted a new asset allocation for the Fund and also adopted new economic and demographic assumptions as the result of an experience study conducted by the Board's actuary, Cavanaugh Macdonald, in May of 2014. The Board maintained a 7.75% investment assumption but lowered both the inflation and payroll growth assumptions. The Board also adopted new mortality and disability assumptions, as well as assumptions related to member refunds. The new assumptions resulted in a $50 million decrease in the UAAL and a slight increase in the funded status of all plays. The assumptions also resulted in improved 30 year funded projections for all plans with the exception of the Municipal Fire plan. The new asset allocation is expected to maintain the investment objective while reducing risk over the current actual allocation. The Board adopted new rules regarding accrual of service credit by part-time employees. Previously, any member who worked 20 or more hours in a month received a full month service credit. Under the new rule,

173

vested part-time employees will be grandfathered under the old rule, but non vested and new members will be required to work 30 or more hours in a month to receive a full month service credit.

INVESTMENT ACTIVITY/INITIATIVES The rate of return for the NM PERA Fund as of 5/14 stood at 15.22%.





54.73 % 25.98 % 3.11 % 14.94 % 1.24 % 0 % 100 % 0 %

DEFINED CONTRIBUTION PLANS NM PERA manages a 457b plan with approximately $500 million in assets and 17,000 participants.

174

NASRA - Roll Call of the States State: New York Retirement System: NYS and Local Retirement Systems Executive Director: Kevin F. Murray Market Value of Assets: $181.3 B Assets as of: 3/31/2014 Number of Active Members: 643,659 Number of Annuitants: 422,405 Participants as of: 3/31/2014

LEGISLATION 1) Chapter 523 of the Laws of 2013 - This Chapter took effect December 18, 2013 and increases the percentage lump sum payments eligible to be made under the Partial Lump Sum (PLS) program for certain members of the New York State and Local Police and Fire Retirement System (PFRS). Certain members of the PFRS previously could elect to receive a partial lump sum payment of up to 15% of the present value of their actuarially determined retirement allowance at retirement. The new law increases the partial lump sum allowance to 20% and 25% for eligible members who file for service retirement after having been eligible to retire for four or five years respectively. 2) S. 7331-a/ A. 9643-a - Passed both houses of the State Legislature in June of 2014 and has yet to be delivered to the Governor. If enacted into law, this bill would increases from 25% to 30% the investments (largely in the alternative categories) permitted outside those delineated in law for the eight public retirement systems of New York State. 3) S. 7839 / A. 6974-b - Passed both houses of the State Legislature in June of 2014 and has yet to be delivered to the Governor. If enacted into law, this bill allow up to three years of service credit for military duty for all members of any of the eight public retirement systems of New York State who have served in the military. The legislation removes the existing requirements in law that such military service be performed during certain war periods or specified hostilities by persons in theater of operations or upon the receipt of an expeditionary medal.

TECHNOLOGY NYSLRS has undertaken a five year technology replacement and benefit administration system redesign. The project includes the replacement of the mainframe based system with an internet based system and adding significant self-service functions for members, retirees and participating employers. The planning and initial design phases of the project are complete and the system build is underway. The roll-out of the new system will take place in phases with the first phase scheduled for late spring 2015.

LITIGATION / CORPORATE GOVERNANCE ● Board Accountability, Board Independence and Board Diversity: The Comptroller filed proposals requesting that boards adopt best practices that make them more accountable to shareholders. Shareholder proposals were filed and withdrawn with agreement on corporate governance issues including two on board diversity. Two additional resolutions seeking the repeal of classified boards achieved majority shareholder support. ● EEO - Sexual Orientation Non-Discrimination: Shareholder resolutions were filed with Fortune 500 and Fortune 1000 companies in the CRF portfolio asking them implement non-discrimination policies based on sexual orientation and gender identity. One company responded to the initiative by agreeing to put anti-discrimination policies in place.

175

● Climate Risk and Carbon Asset Risk letter: Along with 70 global investors managing over $3 trillion of collective assets, the Fund sent letters to 45 of the world’s top oil and gas, coal and electric power companies to assess the financial risks that climate change poses to their business plan. We also continued our participation in the CERES Coalition’s global warming shareholder campaign by sponsoring resolutions at selected companies on climate change. CRF agreed to withdraw four of these resolutions when the portfolio companies agreed to make the requested disclosures.

FUNDING ISSUES The funded ratio (AVA/AL) equals 88.7% as of 03/31/12 (actuarial valuation applicable for the 2015 rates). Rate of Return: 13.02% return for year ending March 31, 2014





54.7 % 23.8 % 6.6 % 11.1 % 3.8 % 0 % 42.4 % 57.6 %

Alternatives: 7.8% private equity, 3.1% absolute return (hedge funds) and 0.2% opportunistic Internally managed assets includes public equities, cash, fixed income and TIPS

DEFINED CONTRIBUTION PLANS Persons initially hired after July 1, 2013 in non-unionized positions with salaries of $75,000 or more are eligible to join a defined contribution plan, which is administered by the State University of New York, which has long administered a similar optional plan for educational employees. The employee contribution is 5.75% to 6.0% depending on income. The employer match is 8%. State employees and employees of approximately 1400 local governments and other participating employers are eligible to join a voluntary supplemental 457(b) plan administered by the State. The program has 203,466 members, 132,347 who are currently contributing.

176

NASRA - Roll Call of the States State: New York Retirement System: NYS Teachers' Retirement System Executive Director: Thomas K. Lee Market Value of Assets: $104.3 B Assets as of: 3/31/2014 Number of Active Members: 273,328 Number of Annuitants: 152,822 Participants as of: 6/30/2013

LEGISLATION Chapter 520 of the Laws of 2013 (Signed into law Dec. 18, 2013) Chapter 520 clarifies the maximum salary which may be used to calculate the paragraph 2 ordinary death benefit for members of a public retirement system with a date of membership on or after July 1, 1973. This chapter made a technical correction to Retirement and Social Security Law sections 448(c), 508(c) and 606 (c) to re-establish a uniform maximum salary for the purposes of this death benefit calculation. The maximum salary currently allowable is $166,294. Military Service Eligibility (Passed the Senate 6/16/14: Passed the Assembly 6/19/14) S7839/A6974-B amends Retirement and Social Security Law Section 1000 to remove existing requirements for military service to be performed during specified periods of war and certain hostilities. Eligible members may claim up to three years of service credit for military duty. A member must be honorably discharged from the military, have at least five years of credited service and make an application for military credit before the effective date of retirement in order to be eligible. Additionally, Tier 1, 2, 3, 4 and 5 members will pay 3% of salary earned during the 12 months of credited service immediately preceding the year in which a claim is made for each year of military service. Tier 6 members will pay 6% of salary earned during the 12 months of credited service immediately preceding the year in which a claim is made for each year of military service. (Note: In NYS, a tier is a classification that specifies the type of benefit for which a member may be eligible. Tier status is determined by date of membership. There are currently six tiers of membership in NYS.)

SYSTEM GOVERNANCE Establishment of a formal Risk Management Department was approved by the Board in July 2013. The new department provides a coordinated framework for identifying, mitigating and reporting risks that could impede NYSTRS from meeting its strategic objectives.

TECHNOLOGY

• The disaster recovery process continues to be refined and improved, including a move toward fully active data centers in both our primary and disaster recovery (DR) locations. In addition to increased utilization of our DR site, this model will increase availability of programs and applications.

• Continued expansion of external web applications for both members and employers, including the ability for:

1. employers to add new members; 2. members to establish direct deposit of loan proceeds; 3. members to correspond with staff through secure messaging; and, 4. members to project benefit payments with and without the inclusion of verified prior service in the

calculation.

177

LITIGATION / CORPORATE GOVERNANCE Empire Center for New York State Policy v. New York State Teachers’ Retirement System The Empire Center, a non-profit corporation, challenged the System’s denial of its request, pursuant to the Freedom of Information Law (or New York State Public Officers Law), for the names of retirees currently receiving a retirement benefit from the System. The System based its denial on a 2011 decision of the Appellate Division, First Department, which held that a New York public retirement system is not required to disclose the names or addresses of retirees. The Supreme Court dismissed the petition, and the Appellate Division, Third Department affirmed. Petitioner then filed a motion for leave to appeal to the Court of Appeals. The New York State Court of Appeals in May reversed the lower court rulings. As a result, NYSTRS returned to its prior policy of disclosing this data.

FUNDING ISSUES NYSTRS’ funded ratio as of June 30, 2013 – the most recent figure available – was 87.5%. Key actuarial assumptions are as follows: Inflation – 3.00% Salary Growth (Min.) – 2.38% Salary Growth (Max) – 12.03% Interest Rate – 8.00% As noted in our 2013 Roll Call of States submission, eight of the nine actuarial assumptions used in the annual actuarial valuation (active member mortality, healthy annuitant mortality, disabled annuitant mortality, service retirement, disability retirement, withdrawal, salary scale and cost-of-living adjustment) were revised in 2011. The valuation rate of interest remained unchanged at 8.0%. (The valuation rate of interest assumption includes an inflationary component which remains at 3.0 %.) The employer contribution rate for 2013-14 salaries is 16.25%. The actuarially required contribution rate (ARC) for 2014-15 salaries is projected to be 17.53%. There have been no changes in the past year impacting plan funding.

MODEL PRACTICES

• Establishment of a formal Risk Management Department (See System Governance). • NYSTRS, in concert with NCTR and other teacher retirement systems, has established a Customer Service

Professionals Network. The goal is to exchange ideas, share best practices, and brainstorm new and better ways to provide both our employees and our customers with extraordinary customer service. Webinars, conference calls and video conferencing will be used to accomplish these goals.

INVESTMENT ACTIVITY/INITIATIVES For the fiscal year ended June 30, 2013, NYSTRS’ return on investments was 13.7 % net of fees. It was the fourth consecutive year of a positive return and the third double-digit return posted since 2010. The 2013 return exceeded the 8.0% assumed rate of return by nearly 600 basis points.

178

At 6/30/13, our 10-year annualized net of fees rate of return stood at 7.5% and our 25-year return at 9.1%.





59.8 % 14.6 % 10.3 % 7.6 % 2.5 % 5.2 % 38 % 62 %

Fixed Income includes global bonds. Alternatives = Private Equity Other = Mortgages Internally managed assets: Equities (approx. 65%); Fixed Income (97%); Real Estate (50%) As of 6/30/13, the cost for NYSTRS to manage its assets was 24.7 basis points.

FUTURE DEVELOPMENTS / OTHER ISSUES

• A formal enterprise risk management system will be implemented in fiscal 2015. • A website redesign scheduled for December 2014 implementation will feature full optimization (meaning

how pages render will depend on the device on which they are viewed), a web content management system (allowing for quicker page updates) and a mobile application that will pull content from the redesigned site. Additionally, to further strengthen controls on personal member data, an additional layer of security will be added to MyNYSTRS, the secure member area of our website.

Further steps will be taken to make NYSTRS’ headquarters more environmentally friendly in an effort to receive certification as a Leadership in Energy & Environmental Design (LEED) green building. The System is also piloting the use of hybrid electric vehicles.

179

NASRA - Roll Call of the States State: North Carolina Retirement System: North Carolina Retirement Systems Executive Director: Steven Toole Market Value of Assets: $87.1 B Assets as of: 5/31/2014 Number of Active Members: 659,726 Number of Annuitants: 258,466 Participants as of: 12/31/2012

LEGISLATION The 2013 Session of the North Carolina General Assembly enacted legislation to:

• Allow participants in the State’s new 403(b) program for teachers and public school employees or retirement system members who are participants in any other private sector retirement plan to make a one-time election at retirement or following retirement to transfer any portion of his or her eligible accumulated contributions in the NC 403(b) program, not including Roth contributions and earnings, to the Teachers’ and State Employees’ Retirement System (TSERS). Those who choose to do so would receive a special monthly retirement allowance based upon this transferred balance, in addition to the members’ other retirement allowances.

• Clarify that the amount of any primary Social Security disability benefits that a member is eligible to receive during a given month will be subtracted from the member’s long-term disability benefit payment in the month in which such benefits are payable.

• Rewrite statutes governing the Firemen’s and Rescue Squad Workers’ Pension Fund. The bill changed the name to North Carolina Firefighters’ and Rescue Squad Workers’ Pension Fund, and made all other statutory references gender neutral. It eliminated the current pension fund board and transfer authority to the Board of Trustees for the Local Governmental Employees’ Retirement System (LGERS). It requires all refunds to be sent to fund members rather than to fire departments or rescue squads. Finally, the bill allowed the pension fund to prevent firefighters and rescue squad workers who are convicted of a felony related to their service from participating in the fund.

• Allow members of the Supplemental Retirement Income Plan for state and local governmental law-enforcement officers to make voluntary contributions to the plan in excess of 10% of the member’s compensation within any calendar year.

• Conform and update the State’s military service provisions to federal law with respect to the granting of service credit for periods of involuntary military service.

• Make various changes in governance to TSERS, LGERS, the Legislative Retirement System (LRS), and other state pension systems. The bill: o Made the Supplemental Retirement Board of Trustees responsible for administering the state’s 403(b)

plan for teachers and public school employees. o Granted individual immunity from civil liability for monetary damages to Supplemental Retirement

Board members, with some exceptions. o Placed the Register of Deeds Supplemental Pension Fund under the administration of the LGERS board. o Placed the National Guard Pension Fund under the administration of the TSERS board. o Reduced the number of governor-appointed members on the TSERS board, decreasing total board

membership from 14 to 13, and added a requirement that one of the governor’s appointees be a member of the N.C. National Guard.

o Reduced the TSERS board representatives on the LGERS board from seven to five members. Added a governor-appointed position to the LGERS board to be filled by a member of the Firemen’s and Rescue Squad Workers’ Pension Fund.

180

o Put the TSERS board in charge of directing policy for the LRS.

• Amend the definition of “Retirement” to add service as a member of a board of trustees of a community college or any constituent institutions of the University of North Carolina or service as an unpaid bona fide volunteer as a Guardian ad Litem member in the Guardian ad Litem program during the required six month break so that it is not considered service for the purpose of retirement.

• Allow greater flexibility in asset allocation for retirement funds. The bill allowed the department to allocate up to 10 percent of retirement assets for various private investments – for example real estate, private equity, private debt funds, hedge funds, commodities and infrastructure – with an aggregate limit of 35 percent of retirement assets.

In 2014 the following legislation is likely to be enacted:

o House Bill 1195 establishes a contribution-based benefit cap for TSERS and LGERS. The cap is intended to control the practice of “pension spiking”, in which compensation increases significantly during or right before the four year period over which compensation is averaged for calculating the benefit. The cap is essentially the annuity equivalent of the accumulated balance of employee contributions, multiplied by a factor. The TSERS and LGERS benefits are typically at least two to three times the annuity equivalent of the employee contributions, so the factor set by the Boards of Trustees would presumably be somewhat greater than three. The Boards of Trustees are required to select a factor such that no more than 0.75% of retirement allowances are expected to be capped. The cap would not apply to members with an average final compensation less than $100,000, indexed.

o For those who became members prior to 2015, the last employer would be required to pay an additional contribution equal to the lump sum equivalent of the benefit in excess of the cap. For those who become members after 2015, the employer and the member will both be given the opportunity to pay the cost of the excess benefit, or the member may choose to have the benefit reduced to the cap. The Retirement System is required to provide a regular report to employers listing those employees most likely to require an additional contribution.

SYSTEM GOVERNANCE The Firefighters and Rescue Squad Workers’ Pension Fund is now under the governance of the LGERS Board of Trustees. The Register of Deeds’ Pension Fund is now under the administration of the LGERS Board of Trustees. The National Guard Pension Fund is now under the administration of the TSERS Board of Trustees.

TECHNOLOGY Member Communications and Benefits Management In October 2013 the department completed a new death benefits processing module known as Death Phase 1. ORBIT Death Phase I streamlines the processing of Death Benefits and the Return of Contributions for deceased active employees and Contributory Death Benefits and Guaranteed Refunds for deceased retirees. The new system will automatically determine eligibility and calculate the benefit amount along with automatically recovering member and beneficiary overpayment invoices. IT staff members also have updated ORBIT to allow retirees to choose new health insurance options, including the Employee Group Waiver Plan and Medicare Advantage plans. ORBIT ORBIT is a system that grants employers, employees, and retirees online access to retirement accounts and

181

transactions. It enables members to access their retirement account information immediately and provides self-service by offering tools that help members make critical retirement planning decisions. It also presents a much more comprehensive internal Intranet line of business application that Retirement System Division employees use daily to administer the pension system. The application can be accessed via a supported Internet web browser. ORBIT uses Microsoft Windows as the operating system and stores and retrieves data from a Microsoft relational database. It uses Microsoft BizTalk to process all inbound and outbound interfaces to other systems. Other systems, such as employer units, submit and retrieve their data interface files via secure internet accounts and encrypted file transmissions. Reports of data from the system are generated through Microsoft’s Reporting Services. Application forms for members and employers to initiate changes or request information from the system are in Adobe PDF format. The ORBIT system relies upon a document imaging system and a workflow system to direct RSD employees’ work within the ORBIT line of business application. The ORBIT system was released to production in two phases. The Benefit Payroll portion of the application was released to production December 31, 2006. All remaining sections of the application were released to production on October 1, 2007. Since October 1, 2007 the system has undergone two extensive technology infrastructure upgrades, the most recent from September 2010 to June 2011. This brought all the underlying technologies up to date with current practices and releases of various Microsoft products used in the system. In 2012, all Retirement Systems forms that were available in the unsecured area of the website were added to ORBIT. As of June 2013, the ORBIT self-service website has more than 370,000 active users. Among those registered as users, more than 220,000 have used ORBIT self-service in the past year.

LITIGATION / CORPORATE GOVERNANCE In 2012, the State Health Plan and the TSERS became defendants in a class action lawsuit related to Session Law 2011-85, which made a 70/30 coinsurance rate health plan the basic plan in which retirees and state employees could enroll without paying premiums. The law also allowed retirees and state employees to enroll in an 80/20 plan, which charges premiums. Previously the basic, non-contributory plan option was an 80/20 plan. Retirees and employees could pay premiums to enroll in a 90/10 plan, which is no longer offered. This lawsuit has yet to be resolved.

FUNDING ISSUES Current Funded Status

Retirement System Valuation Date

Actuarial Value of Assets

Actuarial Accrued Liability

Funded Ratio

Teachers' and State Employees' 12/31/2012 $59,911,833,028 $63,630,278,472 94.2%

Consolidated Judicial 12/31/2012 $481,285,608 1. $527,585,094 91.2%

Legislative 12/31/2012 $29,415,872 $23,851,789 123.3%

Firefighters’ and Rescue Squad Workers' 6/30/2012 338,885,087 $403,816,903 83.9%

182

NC National Guard 12/31/2012 $96,597,464 $131,722,319 73.3%

Register of Deeds' 12/31/2012 $44,995,689 $23,516,992 191.3%

Local Governmental Employees' 12/31/2012 $20,295,238,845 $20,338,784,791 99.8%

Recent Trends in Funding Ratios

Valuation Year

Teachers' and State Employees'

Consolidated Judicial Legislative

Firemen's and Rescue Squad Workers'

NC National Guard

Register of Deeds'

Local G Employees'

2007 104.7% 102.9% 134.2% 94.9% 68.3% 198.8% 99.5%

2008 99.3% 98.1% 130.3% 93.5% 69.2% 202.6% 99.6%

2009 95.9% 92.6% 126.7% 89.9% 66.8% 178.2% 99.5%

2010 95.4% 91.6% 125.6% 86.0% 68.1% 183.4% 99.6%

2011 94.0% 89.9% 124.0% 83.7% 70.4% 192.1% 99.8%

MODEL PRACTICES Fraud, Waste, and Abuse Assessment: The Department initiated an independent fraud, waste and abuse assessment to evaluate the risk for fraud and waste in the Retirement Systems and other benefit plans it administers. The Retirement Systems Division will use the information provided in this evaluation to prevent abuse of its benefit programs and improve oversight of public resources. Buck Consultants was selected to conduct the review. Public Records Database: In an effort to promote transparency, the Department is building an electronic database of information on the members of the retirement system that will be open to the public. The North Carolina Public Records Law states that public records “shall mean all documents, papers, letters, maps, books, photographs, films, sound recordings, magnetic or other tapes, electronic data, processing records, artifacts, or other documentary material, regardless of physical form or characteristics, made or received pursuant to law or ordinance in connection with the transaction of public business by any agency of North Carolina or its subdivisions.” For information to be confidential, a specific provision must be made in the law. The Public Records Project data release falls under these laws.

183

INVESTMENT ACTIVITY/INITIATIVES Investment Return as of March 31, 2014

Account Fund One Year Return

Fixed Income -0.46%

Global Equity 19.46%

Real Estate 12.34%

Alternatives 13.47%

Credit 15.31%

Inflation 0.65%

Total Pension Plan 10.88%

The policy portfolio, as shown below, is continually evaluated to enhance the return of the investment program.

Portfolio Type Allocation Policy

As of 3/31/2014 As of 3/31/2013

Global Equity 40.5% 40.5%

Fixed Income 36.0% 36.0%

Real Estate 8.0% 8.0%

Alternatives 6.5% 6.5%

Credit 4.5% 4.5%

Inflation 4.5% 4.5%

An updated asset liability study was completed in the fall 2013 and a new Investment Policy Statement was drafted which will become effective July 1, 2014. Within the revised IPS, new asset categories were developed, including new asset allocation targets and ranges. Staffing levels remain about 1/3 of large plan standards and competitiveness of compensation is lagging the private sector.





47.24 % 31.08 % 8.44 % 4.56 % 0.55 % 8.12 % 68.8 % 31.2 %

184

Investment grade Fixed Income & Cash assets are managed internally. The “Alternatives” class includes both private equity and hedged strategies. The “Other” class includes 4.94% in credit strategies and 3.18% in the Inflation portfolio. The bulk of the fixed income assets are managed internally in the core Long-Term Investment Portfolio.

DEFINED CONTRIBUTION PLANS State of North Carolina Supplemental Retirement Plans The N.C. Department of State Treasurer administers three voluntary defined contribution plans: the NC 401(k) Plan, the NC Deferred Compensation Plan (457) and the 403(b) supplemental savings plan for teachers and public school employees. All three plans are governed by the Supplemental Retirement Board of Trustees. The board is composed of nine members, with the State Treasurer serving as the chairperson. At 3/31/2014, the NC 401(k) Plan had 243,644 members with plan assets of $7.43 billion, based on market value. At 6/30/12, the NC Deferred Compensation Plan (457) had 48,887 members with $1.1 billion in plan assets, based on market value. The 401(k) and 457 plans are administered by Prudential Retirement. Both plans offer an identical fund lineup of 12 institutional separate accounts; value, growth and index large cap funds; value, growth and index small/mid cap funds; active and index international funds; a global equity fund; active and index-fixed income funds; and a stable value fund. Most of the managers and strategies are the same as those used for the defined benefit plans and fees were negotiated based on combined DB/DC assets.

Other Plans All new University of North Carolina (UNC) system employees hired on or after Jan. 1, 2013 are eligible to enroll in the Optional Retirement Plan (ORP), a defined contribution plan, instead of the TSERS, a defined benefit plan. UNC administers the ORP. UNC and most of the public school systems also offer 403(b) programs to eligible employees.

185


State: North Dakota Retirement System: North Dakota Public Employees’ Retirement System Executive Director: Sparb Collins Market Value of Assets: $1.9 B Assets as of: 7/1/2013 Number of Active Members: 21,200 Number of Annuitants: 8,600 Participants as of: 7/1/2013

LEGISLATION HB 1058: Closes the pre-Medicare plan to retirees after July 1, 2015; allows retiree health credit to be used for other health and prescription drug coverage and the PERS dental, vision or LTC plans. HB 1059: Changes the definition of temporary employee to comply with the Affordable Care Act (ACA) and sets the premium level accordingly; allows political subdivisions to set up their own health spending account if they select the high deductible health plan (HDHP). HB 1452: Increases employee and employer contributions equally for the Main, Highway Patrol, Judges and Defined Contribution plans:

• 1% employee increase and 1% employer increase January 1, 2014.

Increases employee contributions for the Law Enforcement plan:

• 0.5% employee increase and a 0.5% employer increase January 1, 2014.

Increases the temporary employee contribution for the defined benefit and defined contribution plans:

• 2% employee increase January 1, 2014.

Special Studies Legislative Management Study – State Employee Health Insurance Premiums. The legislative management shall consider studying, during the 2013-14 interim, the feasibility and desirability of establishing a maximum state contribution to the cost of state employee health insurance premiums. The legislative management shall report its findings and recommendations, together with any legislation required to implement the recommendations, to the sixty-fourth legislative assembly. Legislative Management Study – North Dakota Retirement Plans. During the 2013-14 interim, the legislative management shall consider studying the feasibility and desirability of existing and possible state retirement plans. The study must include an analysis of both a defined benefit plan and a defined contribution plan with considerations and possible consequences for transitioning to a state defined contribution plan. The study may not be conducted by the employee benefits programs committee. The legislative management shall report its findings and recommendations, together with any legislation needed to implement the recommendations, to the sixty-fourth legislative assembly.

186

SYSTEM GOVERNANCE We had two new members elected to our seven member board this last year. Otherwise no changes during the last year.

TECHNOLOGY The new PERSLink business system rolled out the last of its new features in 2013. The member service portal was made available to all members this last fall. With this new system members can sign on to see their personal and benefit information on line. They can do benefit estimates for retirement dates they may select based upon what they feel their salary growth will be. They can make certain changes on line to their personal data with the exception of changes to beneficiary’s which must still be done by paper. The system was used for our annual enrollment last year. Since NDPERS manages all the benefits for the state each year employees make elections concerning their dental, vision, flex, health insurance and deferred comp programs. Almost 90% of our elections were handled on line last year instead of by paper.

FUNDING ISSUES As of the last valuation the funded status of the plan was 62% at actuarial value and 72% at market. As a result of legislation passed increasing contributions to the plan the long term funded status (next 30 years) is expected to increase to 80% at actuarial value and 90% at market. With the estimated 16% return for this year that will change to 90% at actuarial and 100% at market.

MODEL PRACTICES We continue to be very pleased with the successes relating to our new business system.

INVESTMENT ACTIVITY/INITIATIVES This last year the state recruited a new State Investment Officer. He started in December. No changes were made to the asset allocation this last year or to the investment policies. As of June 30, 2014 the plan was estimated to have a return of almost 16% for the year.





57 % 22 % 10 % 10 % 1 % 0 % 100 % 0 %

DEFINED CONTRIBUTION PLANS NDPERS administers both the 457 plan for the state and an optional 401(a) defined contribution plan for all state employees. Both plans have a core of mutual funds that are offered and an option for them to go out into an investment window to choose among several thousand mutual funds. The election rate for the optional DC plan is low. Less than 5% chose the plan at this time. Participation in the 457 plan continues to grow with the expedited enrollment process and the ability to vest in the employer contribution in the DB/Hybrid plan.

187

FUTURE DEVELOPMENTS / OTHER ISSUES The most important activity at this time is a study by the legislature to stop offering new state employees the Hybrid/DB plan. The committee is discussing preparing a bill for consideration this next session. The study resolution was also assigned to different committee rather than the committee that has oversight of retirement matters.

188

NASRA - Roll Call of the States State: Ohio Retirement System: Ohio Public Employees Retirement System Executive Director: Karen Carraher Market Value of Assets: $89 B ($75.9 pension, $13.1 health care) Assets as of: 12/31/2013 Number of Active Members: 347,727 Number of Annuitants: 196,594 Participants as of: 12/31/2013

LEGISLATION Following the passage of comprehensive pension reform legislation in 2012, the 130th Ohio General Assembly has largely diverted its attention from pension-related issues. Though OPERS monitors and responds to a sponsor(s) of any legislation that could impact the system or its interests, very few of these bills have gained momentum in the current legislative session. OPERS has continued the strong legislative and stakeholder outreach that we developed while advocating for pension reform, including building, maintaining and/or strengthening relationships with our members, retirees, stakeholders, elected officials and representatives from the private sector community. As an example, OPERS is uniquely positioned to provide information regarding the implementation of GASB 67 and 68, which has paid dividends in the form of enhanced relationships with our contributing employers and the Ohio Auditor of State. Finally, OPERS continues to monitor and respond to the many reports and studies issued about defined benefit pension plans’ liabilities coming from think tanks, media outlets, and other outside forces. Below is a summary of the major legislative activity that we followed or advocated our position on in 2013. State legislative activity

• House Concurrent Resolution 19 (HCR 19), which encourages Congress to oppose any legislation that would require Ohio’s public employees to pay into Social Security. HCR 19 is a continuation of the biennial anti-mandatory coverage resolutions that the Ohio General Assembly enacted each session until the early 2000s. With a dearth of mandatory coverage bills in Congress, the General Assembly fell out of the practice of passing these resolutions, but as the idea of mandatory coverage has resurfaced in recent years, OPERS sought and was successful in garnering support for HCR19. HCR19 unanimously passed both chambers.

• House Bill 238, which would, subject to certain exceptions, require OPERS to utilize law firms that maintain a presence within Ohio. OPERS, as well as the other Ohio Retirement Systems, has spoken with the sponsor to raise concerns regarding House Bill 238’s restrictions on retaining non-Ohio outside counsel in certain specialized areas of litigation or negotiation, such as securities litigation. OPERS is required under law to use the Ohio Attorney General as its legal representative, who handles the hiring of special counsel in securities litigation and other civil matters.

Federal legislative activity OPERS continues to monitor a variety of policies, legislation and regulations at the federal level, including proposals for mandatory coverage of Ohio’s public employees in Social Security, anti-defined benefit legislation and reports, and rules pertaining to the implementation of the Patient Protection and Affordable Care Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act. Apart from these topics, OPERS has been active on the bills that are summarized below.

189

• OPERS continues to oppose the Public Employee Pension Transparency Act (H. 1628 / S. 779), sponsored by Rep. Devin Nunes (R-CA) and Sen. Richard Burr (R-NC), respectively. OPERS has sent letters describing its opposition, and the reasons why, to each member of the Ohio Congressional Delegation. In addition, OPERS has joined the other Ohio public retirement systems in signing a letter of opposition addressed to Ohio’s delegation.

• House Joint Resolution 59, sponsored by Harold Rogers (R-KY), which addressed the issue of public retirement system access to the Social Security Administration’s Death Master File (DMF). OPERS has advocated for restored access to the full DMF since 2011 when Social Security restricted access to the database. Unfortunately, HJR 59 did not address OPERS’ concerns; instead allowing public retirement systems access to a partial DMF without any data from the states. As a result, OPERS will continue to advocate for access to the full DMF, inclusive of state data. OPERS has been able to secure the data it needs since 2011 but continues to advocate for a permanent solution for all systems.

Governmental Accounting Standards Board Changes OPERS has been very active in preparing employers or the upcoming implementation of the Governmental Accounting Standards Board (GASB) Standards 67 and 68. While these changes will not be effective for OPERS until 2014, and for our 3,700 employers, the changes will not be effective until 2015; OPERS completed a mock implementation in 2013. The mock implementation involved using the 2012 year-end financials and implementing the standard as completely as possible. The scope included allocating the liability and developing the expense and required disclosures for all our employers. We worked with a sample of our employers as they created their new mock financial statements. We also worked with our external auditors to have them review this information and approach and also worked with the Ohio Auditor of State to determine how the various employers’ auditors would audit this information and address the issues of significantly varying materiality for the respective audits. We wrapped up this work in July 2013 and then began work on educating and sharing our information with our employers. We launched two employer webinars in 2013 and began to speak with employer groups and stakeholders to educate them on the new standards, the impact to employers, and information OPERS will provide. OPERS shared the results with GASB in an effort to assist with their implementation guide. OPERS also shared the results and our own implementation guide at the Public Pension Financial Forum in October 2013. We continue to work with our external auditors, other Ohio state retirement systems, and the Auditor of State on the audit approach, especially in regard to the census data testing and the Auditor of State’s planned role in helping the systems obtain needed attestation reports from the employers’ auditors. Additionally, we have held discussions with rating agencies and banks to discuss the impact of the new standards on credit ratings and loan determinations for our employers. These calls were helpful in discussing how Ohio systems are different in regard to funding and management of the plan, including the involvement of the legislature. We plan to hold these calls on an annual basis with the rating agencies and banks to assist them in understanding the pension numbers included in our participating employers’ statements.

SYSTEM GOVERNANCE The Board conducted its annual review of the Board Governance Manual, signed annual acknowledgment of receipts, and held a strategic planning session focused on Board Governance Issues facilitated by Nancy Williams from Aon Hewitt Consulting and a Fiduciary Refresher from Ian Lanoff from the Groom Law Group.

190

TECHNOLOGY INFRASTRUCTURE

• OPERS technology infrastructure is comprised of Windows desktops, IBM mainframes (zOS / zLinux), and Windows servers. Microsoft Office provides personal productivity functions. Outlook and Exchange 2010 are used for email services. OPERS employs a loosely-coupled, service-oriented architecture infrastructure via an IBM WebSphere and BPM 8.0 middleware stack. Thunderhead NOW software provides correspondence development and management functionality.

• A co-location data center is fully operational for the purpose of disaster recovery. Critical data is being replicated in near real-time via IBM SAN Volume Controller.

• The IT security program evolves with the ever-changing threat profile. It employs a “defense in depth” philosophy and includes perimeter defense, intrusion prevention and detection, data loss prevention, IT risk management, and SOA infrastructure security mechanisms.

APPLICATION SOLUTIONS

• The OPERS investment functions are supported by several commercial packages. The Charles River and Bloomberg AIM order management systems handle trading activity domestically and internationally. eFront Frontinvest is used to manage private equity and real estate deals. The system also handles cash management and hedge funds. Reconciliation and investment accounting functions are provided by Eagle Pace & Star version 10. BarraOne provides a multi-asset risk management system.

• A new pension line-of-business solution, to replace custom legacy applications, is under development using IBM WebSphere. The foundation stage has been completed and deployed providing a common user interface and 360 degree view of the customer while stage two development focuses on core pension processing. The composite application has been built on top of a service-oriented architecture. Business functions / services are sourced from existing assets, purchased components, and newly developed services.

• A Global 360 EmPower document repository houses over 30 million images associated with member and pension processing.

• A Kronos human capital management system (HCM) supports payroll and HR functions. In addition, Taleo, eLearning.com, and PerformancePro software-as-a-service provide support for recruiting, staff development, and employee performance review respectively.

• The OPERS internal portal intranet application runs on Microsoft Sharepoint. • An internally developed (.Net) enterprise PMO application supports program and portfolio management

activities.

LITIGATION / CORPORATE GOVERNANCE Litigation The board is represented by the Attorney General, who also appoints special counsel to represent public pension funds and acts in legal and advisory roles. OPERS continues to serve as lead plaintiff in securities class action litigation against Freddie Mac, BP and JPMorgan. Corporate Governance As a long-term investor, OPERS strives to manage assets and risks in a prudent, timely and cost-effective manner within its investment objectives and legal authority. The objective of OPERS’ corporate governance program is to enhance the long-term value of OPERS’ investments by supporting and promoting: Activities that ensure

191

management and boards of directors are acting in the best interest of shareowners and in ways that protect OPERS’ assets; corporate accountability, financial transparency and responsibility; and governmental policies and regulations that are in the best interest of OPERS. OPERS’ strategies for advancing the program revolved around:

• Voting proxies for U.S. and non U.S. public companies held in equity accounts; • Filing shareowner proposals on board declassification in conjunction with the Shareholder Rights Project, an

initiative with the Harvard Law School; • Engaging in public company educational outreach; • Maximizing OPERS’ membership in national and international organizations that support best practices in

corporate governance; • Enhancing OPERS’ reputation for corporate governance across the country. • Monitoring emerging issues and proposed rules and releases from the U.S. Congress, Securities and

Exchange Commission and other regulatory bodies; • Maintaining the OPERS’ Corporate Governance Policy (“Policy”) and Proxy Voting Guidelines

(“Guidelines”) that mirror best practices and maintaining compliance with the Policy and Guidelines; and • Communicating with internal and external stakeholders and peers across the country.

OPERS staff collaborated with the UAW Retiree Medical Benefits Trust (UAW Trust) as they engaged public companies for greater diversity on their boards of directors. This board diversity initiative included outreach to certain companies that lacked a policy on diversity in the corporate governance and nominating committee’s director nomination guidelines. OPERS staff, in coordination with UAW Trust, were able to reach an agreement with one company whereby the board would adopt as policy, consideration of gender, race, ethnicity, and country of origin in director candidates. The formal adoption of the policy would be done at the company’s next board of director’s meeting and would be noted in the Proxy Statement for the 2014 Annual Meeting of Shareholders. During the 2013-14 proxy season, staff continued participation with the Harvard Law School’s Shareholder Rights Project (SRP) and filed a shareholder proposal at WPX Energy, Inc. An agreement could not be reached while engaging with the company and a declassification of the board proposal was later placed on the company’s 2014 Proxy Statement.

FUNDING ISSUES OPERS was 82 percent funded as of the latest valuation for the year ended December 31, 2013. OPERS had actuarial liability of $86.6B and actuarial assets of $71.4B, leaving an unfunded liability of $15.2B. OPERS’ amortization period was 24 years. OPERS earned 14.4 percent return for 2013, which exceeded the 8 percent assumed rate of return. The market value of assets exceeds the funding value by $3.5B. This valuation reflects the pension changes approved by the legislature in 2012. These changes reduced the actuarial accrued liability for pension benefits by approximately $3.9 billion. These changes also reduced OPERS’ amortization period from 30 years at December 31, 2011 to 15 years at December 31, 2012. However, in conjunction with the pension changes, OPERS restored health care funding to a 4 percent level (from 1 percent), which increased the amortization period from 15 years to 26 years at December 31, 2012 (subsequently reduced to 24 years as of December 31, 2013). This restoration of health care funding was consistent with the goals communicated to our members.

192

MODEL PRACTICES Health care The health care fund stood at approximately $13.0 billion as of December 2013. It is 64 percent funded. OPERS is currently implementing our Health Care Preservation Plan, which incorporates unique aspects and served to reduce the actuarial liabilities by $12.1B. The Plan included the establishment of a reserve fund to provide funding when the anticipated health care funding would need to be reduced due to increased pension funding or lower investment returns. The reserve fund is funded with excess investment returns over the 4 percent assumed rate of return for funding and currently has a balance of $2.2B. Additionally, the Plan changes include the establishment of an allowance tied completely to the member’s age at retirement and years of service. Members will not be eligible for health care unless they reach a minimum of age 60 with 20 years of service. The allowance for Medicare A and B recipients will be provided through the establishment of a Health Reimbursement Account (HRA) and Medicare eligible members will use their HRA allowance to make an individual plan selection using an OPERS contracted Medicare Connector. OPERS will retain an OPERS sponsored plan for the non-Medicare eligible population.

INVESTMENT ACTIVITY/INITIATIVES Total Plan calendar year return for 2013 was 14.4 percent.





45.4 % 28.7 % 8.8 % 13.6 % 3.5 % 0 % 58 % 42 %

Internally Managed portfolios

• 79% of Domestic Equities • 18% of International Equities • 61% of Fixed Income • 100% of Cash

Target Allocations for 1Q2014 (using 12/31/2013 market values) 47.6% Combined Domestic and Foreign Equities 28.4% Fixed Income 9.4% Real Estate 14.6% Alternative

DEFINED CONTRIBUTION PLANS

• Since January 1, 2003, OPERS has administered two defined contribution plans (Member-Directed Plan & Combined Plan).

• The OPERS Board, an 11-member body of elected and appointed members, governs the plans. • The OPERS DC plans are 401(a) plans that are available as options for new OPERS members.

193

• 13,982 members in the Member-Directed Plan and 8,880 members in the Combined Plan (as of May 31, 2014).

• $600.04 million in the Member-Directed DC accounts and $336.66 million in the Combined Plan DC accounts (as of May 31, 2014).

• 16 investment options are available to members in the OPERS DC plans:

OPERS Target Date Funds OPERS Target Payout Fund OPERS Target 2015 Fund OPERS Target 2020 Fund OPERS Target 2025 Fund OPERS Target 2030 Fund OPERS Target 2035 Fund OPERS Target 2040 Fund OPERS Target 2045 Fund OPERS Target 2050 Fund OPERS Target 2055 Fund

OPERS Core Funds OPERS Stable Value Fund OPERS Bond Index Fund OPERS Stock Index Fund OPERS Large Cap Index Fund OPERS Small Cap Index Fund OPERS Non-US Stock Index Fund

OPERS Core Funds OPERS Stable Value Fund OPERS Bond Index Fund OPERS Stock Index Fund OPERS Large Cap Index Fund OPERS Small Cap Index Fund OPERS Non-US Stock Index Fund

• On March 21, 2011, a self-directed brokerage account (SDBA) was implemented as an additional investment option to OPERS members in the DC plans. As of May 31, 2014, there were 104 participants who had a balance in the SDBA.

FUTURE DEVELOPMENTS / OTHER ISSUES Milestone 2015 In addition to the passage of our pension legislation in September 2012, the board approved changes to our health care plan to improve the sustainability of the plan. As a result of the transition plan developed for our health care changes, approximately 45,000 members currently eligible for health care with more than 10 years of service but less than 20 years of service will not be eligible for health care unless they retire with an effective date prior to 1/1/15. Milestone 2015 is the name of the initiative to plan for the rush of members evaluating their retirement options during 2014. Two surveys of this group of 45,000 impacted members have been conducted and initial analysis indicates 19,000 members from this group are likely to retire. To prepare for a potential increase in retirements of up to 95 percent, several proactive steps have been taken:

• A Retirement Planner has been added to our website to provide members with a tool to compare the cost of retiring 12/1/14 or waiting. The planner outlines both the pension difference as well as the cost and access to health care. In a large percentage of cases, a member would lose more in pension than they would gain in a health care allowance.

• A video has been posted to http://www.opers.org/ explaining the changes and the tools available to help member in their decision.

194

• Newsletter articles in both member and employer publications outline the changes as well as encourage members to apply early and electronically if they are going to retire.

• Special mailings have been made to this group of members to inform them of the changes and provide them with a flyer outlining the resources available to them in making their decision.

• Employers with 20 percent or more of the workforce in the Milestone 2015 group have been contacted and special seminars are being held at their locations for the impacted members. We are also creating a special webinar and recorded presentation on this topic for this group.

• System changes have been made to allow us to process these applications up to six months in advance and have them sitting in a pending state until the effective date.

• Additional counseling appointments have been added and we will evaluate the need for evening and Saturday appointments as well as extending phone hours of operation.

Our Way Forward (OWF) In 2010, OPERS completed a business process redesign. The goal of this strategic initiative was to drive efficiency by improving internal processes. These efficiencies and improvements would then lead to improved customer service, enhanced employee satisfaction, reduced costs and increased capacity. Upon completion of the project, over 450 suggested recommendations were delivered. Many of the recommendations required technology enhancements; therefore, the Our Way Forward (OWF) project was initiated. The OWF project has been broken out into two stages. The first stage was the Foundation Stage. This stage laid the foundation for establishing a new technology infrastructure by developing a governance process, improving change management and piloting the use of new tools and processes by implementing selected user interface improvements and business process changes. The second stage, which is currently under way, is the Member and Pension Stage. This further propels OPERS forward in becoming a process-centric organization as further BPR recommendations are implemented regarding processing in the Benefits area. At the conclusion of the project, continuous process improvements will become an integrated part of the OPERS culture. The OWF project has a four-and-a-half-year time frame and is currently scheduled to complete in August 2016. To date, the project team has made the following progress:

• Implemented 177 Business Process Recommendations; • Integrated four processing systems providing a 360 degree view of our member and retirees accounts through

a Common User Interface and workflow solution; • Increased self-service features included retiree banking and tax updates, immediate income verification letter

generation, ability to view documents/letters online, etc.; • Enhanced online security for our customers; and • Delivered a Loosely-Coupled Architecture & Integration Platform to enable a quicker change cycle for

enhancements.

195


State: Ohio Retirement System: Ohio Police and Fire Pension Fund Executive Director: John J. Gallagher Jr

Market Value of Assets: $14.53 B Assets as of: 6/24/2014 Number of Participants: 57,567 Participants as of: 1/1/2013

SYSTEM GOVERNANCE Elimination of non-disabling conditions from our disability formula dramatically reduced our case load.

Implemented BoardVantage on premise, (not cloud), late 2013 for compilation and security of board book materials.

Conducted an audit of our pharmacy benefit program administered by United HealthCare

TECHNOLOGY Infrastructure:

• CODA V11.200 – Financials and Procurement (in a virtual environment). Currently in an RFP • PAM XG10 – Princeton Asset Management – Investments (in a virtual environment). Slated for

an upgrade to latest version of XG of PAM for Investments (PFI) later this year. • Total of 65 Servers in the OPF network, 42 physical and 23 virtual. The Operating System

breakdown is: (34) Windows 2008, (22) Windows 2003, (1) Windows 2000, (1) VMware ESXi 4.0 and (1) VMware ESXi 5.1. These servers run the OP&F website, email databases, file and print, network monitoring, terminal services, SharePoint web services, application servers, Telecommunications, V3 pension system and domain controllers.

• Approximately 200 client PCs running Windows 7 Professional (includes UAT and Training Room machines)

• Cisco Network Switches and Routers Telephony:

• Nortel Meridian 61c Telephone System – Migrated external service to Voice over IP (VoIP) late 2013.

• Voicemail – Call Pilot • Switch Management – Avaya • Call Center Reporting – Symposium Express, Symon View • Call Recording – Telstrat Engage

Security:

• Cisco Adaptive Security Appliance (ASA) Firewalls with Intrusion Prevention (IPS) • Symantec Anti-virus software • Fortinet FortiMail Anti-spam - NEW • Fortinet FortiGuard Unified Threat Management (UTM) appliance - NEW • Code Green Networks Data Leakage Prevention (DLP) appliance

196

• An outside security assessment is scheduled to be completed by end of September. The last assessment was done in the 1st quarter of 2008

LITIGATION / CORPORATE GOVERNANCE Signatory to the Halliburton brief. Ongoing litigation against AIG, British Petroleum and Bank of New York Mellon (fx transactions).

FUNDING ISSUES As of 1/1/2013 (latest actuarial valuation) OP&F had a funding ratio of 64.2 percent. OP&F currently does not meet Ohio’s 30-year funding requirement but changes made in pension reform legislation lowered the funding period from infinity to 47 years as of 1/1/2013. Since the 1/1/2013 actuarial valuation, OP&F reduced the amount of employer contributions going to fund health care. With this percentage being lowered from 2.85 percent to 0.5 percent as of 1/1/2014, the funding period was lowered to 38 years. OP&F expects that the positive investment returns in 2012 and 2013 that will be included in the 1/1/2014 valuation will bring the system into compliance and under the 30-year funding period.

MODEL PRACTICES Adopted Foreign Securities Litigation Policy in the wake of the US Supreme Court’s decision in Morrison.

INVESTMENT ACTIVITY/INITIATIVES Implemented risk parity approach at the asset allocation level several years ago

Recently increased MLP allocation from 5% to 8%

Implemented a multi-strategy, alternative fixed income structure to replace a core bond portfolio

Implementing middle market direct lending strategies within the high yield allocation

Total Fund returns for periods ending 3/31/14:

1-Yr.: 13.52% 3-Yrs.: 10.43% 5-Yrs.: 16.55% 10-Yrs.: 8.07%

ASSET ALLOCATION Actual Allocation as of 5/31/14 49.6% Combined Domestic and Foreign Equities (U.S. includes hedge funds as part of portable alpha program) 28.9% Fixed Income [Core, Global Inflation Protected (levered 2x), High Yield] 6.1% Master Limited Partnerships 9.4% Real Estate 5.6% Alternatives (Private Equity, Timber)

197

0.4% Cash Assets managed externally: 99.6% Assets managed internally 0.4%

FUTURE DEVELOPMENTS / OTHER ISSUES V3 Pension System Upgrade: In November 2013, the Ohio Police and Fire Pension fund completed a three year project to upgrade our V3 Classic Pension system to a browser platform. The upgrade provides the Fund with enhanced usability, more flexibility and customization with regard to user screens, and the ability to maintain more aspects of the system internally thus reducing Change Order costs.

From an investment standpoint, total portfolio performance exceeded expectations over the past two years and has ranked in the top quartile and even top decile for most periods.

OP&F has recently hired a dedicated non-discretionary private markets consultant to help implement the majority of its private markets exposure through direct partnerships to achieve better risk-adjusted, net of fees returns for the private markets asset class, as well as to reduce costs.

198

NASRA - Roll Call of the States State: Ohio Retirement System: School Employees Retirement System of Ohio Executive Director: Lisa J. Morris Market Value of Assets: $12.6 B Assets as of: 12/31/2013 Number of Active Members: 121,642 Number of Annuitants: 70,771 Participants as of: 6/30/2013

LEGISLATION SERS continues to implement Senate Bill 341, our pension reform legislation enacted in 2012. The legislation increased the age and years of service credit to be eligible for retirement in two ways:

• A member must be age 67 with 10 years of service credit, or age 57 with 30 years of service credit, to retire with full benefits

• A member must be age 62 with 10 years of service credit, or age 60 with 25 years of service credit, to retire early with actuarially-reduced benefits

No changes will affect members who have 25 years of service credit before Aug. 1, 2017. SERS’ pension reform plan did not change these three key areas:

• Employer or employee contributions – employee contributions remain at 10%; employer • contributions remain at 14% • Cost of Living Adjustment (COLA) – the COLA remains at 3% • Final Average Salary (FAS) – the FAS remains at the average of a member’s three highest fiscal years of

earnings

As of this date (June 30, 2014), no additional legislation has been introduced that would have a material impact on the system.

SYSTEM GOVERNANCE Fiduciary Audit In early 2013, Funston Advisory Services performed a fiduciary audit of SERS’ internal controls surrounding operations related to the Investment Department. After completing the audit, Funston provided SERS with a report containing a comprehensive review of investment internal controls and procedures. While the report was largely complimentary of SERS, it did offer some suggestions for improvements in order to better align SERS’ current processes with best or leading practices in the industry. For the remainder of 2013 and continuing into 2014, a steering committee comprised of staff from Executive, Legal, Finance, Internal Audit and Investments used Funston’s report as a framework to address areas that were identified as having opportunities for improvement. Leadership SERS hired a new Chief Financial Officer, Tracy Valentino.

199

TECHNOLOGY New Member Benefit System for Pension Administration SERS is continuing to work with its external consultant (Sagitec Solutions LLC) in developing a new member benefit system for pension administration. This solution is a large-scale, enterprise-wide, web-based application system called the SERS Member and Retiree Tracking (SMART) system. SERS staff members participate in numerous design sessions focusing on their specific business processes for customizing the system to fit SERS’ needs and improve and streamline processes. In addition to these sessions, staff members focus their efforts on cleaning up data and correspondence, converting data, and designing the supporting technology systems and security mechanisms. The SMART system project is a phased, multi-year endeavor with identified milestones. The project is targeted for completion in 2015. Information Security SERS has an Information Security Program with the mission of providing guidelines and standards for preserving the confidentiality, integrity, and availability of SERS’ vital information assets. As recommended by best standards, SERS’ continues to invest in layers of technology and training of staff members to protect these assets and make them less vulnerable to cybercrime attacks.

LITIGATION / CORPORATE GOVERNANCE Corporate Governance Under the guidance of the Harvard Law School Shareholder Rights Project, SERS submitted shareholder proposals to five companies in late 2012 that urged a repeal of the companies’ classified board structure and a move to annual director elections. Four of the five companies held their annual meetings in the spring of 2013 with following results:

Company Outcome

Crown Castle International Corp.

Company agreed to put a management proposal on the ballot and it passed with majority support.

Lincoln National Corp. Company agreed to declassify its board through a bylaw amendment.

Reinsurance Group of America Company agreed to put a management proposal on the ballot and received majority support. However, the proposal did not pass because it did not reach the supermajority (85%) voting requirement.

SCANA Corp. SERS’ proposal appeared on the ballot and it passed with majority support.

Tech Data Corp. Company agreed to put a management proposal on the ballot, but the annual meeting was not held until 2014 due to extenuating circumstances.

200

FUNDING ISSUES As of June 30, 2013, funded 65.3% at 29 years. As of December 31, 2013, Net Plan Assets increased 7.5% from the previous June 30, 2013. This increase in asset values is primarily due to the positive investment returns in that six-month period.

MODEL PRACTICES Benefit Payments For the first time SERS is processing estimated benefit payments. Retiring members will now receive their first retirement check with little to no interruption to their personal cash flow. The first estimated benefit payment was paid in March. For that month, SERS issued approximately 65% of the service retirements as estimated payments. Vocational Rehabilitation SERS has developed a Vocational Rehabilitation program. Disability benefit recipients are now evaluated on an “any-occupation” standard after receiving a disability benefit for three years. At that time, if they are determined to be capable of any occupation, as defined by SERS statute, the disability benefit would be terminated. To help prepare members for this change, when evaluating a member for disability, SERS will determine if a member is able to obtain the skills necessary to perform other employment, if given the appropriate training and resources. If appropriate, SERS notifies the member that they are a candidate for vocational rehabilitation, and provides them with a copy of the medical report used to determine their eligibility. Although the member can choose any vocational rehabilitation provider, SERS recommends a resource which is at no cost to the member - Opportunities for Ohioans with Disabilities (OOD). OOD has 14 regional offices throughout Ohio, and provides training and services to disabled Ohioans to help them obtain gainful employment. Cyber Liability Insurance After months of research, SERS staff made the decision to purchase cyber liability insurance for the first time. This coverage provides third party protection in the event that SERS data is hacked, stolen, or lost, in addition to the reimbursement of defense and settlement costs incurred by SERS. Culture Culture – SERS conducted Difficult Conversations Positive Outcomes training for all employees. The training helped staff understand how to constructively craft and hold difficult conversations, while arriving at a positive conclusion. SERS conducted an Active Shooter training where staff learned about the risks of an active shooter in our building. The instructor walked staff members through safety suggestions in the event of an emergency.

INVESTMENT ACTIVITY/INITIATIVES Rates of Return The Total Fund return for one year ending 12/31/2013 is 16.86%. Preliminary return for fiscal year ending 06/30/2014 is 17%.

201

Asset Allocations SERS’ asset allocation targets are: Global Equity 45%; Private Equity 10%; Fixed Income 19%; Real Assets 15%; Multi Asset Strategies (HF) 10%; Cash 1%. Hedge Funds The Hedge Fund portfolio strategy is being modified to reduce equity beta and volatility following a re-definition of the role of Hedge Funds in the Total Fund. This strategy is re-named Multi Asset Strategy. Strategic Investment Plan SERS continues to implement the three-year investment strategic plan with a focus on value-adding performance, risk management, cost reduction and investment culture. Opportunistic Investments SERS has committed to five new opportunistic investments for about 2% of the Total Fund.





50 % 15.3 % 10.5 % 21.9 % 2 % 0.3 % 98 % 2 %

DEFINED CONTRIBUTION PLANS SERS does not administer a defined contribution plan for our members. Retired Ohio public employees who return to public school employment contribute to an annuity and receive interest plus partial employer funds when they terminate employment and withdraw their funds. More than 8,250 reemployed retirees contributed to SERS and maintain an account balance as of 06/30/2013.

FUTURE DEVELOPMENTS / OTHER ISSUES Health Care SERS provides access to Medicare Advantage and non-Medicare group plans and provides varying levels of subsidies depending upon years of service. Increased contributions from investments, as well as mostly level health care expenses since 2012, have allowed us to avoid a premium increase for the past several years in the Medicare plan. We increased cost sharing for the non-Medicare early retiree plan in order to decrease expenses in anticipation of a significant impact of the ACA excise tax. Employer Outreach Employer Services staff increased their outreach efforts through seminars and workshops to discuss topics such as electronic reporting, important due dates, membership topics and technology improvements. In addition, updated guidebooks were prepared and issues. Finally, Employer Services attended numerous events held by stakeholder groups in an effort to strengthen employer relationships.

202

Targeted Communications SERS is reviewing and revising all of its communication materials to match up with targeted member personas. The newly developed publications and electronic communications will focus on what the individual member needs to know. For instance, younger members will be encouraged to establish additional forms of savings for retirement, while older members will be informed of Social Security penalties and relevant deadlines for applying for benefits. Through recent focus groups with SERS members, the generational interest in electronic communications was confirmed; however, staff noted that younger members still prefer to receive paper copies of the information regarding their retirement. GASB/Media Outreach Outreach to Ohio media concerning accounting and pension reporting changes made by the Governmental Accounting Standards Board (GASB) has become a priority for executive, legislative, and communications staff. Communications, with assistance from finance, created a GASB handout to give to media and legislators during face-to-face visits. The handout details what GASB is, the major changes that affect Ohio’s pension systems and employers, and why GASB made the changes. To date, executive, legislative, and communications staff have visited nine editorial boards and spoken with business reporters from two newspapers by phone. So far, our efforts have resulted in one article and an invitation to write and Op-Ed article later in 2014. Leadership in Energy and Environmental Design (LEED) for Existing Buildings Certification In the LEED – SERS Receives National Green Recognition for Energy Conservation Efforts After years of fine-tuning the operational efficiency at SERS’ headquarters building in downtown Columbus, SERS applied for and received a Leadership in Energy and Environmental Design for Existing Buildings (LEED-EB®) award from the U.S. Green Building Council (USGBC). The SERS building became the 5th LEED-EB certified building in Columbus and the 32nd in Ohio. The LEED rating system is the most universally accepted program for buildings, homes, and communities that are designed, constructed, maintained, and operated for improved environmental and human health performance. There are four levels of LEED certification – Certified, Silver, Gold, and Platinum. SERS received a LEED Silver certification. To establish a baseline by which energy conservation efforts could be measured, SERS’ staff had the building evaluated for energy efficiency using the EPA’s Energy Star standards. On April 1, 2008, SERS’ building efficiency was rated in the 60th percentile of the Energy Star rankings, meaning it was more energy efficient than 60% of similar sized buildings in the nation. Confident that the building could become even more energy efficient, staff began adjusting internal temperatures, shortening the run times of heating and cooling mechanisms, reducing lighting in the 512-space parking garage, and reducing the amount of lighting in meeting rooms. SERS also began turning off external lights at 11 p.m., which not only saved electricity but complied with the National Audubon Society’s “Lights Out” initiative, aimed at protecting migrating song birds drawn to the lights of large downtown buildings as they fly at night. In just one year, the Building Services staff was able to increase the energy efficiency of the building by an additional 23%. It was then that staff looked into the possibility of applying for LEED-EB certification.

203

While energy conservation is a primary category within the LEED certification program, the project team had more work to do in the categories of sustainable sites (landscaping, pest management, alternative commuting transportation), water efficiency, materials and resources (sustainable purchasing, recycling), and indoor environmental quality (air quality, green cleaning). As the project team was preparing a plan to comply with LEED requirements, American Electric Power (AEP), SERS’ electricity provider, began a rebate program that helped offset the cost of the improvements. SERS made six efficiency changes to the heating, cooling (HVAC), and ventilation, systems that cost $16,081. Staff also replaced nearly 5,000 incandescent light bulbs (32-watt) with CFL light bulbs (28-watt), at a cost of $14,094. In January, AEP presented SERS with a rebate check of $26,781 that nearly covered the costs of these upgrades. These upgrades will reduce electric consumption by approximately 405,000 kilowatts annually, which will save a significant amount of money on future electric bills. Other improvements that helped SERS attain LEED Silver certification included:

• Purchasing paper with 30% recycled content • Purchasing electric equipment that is Energy Star qualified • Using environmentally friendly cleaning products and LEED-approved cleaning equipment • Planting Ohio native, drought-resistant plants to reduce watering • Implementing a single-stream recycling program • Using LEED-certified paints and carpeting

Since SERS began tracking energy consumption in 2007, natural gas usage has been reduced by 33%, and electric usage has been reduced by 9%. In addition, the recycling program has reduced landfill waste by 70%. All of the work done by the project team to make SERS’ building more energy efficient also led to a staff innovation that will collect condensate water from the air conditioning system and allow it to be used in the cooling tower. This modification is expected to save SERS $300-$400 per month in water costs during the summer months when the air conditioner is running. As an organization devoted to providing retirement security for the state’s school employees, obtaining LEED-Silver certification is more than just conserving natural resources, it is another way to fulfill the mission of “serving the people who serve our schools.” “We know our members are vital to the operation of schools throughout the state, and we admire their dedication to their jobs,” said Lisa J. Morris, executive director of SERS. “Our job in Columbus is to serve them as best we can, and it’s only fitting that we do our best to conserve natural resources and lower our operating costs on their behalf. The money we save on operating costs allows us to improve services to active and retired members.” SERS Building Stats 300 E. Broad St., Columbus, Ohio Built in 2001 10-story building 197,570 square feet of Class A office space SERS staff occupies 72% of available space Tenants occupy 28% of available space 512-space parking garage (attached) Electricity usage: FY 2007 – 3,680,700kwh / FY 2013 3,334,800kwh Gas usage: FY 2007 – 6,949 ccf / FY 2013 – 4,636 ccf

204

NASRA - Roll Call of the States State: Ohio Retirement System: State Teachers Retirement System of Ohio Executive Director: Michael J. Nehf Market Value of Assets: $74 B Assets as of: 5/31/2014 Number of Active Members: 193,800 Number of Annuitants: 149,200 Participants as of: 7/1/2013

LEGISLATION Alternative Retirement Plan This is not a budget year in Ohio, but in the spring, several bills commonly referred to as mid-biennium review (MBR) bills were introduced. One of these bills, House Bill 483, contained two amendments pertaining to STRS Ohio. The first of these relates to the mitigating rate on Alternative Retirement Plan (ARP) accounts. The mitigating rate is a percentage of the employer contribution that stays with the system when a person who would have otherwise been contributing to the STRS Ohio defined benefit plan, chooses to instead contribute to either the STRS Ohio defined contribution plan, the STRS Ohio combined plan or an alternative retirement plan administered by a third party vendor. The legislation placed a moratorium on the rate at 4.5% of the 14% employer contribution. The bill also requires the Ohio Retirement Study Council to conduct a study of the applicability, operation, and efficacy of the ARP mitigating rate. Furthermore, the study shall research the historical impact of the mitigating rate and whether its purpose is being served. The ORSC is to prepare and submit to the Governor, the President of the Senate, and the Speaker of the House of Representatives a report of its findings and recommendations by December 31, 2014. Membership The second of the two amendments in HB 483 that effect STRS Ohio requires the Ohio Retirement Study Council, in cooperation with the State Teachers Retirement Board, to develop a procedure to determine if an individual who would otherwise be required by virtue of their license, but who is providing auxiliary services to students attending nonpublic schools employed under a contract with a third party, is a teacher under the State Teachers Retirement System. The bill requires the Ohio Retirement Study Council to make their recommendation to the STRS Ohio Board no later than December 31, 2014.

SYSTEM GOVERNANCE Several years ago, STRS Ohio instituted an Enterprise Risk Management (ERM) Policy. The policy is reviewed and modified, as needed, annually. The concept is that internal and external factors can create uncertainty about whether an enterprise, in this instance STRS Ohio, will achieve its objectives. The effect of this uncertainty is called “enterprise risk”. ERM is the process by which STRS Ohio evaluates and manages its risk, thereby mitigating potential adverse outcomes for the system. It is very much a forward-looking process, assessing where impediments to system objectives may lie, and outlining strategies to avoid those impediments. The ERM organizational design, as mentioned, is based on the strategies in place to assist STRS Ohio in accomplishing its mission, vision and primary objectives, as provided in Board policies relative to investments, member benefits and the actuarial condition of the plan. ERM is a continuous process and identifies, assesses, prioritizes and manages risk exposure and opportunities across the organization.

FUNDING ISSUES The current funding period for STRS Ohio is 40.2 and the funded ratio is 66.3%.

205

MODEL PRACTICES STRS Ohio increased to 73% of new retirees filing online compared to 63% last year and only 7% the first year of implementation in 2012. STRS Ohio implemented tax and bank changes online and are seeing nearly 60% of tax changes being done online and almost 40% of bank changes are done online.

INVESTMENT ACTIVITY/INITIATIVES STRS Ohio recently completed an eighteen month phase-in to implement its 2012 Asset-Liability Study. The study called for reducing exposure to publicly traded equities by four percentage points and increasing the allocation to alternative investments by the same amount. While the overall exposure to publicly traded equities declined in aggregate, the composition also changed as the allocation for domestic equities declined by seven percentage points and the allocation to international equities increased by three percentage points. Annualized returns as of 12/31/13 are as follows: 1 yr. +17.39%, 3 yr. +10.61%, 5 yr. +12.89%, 10 yr. +7.76%. The long-term targeted actuarial rate of return is 7.75%. STRS Ohio internally manages approximately 75% of its investment assets.





55.9 % 19.9 % 9.3 % 11.8 % 3.1 % 0 % 25 % 75 %

DEFINED CONTRIBUTION PLANS STRS Ohio has offered a defined contribution plan and a combined plan (plan has components of the defined benefit and the defined contribution plans) since 2001. Those in higher education also have the ability to choose an alternative retirement plan administered by a third party vendor. Below are member participating rates for DB, DC and combined plans as of June 26, 2014. Membership, including non-active DB – 319,967 (94.5%) DC – 11,824 (3.5%) CO – 6,897 (2.0%) Active members DB – 195,005 (92.8%) DC – 9,215 (4.4%) CO – 5,885 (2.8%) Member elections during this past year was 77.0% defaulted to DB 10.2% elected DB 8.5% elected DC 4.3% elected CO We had 15,384 member elect through the end of May.

206

NASRA - Roll Call of the States State: Oklahoma Retirement System: Oklahoma Public Employees Retirement System Executive Director: Tom Spencer Market Value of Assets: OPERS $8.4 B, URSJJ (judges) $297 million Assets as of: 5/31/2014 Number of Active Members: 42,328 Number of Annuitants: 31,706 Participants as of: 4/30/2014

LEGISLATION HB 2630 & SB 2120 create a Defined Contribution system for all state employees effective November 1, 2015. Oklahoma PERS will administer the new plan. The basic features include a dollar for dollar employer match with the minimum of 3% and a maximum of 7%. There is a five-year vesting period for employer-matching funds with 20% of the fund balance after one year, and another 20% each year thereafter up to five. Employers will still pay the full employer contribution currently going to the DB plan. (16.5%). Oklahoma PERS will take the DC matching funds from these contributions and deposit the balance into the legacy DB plan.

TECHNOLOGY OPERS finally retired its legacy pension administration system and the aging computer on which it runs. The legacy system has been replaced with a database system using Oracle tools using PL/SQL, with Oracle Forms, Reports, and Oracle Application Express. About 80% of documents submitted to OPERS are being scanned as they come in or within a few days. The next project is to increase the number of transactions done online.

LITIGATION / CORPORATE GOVERNANCE Continued collaboration with the State Auditor & Inspector’s office to check for payroll and contribution compliance issues when doing scheduled county audits. Ongoing efforts have resulted in increased compliance and identifying many years of retirement service for members that would otherwise have been lost. In excess of $300,000 in delinquent contributions have been collected.

FUNDING ISSUES As of July 1, 2013, the funded ratio for OPERS was 81.6% and 97.3% for URSJJ (judges). The ARC for OPERS has been met for three years in a row which hasn’t been done in recent memory. However, contributions to the URSJJ are still well below the required rate.

The actuarial firm for Oklahoma PERS completed a three-year experience study. There were no changes in the significant actuarial assumptions: Inflation - 3%. Investment return - 7.50%. Wage Growth - 4.00%. There were minor adjustments to the rates of withdrawal and retirement. There were decreases in the rates of disability retirements, electing a vested benefit and the salary scale.

INVESTMENT ACTIVITY/INITIATIVES As of 5/31/14: OPERS fiscal year-to-date return was 16.13%. The five-year annualized return was 13.06% and the 10-year annualized return was 7.71%. The return for fiscal year 2012 was 12.03%. URSJJ fiscal year-to-date return was 15.82%. The five-year annualized return was 12.94% and the 10-year

207

annualized return was 7.35%. The return for fiscal year 2012 was 11.47%. The Board changed the strategic policy asset allocation in October 2013. The changed resulted in the reduction of the fixed income asset class and an increase to the US equity asset class. The fixed income asset class allocation changed to 32% of the fund from 36%, and US equities allocation changed to 44% of the fund from 40%. As a result of this change, several subsectors/investment advisor mandate allocation sizes as a percent of the overall fund were also revised--as was the rebalancing policy. The change was in recognition of the exceptionally low level of yields available in the fixed income markets, and the subsequent relative value differential between the equity and fixed income markets, given the Fed’s efforts to stimulate economic activity.





69.84 % 29.89 % 0 % 0 % 0.27 % 0 % 100 % 0 %

DEFINED CONTRIBUTION PLANS OPERS administers a 457 and a 401(a) plan. The 3rd party administrator for both plans is Great-West Life and Annuity. There are currently 20 investment options which include a stable value fund, a balanced fund, 2 bond funds, 4 large-cap equity funds (includes 2 index funds), 3 mid-cap funds, 2 small-cap funds, 2 international equity funds and 5 Target Date Funds. There is also a self-directed brokerage option for mutual funds only. The net positions of the two defined contribution plans as of 5/31/14 are listed below: 457 Plan - $695 million voluntary 401(a) - $184 million employer match $25 per month Participants = 37,445 69% participation rate In January, the OPERS Board approved a $406,000 administrative fee refund to plan participants. The fee refund was a distribution of revenue collected from the SoonerSave investment options in excess of the administrative fee paid to the third party administrator, Great-West Life. The fee refund was credited, pro rata to participant accounts. As a result of legislation passed this year, employees hired on November 1, 2015 and later will not be eligible to participate in the two defined contribution plans described here. New employees will participate in a new defined contribution plan and will no longer be eligible for the OPERS defined benefit plan or the current defined contribution plans.

FUTURE DEVELOPMENTS / OTHER ISSUES Oklahoma PERS will be consumed with prep work to roll out the new DC plan by 11/1/15. Fortunately OPERS has an existing voluntary savings plan using a 457(b) plan for employee deferrals and a 401(a) plan for a small employer match. Initially we will be using the same record-keeper for the new plan and many of the same investment options that exist for the voluntary plan. Our goal is to keep as much of the administrative work outsourced and paperless. On the DB side of the system we are trying to cut down on paper and administrative time by moving more and more transactions to an online environment. We are currently testing a paperless end-of-employment verification for retirements with several employers, which will ultimately result in faster processing.

208

NASRA - Roll Call of the States State: Oregon Retirement System: Oregon Public Employees Retirement System Executive Director: Paul R. Cleary Market Value of Assets: $69.5 B Assets as of: 5/31/2014 Number of Active Members: 164,190 Number of Annuitants: 127,689 Participants as of: 12/31/2013

LEGISLATION Pursuant to a 2013 regular session statutory change, Oregon PERS implemented cost-of-living adjustment (COLA) reductions as of August 1, 2013. Further reductions were passed in a fall 2013 special session that will become effective for benefit recipients’ August 1, 2014 payments. That revised COLA will be based on a sliding scale (1.25% COLA on benefits up to $60,000 per year, 0.15% on amounts over $60,000). Those reductions will be partially offset by an annual “supplementary payment” of up to $150 for each of the next six years (2014 – 2019). Those payments are to be funded from the system’s Contingency Reserve. 2013 legislation also eliminated supplemental tax remedy benefits for PERS benefit recipients that do not pay Oregon state income taxes because they do not reside in Oregon. As of January 1, 2014, we removed the tax remedy from 16,564 recipients, reducing their monthly benefits by a total of some $2.2 million (about 6% on average for each recipient). Legislation adopted during the 2014 session gives PERS the specific authority to recover its administrative costs to develop and provide its 900+ employers with the data they need to comply with the GASB 68 pension liability financial reporting requirements. Those administrative costs will be charged annually against the earnings on employer reserve accounts.

SYSTEM GOVERNANCE Following a series of internal and external reviews, a substantial revision to the organizational structure and governance authorities for the Oregon Investment Council (OIC) and the State Treasury Investment Division was proposed to both the 2013 and 2014 legislature, but was not adopted in either session. The five-member PERS Board continued with its successful transition and on-boarding of four new Board members over the last two years.

TECHNOLOGY We continue to leverage the new technology platform we implemented in 2011 by beginning to migrate the recordkeeping and payment elements of our Individual Account Program in-house, using that project to explore new technology solutions like an open-source systems integration tool and elements of Systems Oriented Architecture. We also continued executing on initiatives to centralize data warehousing and reporting functions and upgrading network components, such as installing a new Storage Area Network. Our recently hired new Chief Information Officer organized a full-day Envisioning Session focused on the question of how information technology can enable our agency’s transformation to a process-driven organization.

LITIGATION / CORPORATE GOVERNANCE Legislation that enacted benefit reductions to contain system costs (reduced COLA and removal of tax remedy payments for non-residents, which combined lowered system liabilities by some $5 billion) contained a direct referral to the Oregon Supreme Court, where those challenges are now pending. In addition, those reductions generated 922

209

appeals and contested cases, which staff processed through the administrative review process. Another project to clean up violations of Work After Retirement (WAR) restrictions also generated 86 appeals and contested cases.

FUNDING ISSUES As of December 31, 2013, Oregon PERS was estimated to be 96% funded when including employer pension obligation bond proceeds and other lump-sum contribution pre-payments held in employer “side accounts.” The system-wide UAL was estimated to total $2.2 billion when including side accounts; and $8.1 billion when excluding employer side accounts. Investment returns over the ten-year period ending December 31, 2013 averaged 8.07%. The PERS Board completed its biennial review of actuarial methods and assumptions in July 2013, and reduced the annual earnings assumption from 8% to 7.75% based on investment return projections and recommendations from the Board’s actuary and the consultants to the Oregon Investment Council (OIC).

MODEL PRACTICES To advance our agency governance, we undertook a comprehensive organizational redesign process that, for the first time, followed a principled approach to aligning our governance structure along the agency’s business processes to better define authority and accountability. The high-level design work was completed in 2013; with 2014 being spent developing implementation plans to populate the new structure and complete the transition. Two Breakthrough initiatives provided model practices: 1. As the next phase of implementing an outcome-based management system, we conducted a gap analysis and developed plans for closing those gaps on moving the agency as a whole to a consistent level of adoption and execution on elements of that system. This comprehensive, analytic approach ensures that the new management system becomes embedded as the “normal” way we do business, instead of just a passing fad. 2. The lease on our second building location was to expire in October 2013, so we participated in a new service offered by our state Department of Administrative Services to test the market on a new location and better leverage the state’s overall market presence. A new location was identified that offered substantial costs savings (over $750,000 over the seven year lease term) and allowed us to establish a facilities plan that better defined the purpose and function of both our headquarters and our production locations. The new lease space is substantially larger than the prior space, allowing us to also co-locate production services in the new location, fostering better collaboration and communication that is improving service delivery.

210

INVESTMENT ACTIVITY/INITIATIVES Policy Mix and Return Expectations for OPERF Regular Account (as of 12/31/2012)

Asset Class Target

Allocation (%)

Re-balancing Range

(%)

Expected Annual Policy

Return 1,2 (%)

Expected Annual Active Management

Return (net of fees) (%)

Expected Annual Total

Return (%)

Public Equities 37.5 32.5-42.5 7.9 0.75 8.6

Private Equity 20 16-24 10.2 0.7 10.9

Fixed Income 20 15-25 2.3 0.35 2.6

Real Estate 12.5 9.5-15.5 7.1 0.75 7.8

Alternatives 10 0-10 6.4 0.5 6.9

Total Fund 100 7.0 0.6 7.6

1. Based on capital market forecasts developed by the Council’s investment consultant for the next two to three market cycles.

2. Total Fund expected returns are simply the weighted averages of the asset class returns. The geometric mean return of the policy portfolio is 7.9%.





41 % 24 % 11 % 23 % 0 % 1 % 93 % 7 %

Other assets - opportunity portfolio

DEFINED CONTRIBUTION PLANS 457 Deferred Compensation Program - Oregon Savings Growth Plan (OSGP): 24,991 participants with $1.6 billion invested as of April 30, 2014. This program offers deferred compensation services to state and local government employees with up to nine investment options as well as retirement planning services. 401(a) and 414(k) Individual Account Program (IAP): 238,625 participants with $5.9 billion invested as part of the Oregon PERS Fund’s Regular Account as of December 31, 2013. Member contributions are statutorily set at 6% of covered salary. Under the 2003 PERS reforms creating a hybrid system, member contributions were redirected to the IAP effective January 1, 2004.

211

NASRA - Roll Call of the States State: Pennsylvania Retirement System: Pennsylvania Public School Employees' Retirement System Executive Director: Jeffrey B. Clay Market Value of Assets: $51.4 B Assets as of: 3/31/2014 Number of Active Members: 267,428 Number of Annuitants: 209,204 Participants as of: 6/30/2013

LEGISLATION ADDITIONAL PENSION REFORM Pension reform remains a key issue in Pennsylvania. As this Roll Call goes to print, additional pension reform legislation could come up to vote in the Legislature. The Commonwealth currently faces over a $1billion structural budget deficit and the Governor has placed additional pension reform as a top priority before resolving state budget issues. While the budget deadline is June 30th, it appears the Commonwealth budget debate might extend beyond that date. As reported last year, many pension reform bills have been introduced (SB 922, HB 1350, and HB 1352) during the 2013/2014 legislation session but it remains unclear if any will pass. A cash balance plan and a stacked hybrid plan are also being discussed. We fully expect the pension funding issue to remain an issue in Pennsylvania.

SYSTEM GOVERNANCE PSERS’ previous Chief Investment Officer, Alan Van Noord, retired on June 30, 2013. James H. Grossman Jr. was appointed PSERS Chief Investment Officer in March 2014.

LITIGATION / CORPORATE GOVERNANCE RIVERCENTER/MARRIOTT CASE Keystone Texas Property Holding Company, a PSERS holding company (Keystone), has been involved in litigation arising out of the attempted sale of land in Texas in 2005. HMC Hotel Properties II Limited Partnership, an affiliate of Host Marriott Corporation (Host), which leases the Marriott Rivercenter Hotel on the land situated on San Antonio’s Riverwalk, sued Keystone alleging the attempted sale violated a right of first negotiation in its lease. Keystone asserted claims against HMC and Host for slander of title and tortious interference with contract.

In 2010, following a lengthy state court trial, a Bexar County jury determined Keystone was entitled to actual damages against HMC and Host of $39 million, plus attorney’s fees and $7.5 million in exemplary damages. The District Court’s judgment awarded Keystone $39 million in actual damages plus attorney’s fees and costs but did not award Keystone exemplary damages. On appeal, the San Antonio Court of Appeals affirmed the District Court’s judgment in favor of Keystone and reinstated the jury’s $7.5 million exemplary damage award. HMC and Host filed a petition for review to the Texas Supreme Court, seeking review of the San Antonio Court of Appeals’ decision.

On June 28, 2013, the Texas Supreme Court denied their petition and thereby declined to review the case. HMC and Host filed a motion for rehearing of the denial of their petition for review. The Court reversed its decision and oral arguments were heard in February 2014. In June 2014, the Texas Supreme Court reversed the Court of

212

Appeals' judgment and found no evidence that Marriott's actions caused the sale's demise. The Supreme Court reached this decision despite the fact that the jury found liability and awarded damages for slander of title and tortious interference with the contract. We plan to file a Motion for Reconsideration on or before June 30.

FUNDING ISSUES As of June 30, 2013 PSERS funded ratio was 63.8%. PSERS’ employer contribution rate for FY 2014-2015 is 21.40% which is an increase from the current FY 2013-2014 rate of 16.93%. The new rate is expected to go into effect on July 1, 2014. The rate, however, could change if additional pension reform legislation is passed that impacts the rate collars and lowers the rate.

INVESTMENT ACTIVITY/INITIATIVES Investment Performance as of March 31, 2014 Quarter 3.61% Fiscal year to date 10.25% 1 year 9.02% 3 years (annualized) 7.86% 5 years (annualized) 13.12% 10 years (annualized) 6.90%





21.9 % 19.1 % 14.3 % 21 % 2.3 % 21.4 % 67.8 % 32.2 %

Other 3.9% Commodities 3.5% Master Limited Partnership (MLP) 3.4% Risk Parity 10.6% Absolute Return PSERS investment staff manages cash/cash equivalents, and portions of private markets, U.S. equity, Non-U.S. equity, fixed income, commodities and risk parity in-house.

213

NASRA - Roll Call of the States State: Pennsylvania Retirement System: Pennsylvania State Employees' Retirement System Executive Director: David E. Durbin Market Value of Assets: $27.7 B Assets as of: 12/31/2013 Number of Active Members: 105,186 Number of Annuitants: 120,052 Participants as of: 12/31/2013

TECHNOLOGY SERS Office of Information Technology is responsible for implementing and maintaining the Agency’s data processing, transfer, and storage infrastructure. The Office is comprised of three divisions, 1) Application Development, 2) Database Administration, and 3) Technical Support – network. SERS is primarily an Oracle shop. Currently, we use Oracle 11.1.2 (11gR2) and all Oracle databases use Linux as the operating system. Windows Office 2010 is the standard for most of our desktops. Our primary information system is the State Employees' Retirement Information System (SERIS), implemented in 1995, is a custom-developed Oracle application for member account and benefits processing. OIT in the process of upgrading the SERIS environment to prepare for the retirement of the Oracle Forms and Reports products currently scheduled for 2017. In conjunction with these upgrades, the SERIS application will be reconfigured to utilize new technology. This major technology shift will take about three more years to implement. The Customer Relationship Information System (CRIS), implemented in 2000, is an SAP module that manages our interaction with the members. The Investment Data Warehouse (EAGLE PACE), implemented in 2000, is primarily an Oracle in-house repository of all our investment holdings and transactions. The Document and Workflow Process Management (DAWPM), implemented in 2001, is an open-text document imaging system. The Content Management System (CMS), implemented in 2008, is an open-text system of organizing, storing, and retrieving information that permits employees to have access to information that is necessary to complete their tasks in an efficient and accurate manner. The telephone system in SERS central office is Black Box PBX. The PBX has been removed in SERS Regional Counseling Centers and replaced with VOIP. New reporting capability will be added as well to the phone system. System Access Request Application (SARA) – Implemented in 2011, SARA is a data collection application to be used to request setup activity from the Office of Information Technology, and the Office of Finance and Accounting. This application should be utilized for the following activities:

• Setup of a new employee • Removal of a separating or transferring employee • Reclassification/Internal Transfer of employee • Reclassification of an employee in their current position • Non-Commonwealth Employee Set up • Non-Commonwealth Employee Removal • Profile additions

214

• Profile retractions • Office Relocations

Actions may be initiated either within the Human Resource Division (for new employees, separating or transferring employees, internal transfers, and reclassifications) or by a supervisor (for profile changes, office relocations, and Non-Commonwealth employee actions).

FUNDING ISSUES As of December 31, 2013, SERS actuarial funded ratio was 59.2%, which represents a slight improvement over the previous year. This increase is mainly due to the fact that in 2013 SERS was no longer recognizing or smoothing in significant losses suffered in 2008. Currently, SERS is smoothing in net gains greater than the assumed rate of return for the past five years. This increase is offset by the cost of having employer contributions capped below the actuarially required rates. Global public equity and alternative investments helped the SERS portfolio produce an annual investment return of 13.6% in 2013, generating net investment gains of approximately $3.7 billion. In addition, investment expenses continued their steady decline; they were $9 million lower in 2013 than in 2012. SERS always reports its investment performance net of fees. Our earnings have been positive for 16 of the last 20 years and actual earnings have exceeded the assumed rate of return for 14 of them. Over the past three, five, and 10 years, the SERS Fund has earned compounded annual returns of 9.3%, 9.8%, and 7.4%, respectively. SERS benefit obligations are changing pace. The system was established in 1923 but did not pay more than $1 billion in annual benefits until 1997. Annual payments reached the $2 billion mark just a decade later, in 2007 and – based on recent forecasts – will reach $3 billion in 2014.

MODEL PRACTICES Online Member Services Security Upgrade: This past year SERS completed a project to upgrade the security of its online member services in preparation for future enhancements. The upgraded security features a single sign-in for several different Commonwealth of Pennsylvania services. New Brand: Over the past year SERS has developed a new graphic identity, and has created business tools and a communications guidelines manual that will be provided to every SERS employee. Tools include new letterhead, envelopes, labels, business cards, and easy-to-use memo and fax cover sheet templates. Employees will integrate the new brand, tools and guidelines into their day-to-day work, from producing mass-distributed publications to preparing individual letters and e-mails. In addition, the framework for a new unified web presence was developed that addressed three crucial aspects: determining appropriate technology platforms; selecting appropriate content; and developing graphic and language standards. The new web presence will be launched in mid-2014.

INVESTMENT ACTIVITY/INITIATIVES Source: Comprehensive Annual Financial Report, December 31, 2013 In 2013, SERS’ investments generated a net gain of 13.6%, well ahead of the system’s 7.5% actuarial return assumption. When added to member and employer contributions, the $3.7 billion in net investment income resulted in total fund contributions of $4.9 billion for the year. These were offset by benefit and expense

215

payments of $2.9 billion, resulting in a roughly $2.0 billion increase in total fund assets. SERS’ 10-year annualized net return is 7.4% while SERS long-term annualized net returns over 20, 25, and 30 years are 8.4%, 9.2%, and 9.7% respectively. SERS’ 2012-2013 Strategic Investment Plan emphasizes liquidity to ensure that benefit payment obligations can easily be met and to mitigate capital impairment risk. Two key activities during the year included:

• creating and fully funding a designated liquidity reserve, consisting primarily of cash and short-duration government bonds; and

• reducing the fund’s allocation to less-liquid asset classes (i.e., alternative investments, which include private equity, special situations, and venture capital, as well as, diversifying assets, which include absolute return and hedged strategies) while increasing exposure to more-liquid market segments (i.e., public equity).

The entire portfolio must be analyzed and adjusted in order to balance risk, achieve the liquidity goal, and produce a total return that equals or exceeds the present actuarial assumption of 7.5%.





35.7 % 14.7 % 10.3 % 23.2 % 4.8 % 11.3 % 100 % 0 %

• Combined domestic and foreign equities - global public equity • Real estate - [core real estate (1,761.1), non-core real estate (753.5) and REITs (309.9) sections of real assets] • Alternatives - AI + private equity • Other - diversifying assets and C&I

DEFINED CONTRIBUTION PLANS The Pennsylvania State Employees' Retirement Board (SERB) is the trustee for the state’s voluntary, supplemental, Deferred Compensation Program (Program), an Internal Revenue Code section 457(b) retirement plan for eligible government employees and officers. The Program is a voluntary tax-deferred supplemental retirement plan. The participants may direct their deferrals among the Program’s eleven investment options. A Third Party Administrator (TPA) maintains individual participant records. Investment advisors selected by the SERB manage the Program’s investment options. The Program began accepting initial deferrals in 1988. As of March 31, 2014, there were 50,733 active/inactive accounts (approximately a 30% participation rate) and plan net assets were $2.8 billion. The equity investments are composed of primarily three core equity index funds – a stock index representing domestic large cap companies, an extended market index of domestic mid and small-cap companies and a European, Australian and Far East markets (EAFE) international index fund. The Program offers a bond index fund, a short-term money market account, and a self-directed brokerage option. Three ‘Profile Funds’ are available to the participants. These funds are composed of a mix of the equity, cash, and bond core index funds, tailored to 3 levels of risk that allows participants to invest in a conservative, moderate, or aggressive portfolio. The Program also offers a 60/40 Balanced Fund which uses a mix of the stock index and the aggregate bond index fund. These four portfolios are automatically rebalanced each quarter by the TPA.

216

SERS Board voted to discontinue the Stable Value Fund because the fund wrapper is at maximum wrap capacity; there is a potential for a fee increase to the current wrap and a decrease in future quarterly credit rates as interest rates rise. The removal of this fund and any additions to the DCP will take six to 12 months. In 2012, SERS implemented the Roth provision in the Program, which enables members to make after-tax contributions. Those contributions and related earnings will then be tax free when distributed. As of December 31, 2013, Roth participant data was 1,630 accounts with a total Roth balance at $4,600,385.

FUTURE DEVELOPMENTS / OTHER ISSUES The GASB issued Statement No. 67 (Financial Reporting for Pension Plans an amendment of GASB Statement No. 25.) This statement replaces the requirements of Statements No. 25 and No. 50 related to pension plans that are administered through trusts or equivalent arrangements. The requirements of Statements No. 25 and No. 50 remain applicable to pension plans that are not administered through trust or equivalent arrangements. The requirements of GASB 67 are effective for financial statements for fiscal years beginning after June 15, 2013. This will be applicable to SERS financial statements for the year ending December 31, 2014. GASB 67 establishes consistent methodologies for calculating and reporting the pension plan’s net pension liability/asset in the notes to the financial statement independent of how those pension plans are funded. The pronouncement will also enhance the amount of information in the RSI to include 10-year schedules of various financial data such as total pension liability/asset and the components of the changes in the liability/asset each year. The GASB issued Statement No. 68 (Accounting and Financial Reporting for Pension Plans an amendment of GASB Statement No. 27.) This statement replaces the requirements of Statements No. 27 and No. 50 as related to pensions provided by pension plans that are administered through trusts or equivalent arrangements. The requirements of Statements No. 27 and No. 50 remain applicable to pension plans that are not administered through trust or equivalent arrangements. The requirements of GASB 68 are effective for financial statements for fiscal years beginning after June 15, 2014. This will enhance reporting for employers of SERS using information from GASB 67 to record and report their proportionate share of the net pension liability/asset, pension expense, and pension related deferred outflows/inflows of resources directly into the employer’s financial statements. SERS has been working hard with its actuaries, external auditor, and employers to implement these standards. SERS will be obtaining a special GASB 67/68 valuation using 2013 census data later this summer. The results will be distributed to SERS employers in the fall in order to help them implement GASB 68. It should be noted that it is ultimately the employers’ responsibility to ensure they are abiding by the GASB 68 requirements.

217


State: Rhode Island Retirement System: Employees' Retirement System of Rhode Island Executive Director: Frank J. Karpinski Market Value of Assets: $8.143 B Assets as of: 5/31/2014 Number of Active Members: 32,091 Number of Annuitants: 26,774 Participants as of: 6/30/2013

SYSTEM GOVERNANCE ERSRI will be issuing an RFP for a Governance Consultant to review the current policy-setting environment by measuring against best practices. The selected consultant will work with the Board and the Executive Director to create a Governance Policy.

TECHNOLOGY Signed a contract in July 2014 with Morneau Shepell, LTD to upgrade line-of-business system. The System is a SaaS model. Tool includes line-of-business system, accounting system and web-site redesign. As of July 2014 Microsoft Dynamics AX accounting system has been implemented.

LITIGATION / CORPORATE GOVERNANCE 2009 – General Assembly enacts first round of pension changes (“2009 Act”) 2010 – General Assembly enacts second round of pension changes (“2010 Act”) 2010 – Complaints filed by State Employee and Teacher Unions challenging 2009 and 2010 Acts November 2011 – General Assembly enacts RIRSA (Rhode Island Retirement Security Act) June 2012 – Complaints filed by Public Sector Unions and Retiree Coalition challenging RIRSA July 1, 2012 – RIRSA becomes effective January 2, 2013 – Court orders parties into mediation January 14, 2013 – Court imposes Confidentiality Order on parties April 2014 Court ordered mediation failed to be approved by the plaintiff unions and the matter is set to go to trial. The Judge recently vacated a September 15, 2014 trial date.

FUNDING ISSUES Please see http://content.ersri.org/actuarial-valuations-1/

INVESTMENT ACTIVITY/INITIATIVES Please see http://treasury.ri.gov/divisions/finance/

http://content.ersri.org/actuarial-valuations-1/

http://treasury.ri.gov/divisions/finance/

218





38 % 19 % 8 % 15 % 3 % 17 % 100 % 0 %

Other - 7% absolute return hedge funds, 5% rate insulated credit, 5% infrastructure

DEFINED CONTRIBUTION PLANS A 401(a) Defined Contribution Retirement Plan is a state mandated plan. TIAA-CREF is the State’s service provider for the Defined Contribution Retirement Plan. Started in July1, 2012, member contributions are split between the Defined Benefit Pension Plan and the new Defined Contribution Retirement Plan. Asset size is $243,741,661 as of May 31, 2014 and 92% of assets are in Vanguard Lifecycle Trusts

219

NASRA - Roll Call of the States State: South Dakota Retirement System: South Dakota Retirement System Executive Director: Rob Wylie Market Value of Assets: $10.4 B Assets as of: 6/15/2014 Number of Active Members: 40,000 Number of Annuitants: 24,000 Participants as of: 5/31/2014

LEGISLATION SB 40 - Established an actuarially reduced Early Surviving Spouse Benefit – Provide an actuarial neutral surviving spouse benefit prior to Normal Retirement Age. SB 43 - Revised the Disability Benefit design – Revised the design of the disability and certain survivor benefits to provide for a more regular payment stream for beneficiaries. SB 152 - Consolidated a small closed plan into SDRS – Funding was provided to fully fund the South Dakota Cement Plant Retirement Plan and then consolidate the plan into the South Dakota Retirement System. SB 42 - A lump sum trustee-to-trustee payment feature for former Cement Plant employees was enacted to match the SDRS feature.

SYSTEM GOVERNANCE Long-term Director of Operations retired - Duties rearranged among current staff After significant negotiations, amended our actuarial services contract to change the responsibilities of the outside actuary and hired an internal actuary. This change allowed us to maintain the current independent actuary with a reduced scope of work but also limited liabilities and, for the first time, bring actuarial resources in-house.

TECHNOLOGY We are currently in the early stages of a code transformation project. We anticipate that the work will be completed and new system up next spring. I will have to report next year on how it goes.

FUNDING ISSUES FY 2013 Market Value Funded Status – 103% (Estimate for FY 2014 – 112%) FY 2013 Actuarial Value Funded Status – 100% During 2013, the SDRS unfunded liability was completely paid off. Board of Trustees is reviewing our mortality table – currently use a static table projected forward / considering moving to a generational table (RP-2000 BB Scale) Experience Study completed and Assumption Changes were made in 2012

220

MODEL PRACTICES Funding Policy – Defines Funding Objectives, establishes a Funding Cushion and Reserve, defines the conditions when benefit improvements may be considered and the funding thresholds when corrective actions are recommended. Shared Risk and Flexible Benefit Features – Matching Employer and Employee Contribution Rates and COLA based on funding and CPI

INVESTMENT ACTIVITY/INITIATIVES FY 2013 – 19.0% Net (Estimated FY 2014 – 17.0% Net). Currently reevaluating risk calculations – particularly for alternative investments During FY 2009 to FY 2014, we maintained a high equity-like risk allocation. We recently adjusted the asset allocation to a lower equity-like risk / currently maintain over 12% cash





44 % 20 % 14 % 10 % 12 % 0 % 30 % 70 % Most global equities, fixed income and cash managed internally

DEFINED CONTRIBUTION PLANS Supplemental Retirement Plan – 457, voluntary, employer may choose to offer automatic enrollment for new hires (auto enrollment was implemented in 2009 and has been very successful – over 90% retention rate). We will be reinitiating an employer signup campaign in the near future based on prior results. Offered Roth options effective FY 2013. Special Pay Plan – 401(a) Termination Pay Plan / employers may choose to participate Both plans are administered by a third party administrator – Nationwide Retirement Solutions

FUTURE DEVELOPMENTS / OTHER ISSUES The Board of Trustees remains committed to the hybrid defined benefit model and is reviewing the SDRS benefit design with a focus on improving plan sustainability while maintaining risk sharing and flexible features. They are identifying and considering benefit incentives and subsidies and how they impact plan experience and workforce management. Data processing code transformation project currently underway – Though still working well, the current Retirement Administration system is based on software no longer supported by Microsoft. We have established of an internal actuarial services department, while maintaining the current long-term actuary services relationship. From the communication and engagement prospective, we are focused on carrying a positive message about public employee retirement plans every chance we get. When possible, we are trying to engage and interact on a very detailed level with both local and national organizations that publish or plan to report on public retirement plan issues.

221

NASRA - Roll Call of the States State: Tennessee Retirement System: Tennessee Consolidated Retirement System Executive Director: Jill Bachus Market Value of Assets: $41.1 B Assets as of: 3/31/2014 Number of Active Members: 213,646 Number of Annuitants: 116,958 Participants as of: 3/31/2014

LEGISLATION Legislation has been enacted to assure Tennessee local government entities fully pay the annual payment to the public employee pension plans in order to protect the financial stability of local governments and to protect workers’ pensions. The new law, called the Public Employee Defined Benefit Financial Security Act of 2014, will require all local government entities that operate pension plans in Tennessee to pay the payments recommended by their actuaries each year. These actuarially determined contributions (ADC) are the amount of money the actuaries determine is needed to annually fund in a financially sound manner the benefits provided by public pension plans. Under the new law, local government entities that haven’t been paying 100 percent of their ADC will have six years to gradually ramp up their yearly payments. If local government entities fail to pay 100 percent of the ADC after that phase-in period, the state will have the authority to withhold money it provides to those governments and use it to make the required payments to the pension plan. The Public Employee Defined Benefit Financial Security Act of 2014 is Public Chapter 990 and may be viewed at http://www.tn.gov/sos/acts/108/pub/pc0990.pdf In 2013, legislation was enacted creating a new Hybrid Pension Plan for state employees and K-12 public school teachers hired on or after July 1, 2014. The Hybrid Pension Plan became effective July 1, 2014.

TECHNOLOGY Deloitte Consulting, LLP was selected in November 2010 to provide the new pension administration system (Concord). The retired payroll module of Concord was rolled out in April 2013. The final phase of Concord, Employer and Active Benefit Calculations, was rolled out in July 2014.

FUNDING ISSUES Funded status as of July 1, 2013 for the State/Teacher plan and Political Subdivision plan is 93.34% and 94.97%, respectively. The July 1, 2013 actuarial valuation set the contribution rates for fiscal years 2015 and 2016. The state has contributed the actuarially determined contributions (ADC) every year since 1975. In addition, political subdivisions are required to contribute the ADC.

INVESTMENT ACTIVITY/INITIATIVES Year to date return as of March 31, 2014: 10.02%

http://www.tn.gov/sos/acts/108/pub/pc0990.pdf

222





57.6 % 33.4 % 5.4 % 1.2 % 1.3 % 1.1 % 25.7 % 74.3 %

As of March 31, 2014, International Equity, Real Estate, and Private Equity are managed externally, representing 17.9%, 5.4%, and 1.2% of the total TCRS portfolio.

DEFINED CONTRIBUTION PLANS State employee deferred compensation plans – voluntary participation

401(k): $1.82 billion; 76,639 participants; $50 per month match, Pre-tax or Roth 457: $277 million; 6,398 participants

16 investment options, plus 11 target date funds and a brokerage window

Local governments may also participate in the state’s Defined Contribution plan. Currently, 25 local governments participate with assets of $7.9 million. Optional Retirement Plan is maintained for higher education faculty TIAA, ING and Valic are vendors; $3.15 billion; 52 funds, 25 target date funds

223

NASRA - Roll Call of the States State: Texas Retirement System: Texas County & District Retirement System Executive Director: Gene Glass Market Value of Assets: $23.1 B Assets as of: 12/31/2013 Number of Active Members: 124,525 Number of Annuitants: 49,820 Participants as of: 12/31/2013

LEGISLATION TCDRS did not propose any bills in the Texas Legislature’s biennial 2013 session. The following bills that passed during the legislative session had minimal impact on TCDRS:

• HB 13 required that individual public retirement systems post contact information, annual financial reports, and investment returns and assumptions on their respective websites. TCDRS was already substantially in compliance with these requirements.

• SB 200 prohibited statewide public retirement systems, including TCDRS, from investing in companies that do business in Iran.

SYSTEM GOVERNANCE The board of trustees has used the John Carver Policy Governance® model since 2002. Gene Glass, who has served as director since Feb. 2005, announced that he will be retiring in January 2015. The board appointed Amy Bishop as the director-designate to succeed Mr. Glass.

TECHNOLOGY Over seven years ago, TCDRS began an extensive strategic planning process with the goal to offer services to our employers and membership that were on par with or exceeded other public and private financial services organizations. To achieve this vision, we developed a strategic plan to significantly change how we deliver services including updating our processes, technology, communications and staff training. The approach for these changes was one of continuous, incremental improvements which allowed for quicker delivery to our customers while reducing the delay and risks associated with a “big-bang” approach. Projects completed in the strategic plan are:

• An IBM FileNet content management system was implemented to manage the lifecycle of most incoming and outgoing business documents, including case management and workflow.

• A Siebel Customer Relationship Management (CRM) solution was implemented to provide a 360-degree view of customer information and interactions. We also implemented several other technologies to assist with incoming communications including a Cisco phone system, call center software integration with screen pop functionality and Interactive Voice Response (IVR).

• Our redesigned website, tcdrs.org, provides members access to real time information, ability to update account information online and improved planning tools including the ability to estimate retirement benefits. Employers have improved tools for plan administration, member enrollment and electronic payroll submission.

• Siebel Events & Marketing software gives us the capability of targeting education and communications to members and employers. In addition to sending a welcome kit to new members, we are sending education to

224

members as they meet certain milestones such as eligibility for survivor benefit, vesting and retirement eligibility.

• A new HR/Finance application, Microsoft Dynamics GP, deployed electronic workflow for related processes, implemented enhanced reporting and budgeting tools, established better auditing and control mechanisms and improved employer transparency by providing online employer account statements.

• Microsoft BizTalk Server Enterprise was deployed as our solution for integrating data shared between the website, Siebel CRM system, FileNet, the pension system, MS Dynamics GP and other systems.

Pension Administration System Replacement project A project is currently underway to replace the functionality that remains on our existing, obsolete pension administration system which is used to store and process financial and eligibility data related to TCDRS members, annuitants and employers. In addition to needing the ability to integrate with current best-in-class solutions and legacy technologies, we sought a solution that would allow us to adapt dynamically to changing demands, improve business process management and improve security and audit capabilities. TCDRS selected Pegasystems to begin transitioning core business functions from the current pension system in five phases:

• Phase I, which was implemented December 2012, provides prospective employers the ability to apply for TCDRS participation on-line including the ability to electronically submit census data securely.

• Phase II, which was implemented in 2013, includes the annual decision process for employers including communicating employer rates, selection of benefit plans by employers and the updating and confirmation of plan data.

• In June 2014, an online tool that allows employers to see the impact of changing benefits on current and future costs, liabilities and benefits called the Plan Customizer was rolled out.

• Phases III – IV will be implemented in 2014 and 2015. These phases will cover member demographic information updates; financial transactions and benefits calculations; and payment processes, respectively.

LITIGATION / CORPORATE GOVERNANCE In mid-2013, TCDRS filed a lawsuit alleging fraud and breach of fiduciary duty against Wexford Capital and its managers and fund advisors. This is the first such lawsuit filed by TCDRS in its 47-year history. The case is set for trial in April of 2015.

FUNDING ISSUES TCDRS is an agent multiple-employer plan with each of the 656 individual employer plans responsible for its own funding. Employers must pay 100% of their required contributions. In aggregate as of Dec. 31, 2013, the funded ratio is 89.4%. The funded ratio on a market-value basis (no smoothing) is 91.2%. Individual employer funding will vary from the aggregate. TCDRS has a conservative funding policy. The entry-age cost method is used with a level percent, closed, 20-year amortization period for unfunded accrued actuarial liabilities. When calculating employer rates, investment gains and losses are smoothed to avoid single-year rate spikes for employers and to give markets time to recover. Strong investment returns in 2013 enabled TCDRS to adopt a more conservative funding policy by moving from a 10-year to a 5-year smoothing method. This ensures that employer rates are more reflective of market conditions. This accelerated the recognition of gains and losses previously unrecognized, thereby allowing the net 2008 losses to be fully offset. Employer rates have remained stable with a slight decrease anticipated in future years. This reverses the trend of rising rates since 2008.

225

New assumptions were adopted for the 2013 valuation; however, they did not have a material impact on the overall funding of the system. The investment return assumption is 8%. Inflation is projected at 3.0% (which was lowered from 3.5%).

MODEL PRACTICES

• TCDRS offers state-of-the-art services for our employers to help them make better decisions about and more easily administrate their retirement plans. We recently introduced an online tool that allows employers to see the impact of changing benefits on current rates, future costs, liabilities and benefits called the Plan Customizer. This tool is integrated with our internal electronic workflow that notifies the appropriate employer services representative of decisions, generates customized plan agreements, updates plan data and sends automatic confirmations when plans are changed. In addition, we have recently begun outreach to new employer contacts via a welcome kit that is customized based on their role at the employer: administrator vs. decision-maker.

• TCDRS has a successful communications program that includes targeted member communications at key milestones and by age group. In addition to sending a welcome kit to new members, we are sending education to members as they meet certain milestones such as eligibility for survivor benefit, vesting and retirement eligibility. We have recently begun an e-newsletter targeted to members 18-29 years of age. The newsletter is designed to be read on a mobile device. We have a multi-channel approach to communicating to members and allow our members to set preferences on how they wish to communicate – electronically or by mail. In addition, we have a comprehensive social media strategy that includes nearly 6,000 fans on our Facebook page, presence on Twitter, LinkedIn and Wikipedia; and a YouTube channel with thousands of views of our videos.

INVESTMENT ACTIVITY/INITIATIVES Investment Returns as of Dec. 31, 2013 net of fees:

Annualized Returns

2013 Return

5 Year

10 Year

20 Year

25 Year

30 Year

Total Fund 16.4% 13.1% 6.9% 7.5% 8.6% 9.5%





38 % 3 % 9 % 37 % 0 % 13 % 100 % 0 %

Real estate: 2% real assets - REITS, 2% commodities, 3% private real estate, 2% master limited partnerships Alternatives: 25% hedge funds, 12% private equity Other: 3% high yield including high-yield bonds, 5% opportunistic credit, 3% distressed debt, 2% direct lending

DEFINED CONTRIBUTION PLANS We do not administer any defined contributions plans. Employers may elect to participate in 457 plans administered by private providers in addition to their participation in TCDRS.

226

NASRA - Roll Call of the States State: Texas Retirement System: Employees Retirement System of Texas Executive Director: Ann S. Bishop Market Value of Assets: $24 B Assets as of: 8/31/2013 Number of Active Members: 134,227 Number of Annuitants: 92,042 Participants as of: 8/31/2013

LEGISLATION ERS implemented new legislation from the 83rd Legislative Session. Major provisions include: 1. Established a new retirement plan for members hired on or after September 1, 2013 who do not have an existing ERS retirement account o They will still be required to meet the Rule of 80 (service credit and age must equal 80) to be eligible to retire, but will need to be a certain age to receive full retirement benefits. Retirement age for a service retirement is 62. Retirement age for members of the Law Enforcement and Custodial Officers Supplemental Retirement Fund (LECOSRF) is 57. Employees who meet the rule of 80 prior to the retirement age will see a 5% reduction in their annuity amount for each year they retire prior to their retirement age. o These plan members cannot use any sick or annual leave to count toward retirement eligibility, but can use unpaid sick leave as part of the annuity benefit calculation. § Can choose to receive a lump sum payment of their unused vacation leave or request that it count toward their annuity calculation. If they choose to receive a lump sum payment of their unused vacation leave, they cannot use it to help increase their annuity. Vacation accrual that is not paid in lump sum will count toward their annuity amount. 2. Changed account balance interest withdrawal rate to be more in line with market rates (from 5% to 2%) Members earn 5% interest on account balances through December 31, 2013. Beginning January 1, 2014 and going forward, balances earn 2% interest. 3. Changed eligibility for state contributions towards health insurance premiums for new retirees. The insurance state contribution for retirees changed based on their years of service at retirement. Currently, employees with ten or more years of service receive a 100% contribution and 50% for dependents. Employees who had been covered in the program for five years as of August 31, 2014 are not affected, nor are any current retirees: o Full-time employees with ten years of service will receive a 50% retiree and 25% dependent contribution o Full-time employees with 15 years of service, will receive a 75% retiree and 37.5% dependent contribution o Full-time employees with 20 years or more of service will receive a 100% retiree and 50% dependent contribution. 4. Reduced health insurance waiting period from 90 days to 60 days as required by ACA ERS is conducting three interim legislative studies: § Accounting for the assets and liabilities of Law Enforcement and Custodial Officers (LECO) members separately from the ERS plan. Currently these members are part of the service fund, making up about 30% of the membership. In addition, they contribute to and receive a benefit from a supplemental trust (LECOSRF). This accounting exercise will identify the true cost for these members, which is higher than the regular state employee cost. § The cost of adding officers of the Texas Juvenile Justice Department to the LECOSRF.

227

§ Modeling alternative health insurance plan design options, including a professional census of 135,000 active employees and 30,000 pre-65 retirees enrolled in the group insurance plan.

SYSTEM GOVERNANCE ERS received favorable determination letters from the Internal Revenue Service for the ERS plan and the Judicial Retirement System Plan 2 in response to ERS’ Cycle C submission requests. Following a competitive bid process, ERS transitioned to Gabriel, Roeder, Smith & Company as pension actuary.

TECHNOLOGY The Business Intelligence Data Warehouse was enhanced for increased data and reporting capabilities. Several data sets were added to enable requested business reporting. Improved system processing from multiple days to several hours enabled business partners more timely access to the data. Development continues on a centralized research library using SharePoint technology, which will offer a single location for important documents, data and messages. The system also houses a collaborative workspace for administrative operating budget preparation. ERS contracted with a firm to conduct an analysis of benefits administration processes as part of the modernization of benefits administration (MBA) effort. Increased security, efficiency and transparency in ERS’ management of over 200 data exchange partners by implementing an enterprise solution for encryption and transferring of incoming and outgoing files on the ERS server.

FUNDING ISSUES Passage of SB 1459 lowered the normal cost for benefits, but did not make the fund sound. As a result, pension funding is top priority for ERS as we head into the legislative session that begins in January 2015. ERS has launched an education campaign to raise awareness of the issue. Without action, the unfunded liability increases about $500 M each year with fund exhaustion currently projected in 2052.

MODEL PRACTICES ERS has dedicated resources to enterprise risk management by creating a dedicated office to risk management. The agency has completed a full enterprise wide risk assessment of all business processes, ranking each risk and mitigating control. Identified key positions in agency and created succession and staff development plans to improve retention of employees and smooth transitions in the event of resignations and retirements. The Enterprise Risk Management office updated the ERS Continuity of Operations Plan and Procedures to prepare in the event an emergency prevents occupancy of ERS headquarters. The plan provides an operational framework for continuing mission-critical functions when normal operations are disrupted or otherwise cannot be conducted from the primary facility. Key staff members participated in a mock implementation of the plan. The incorporation of extensive strategic planning into our administrative budget process and performance measures strongly supports the agency’s ability to achieve its core mission.

228

INVESTMENT ACTIVITY/INITIATIVES At the end of fiscal year 2013, the trust fund balance was $24 billion. Investment earnings make up nearly two-thirds of long-term trust fund revenue. The portfolios are managed by professional ERS investment staff, with guidance from the Investment Advisory Committee and oversight of the ERS Board of Trustees. ERS internal investment staff manages about 70% of the fund, which lowers investment expenses. About 30% of ERS investments are in companies with Texas headquarters or more than 200 Texas workers. The Investments Division continued to accelerate the transition to new asset allocation targets as determined by the FY 2012 asset/liability study, including reaching full allocation of absolute return portfolio (hedge funds).





53.6 % 29.5 % 6.3 % 9.1 % 0.8 % 0.7 % 30 % 70 % Asset Class August 2013 Long-Term Target Global Equity 53.6% 45.0% Fixed Income 29.5% 25.0% Global Real Estate 6.3% 10.0% Private Equity 6.6% 10.0% Hedge Funds 2.5% 5.0% Infrastructure 0.7% 4.0% Cash & Equivalents 0.8% 1.0% TOTAL 100.00% 100.00%

DEFINED CONTRIBUTION PLANS ERS continued to promote retirement savings by expanding and improving the optional $2.1 billion Texa$aver deferred compensation program by incorporating the real asset and short term government fund into the core fund line-up, garnering $1.3 million in assets, and issuing a Request for Information for an international fund addition. The Roth enrollments in the Texa$aver Program surpassed 2,700 participants with $6.7 million in assets. Two Requests for Qualification proposals were issued for the International Fund and the Large Cap Funds for the Texa$aver program. Contract extensions through August 2015 were negotiated for the Texa$aver administrator, Great West Retirement Services. The “What’s Your Excu$e?” campaign for Texa$aver’s auto enrolled participants received 12 national awards for outstanding communication strategy.

229

FUTURE DEVELOPMENTS / OTHER ISSUES The ERS public/member website was redesigned based on a comprehensive audit begun in fiscal year 2013. The refreshed site features enhanced vendor sub-sites. The first year of the Employee Group Waiver Program (EGWP) plus Wrap was completed with realized savings of $40 million. ERS successfully filed for $2.46 million from the federal Retiree Drug Subsidy (RDS) during the program year 2014. A contract was also implemented to audit RDS claims to ensure that the plan gets every dollar it is due. The Part D Advisors reopened RDS filings for fiscal years 2006 through 2011. ERS received a net of $7 million in additional revenue. ERS conducted a second phase of a health insurance dependent verification process. Going forward, members who add new dependents to insurance will be required to provide verification documentation as part of the enrollment process.

230

NASRA - Roll Call of the States State: Texas Retirement System: Texas Municipal Retirement System Executive Director: David Gavia Market Value of Assets: $22.96 B Assets as of: 4/30/2014 Number of Active Members: 145,448 Number of Annuitants: 45,480 Participants as of: 12/31/2013

LEGISLATION The Texas Legislature did not enact any changes to the TMRS governing statute, but amended the laws affecting all Texas public retirement systems. New laws addressed education requirements for trustees and top administrators under a program to be designed by the Texas State Pension Review Board (or equivalent education under an individual System’s auspices); reporting requirements to the State Pension Review Board; and divestiture of investments in companies doing business in Iran.

SYSTEM GOVERNANCE TMRS hired a new Chief Investment Officer in late 2013 who began full-time employment with the System in early 2014. T.J. Carlson replaced retiring CIO Nancy Goerdel. TMRS also hired the System’s first Project Manager, Jesse Pittman, under the direction of the Deputy Executive Director, and replaced a retiring Director of Human Resources by hiring Kristy O’Hara for the position. Three new Board members also took positions on the Board in 2013.

TECHNOLOGY TMRS made several infrastructure improvements in 2013: Virtual Desktops: The replacement of physical PCs and laptops for every TMRS employee was completed in April of 2014. Virtual desktops provide TMRS employees easier and more complete access to our applications and data in more places and ways. They also improve IT efficiency by simplifying software upgrades and maintenance. In the switch to virtual desktops, TMRS also upgraded every personal computer from Windows XP to Windows 7. Mobile Device Replacement: TMRS 38 Blackberry mobile phone users were switched to the iPhone 5 from January to September of 2013. In addition, eighteen iPads were deployed to TMRS’ senior management, Investments, and Communications departments by the end of 2013. Wireless Network Installation: A wireless network was installed in June of 2013, providing wireless access for employees and guests throughout TMRS’ headquarters.

FUNDING ISSUES The Board engaged in extensive study during the year of two issues, the adoption of generational mortality tables for purposes of calculating both benefits and funding and a change in actuarial cost method from Projected Unit Credit to Entry Age Normal. TMRS adopted updated mortality tables for funding purposes in 2007 and 2011, but the table used for calculating annuities was the UP-1984 table. After extensive study by TMRS’ actuaries and following their recommendation,

231

the Board adopted a unisex blend of the RP-2000 Combined Healthy Mortality Tables with Blue Collar Adjustment for males and females with both male and female rates multiplied by 107.5% and projected on a fully generational basis with scale BB, effective with the December 31, 2013 actuarial valuation. To mitigate the effect on employees and to prevent disruption in retirement patterns, the new tables which are used to develop annuity purchase rate factors used in calculating retirement benefits are being phased in over a 13-year period beginning January 1, 2015. Extensive communication in 2013 prepared members and cities for the change and has continued into 2014. Also in 2013, the TMRS actuaries studied the effect of changing the System’s actuarial cost method from Projected Unit Credit to Entry Age Normal. TMRS previously had changed its actuarial cost method from Unit Credit in 2008. Changing to Entry Age Normal will provide more predictable and less volatile city contribution rates over time and also helps position TMRS for the GASB disclosure requirements coming in 2015. The change was made along with decreases or increases (to a maximum of a 30-year, closed period) to individual city amortization periods to prevent wide swings in rates. In any instance when a city rate increased more than 0.5%, the city is being allowed to phase into the new rate one half percentage per year. The change in methods takes effect with the December 31, 2013 actuarial valuation and affects contribution rates beginning in January 2015. The change in cost method caused a slight decline in the System-wide funded ratio and a slight increase in city contribution rates. TMRS’ funded ratio is 84.1% as of December 31, 2013.

MODEL PRACTICES The change in mortality tables discussed above was performed very successfully with regard to member and city reactions. No retirement plan undertakes a change in the benefit mortality factors lightly and the preparation, communication, and design of this change was extremely successful. TMRS is also well-prepared for the new disclosure requirements of GASB 68. We have communicated extensively with cities regarding user entity controls that need to be in place and engaged an external auditor to perform a SOC audit in preparation for next year’s disclosures.

INVESTMENT ACTIVITY / INITIATIVES Total Fund Composite as of 3/31/14*

1

Quarter

YTD

1

Year

3

Years

5

Years

7 Years

10 Years

2013

* Gross of Fees 1.95 1.95 8.29 7.31 9.32 6.98 6.54 9.75

Managers selected and contract negotiations underway for the following allocations:

• Equity Allocation

o Non US All Cap

o US Mid Cap

• Non-Core Fixed Income Allocation

o Bank/CLOs

232

o RMBS/CMBS

• Real Estate

o Core/Value/Opportunistic

• Absolute Return Allocation

o Customized Fund of One





48.5 % 43.3 % 3.6 % 0 % 0.2 % 4.3 % 0 % 0 %

TMRS is continuing to work toward its strategic target allocation:

Asset Class Allocation % as of April 30, 2014 Strategic Target Allocation %

US Equity 26.2 17.5

International Equity 22.3 17.5

Core Fixed Income 43.3 30

Non Core Fixed Income 0 10

Real Estate 3.6 10

Real Return 4.3 5

Absolute Return 0 5

Private Equity 0 5

Cash Equivalents 0.2 0

100% Assets managed externally Market Value: 22.96 Billion (April 30, 2014)

FUTURE DEVELOPMENTS / OTHER ISSUES TMRS will continue the diversification of System assets described above. We are also engaging in an expansion of “self-service” capabilities for members and cities with on-line member enrollment targeted for 2015 and additional features to be rolled out over a several-year period, with the eventual goal being straight-through processing for the majority of member and city transactions with TMRS. Work during 2014 with the System’s Advisory Committee on Retirement Matters has analyzed and vetted a number of potential benefit design changes that have been requested by cities over the past few years, including

233

new COLA options, tiered plans, and optional membership eligibility requirements. The Advisory Committee, composed of 19 members representing all major TMRS constituencies, has been recognized as a model practice in past years and once again served a valuable purpose in the analysis of these proposals. The Committee’s work this year did not result in any legislative initiatives being proposed to our Board. As most other retirement systems are experiencing, TMRS continues to operate in an atmosphere of criticism and public distrust of retirement programs for public employees. Fortunately, the System’s strong history, requirement that all benefits be fully advance funded, vigorous communication, and legislative preparations enable us to continue to tell the good story of our plan.

234

NASRA - Roll Call of the States State: Texas Retirement System: Teacher Retirement System of Texas Executive Director: Brian Guthrie Market Value of Assets: $126.1 B Assets as of: 3/31/2014 Number of Active Members: 1,021,412 Number of Annuitants: 348,228 Participants as of: 8/31/2013

LEGISLATION None – The Legislature meets every odd-numbered year unless called into Special Session by the Governor. In May 2013, the Legislature passed SB 1458. This legislation made contribution and benefit changes resulting in an actuarially sound pension trust fund and the first COLA for retirees in almost a decade. TRS reported on the legislation in the 2013 Roll Call of the States, but the major provisions are as follows:

• State contribution rate set at 6.4% for FY 14 and 6.8% for FY 15. • Member contribution rate of 6.4% in FY 14, 6.7% in FY 15, 7.2% in FY 16, and 7.7% in FY 17. • 1.5% contribution by school districts for those TRS members who do not participate in OASDI. • Any reduction in state contribution rate reduces member and school district rate by corresponding tenth. • Rule of 80 + Minimum age 62 is now normal-age retirement for new hires and members who are not vested

(less than 5 years of service) on 8/31/2014 (previous minimum age was 60). • Penalty of 5% per year for each year of retirement below age 62. • Provides a COLA of 3% (capped at $100) to those who retired 8/31/2004 or earlier. • Reduce interest on withdrawn service from 5% to 2% prospectively.

The legislation, and particularly the increased contribution rates, had a positive impact on the fund. The pension fund was deemed actuarially sound upon passage of the legislation in June 2013 and again as part of the fund’s annual valuation. Since the last NASRA Roll Call, TRS has been implementing the new provisions with the following:

• Programming to pay the COLA beginning with the September 2013 annuity (paid on October 1). • Adoption of new rules necessary for minimum age 62 and reduction of interest on withdrawn service credit. • Adjusting actuarial tables for service purchases and early retirement actuarial reductions (such as the

reduction of 5% per year for each year below age 62).

SYSTEM GOVERNANCE New Board Members In October 2013, TRS welcomed two new members to the Board of Trustees. Ms. Dolores Ramirez is one of two trustees who represent active public educators, and David Corpus is a financial industry professional selected as the representative for the State Board of Educator Certification (SBEC). Additionally, one trustee, Joe Colonnetta who is a financial industry professional direct appointee of the Governor, was reappointed to the Board of Trustees. Division of Strategic Initiatives A new Division of Strategic Initiatives (DSI) was created to serve as the Executive Division’s resource in strategic planning.

235

TECHNOLOGY TRS Enterprise Application Modernization (TEAM) Program The overall goal of the TEAM Program is to implement a cost effective, efficient, and sustainable program of business and technological processes that enables TRS to serve the expanding and ever changing needs of its members, employers, and annuitants. TRS is pursuing this goal through a collection of initiatives under a common organizing umbrella called the TEAM Program. The TEAM Program is focused on addressing the changing expectations of a growing membership, providing for the collection and maintenance of accurate and reliable data, expanding the number of automated processes, and incorporating modern technologies. The TEAM Program demands re-engineered business processes, revised policies, and new ways of working together. The TEAM Program will also deliver tools and techniques that will position TRS to have flexibility in updating our systems in response to growing member demands and future technological and regulatory changes. TEAM will replace aging technology, and update legacy systems and processes with a new architecture and applications. This architecture will better enable re-use of services and business rules. These initiatives will reduce our risk of reliance on legacy technologies. New applications will also offer constituent self-service, reduce errors and manual circumventions, and enable greater flexibility to address changing rules. Without these essential changes, TRS jeopardizes overall efficiency and quality of service in the future. When the project is complete in 2017, TRS will have upgraded financial and pension administration systems running on modern technology. In addition, TRS will deliver more self-service options to members and annuitants and improve internal business processes to better meet growing demands. Program Status The TEAM Program is comprised of nine interdependent projects. The following is a status for the TEAM Program as a whole and some of the individual projects. TEAM Program

• Completed documenting business rules • Completed processing maps of over 120 key business processes • Created new Project Management Office at enterprise level • Remodeled space to co-locate PMO and vendor teams • Conducted technical proof of concepts with new architecture • Launched project to Decommission Legacy Systems • Approved Charter for Business Procedures and Training Project • Completed Envision Phase for Financial System Replacement Project • Awarded Line of Business RFO and completed planning and high level requirements

Data Management Project

• Completed assessment of active member data • Started conditioning data

Financial and Human Resources System Upgrade Project

• Completed Envision Phase with selected vendor • At the end of the Envision Phase, made decision not to proceed with selected vendor

236

• Planning for next steps in the Financial System Replacement Project

Organizational Change Project

• Hired additional staff to assist with organization change effort • Launched TEAM Connect Website to help with program communications • Conducted TEAM huddles with department leadership • Continued advisory group meetings • Planned and implemented a Vendor Meet and Greet so TRS staff could meet contractors

Pension Administration System Line of Business (LOB) Project

• Awarded Line of Business RFO to vendor • Completed Project Planning Phase • Completed High Level Requirements Phase • Currently conducting detailed level requirements

LITIGATION / CORPORATE GOVERNANCE Bank of America Class Action Litigation: TRS and four other public pension funds, the State Teachers Retirement System of Ohio, the Ohio Public Employees Retirement System, Stichting Pensioenfonds Zorg en Wilzijn (represented by PGGM Vermongensbeheer B.C.), and Fjarde AP-Fonden, serve as co-lead plaintiffs in a securities fraud class action filed in January 2009 against Bank of America and certain related defendants. This is the first time TRS has served as a lead plaintiff. The suit alleges misrepresentations and non-disclosures by the defendants in connection with Bank of America’s acquisition of Merrill Lynch in late 2008 and early 2009. On February 6, 2012, the Court certified the plaintiff class. On April 5, 2013, the Court gave final approval to a settlement of $2.425 billion in cash and certain corporate governance enhancements to be implemented or continued by Bank of America. The settlement is presently on appeal before the United States Court of Appeals for the Second Circuit and is fully briefed and argued. BP Litigation: On April 18, 2014, TRS filed a direct action against BP plc (formerly known as British Petroleum) in federal district court in Texas. The suit alleges that BP made material misstatements and omissions related to its safety program and the Deepwater Horizon oil spill. The litigation is still in its very early stages. Indymac Supreme Court Appeal: TRS joined with more than 40 public and private pension funds in an amicus brief to the Supreme Court of the United States in Public Employees’ Retirement System of Mississippi v. IndyMac MBS, Inc. The amicus brief was filed on May 28, 2014. The amicus brief supports petitioner, the Public Employees’ Retirement System of Mississippi, which is seeking to overturn a Second Circuit decision that held that the filing of a class action complaint does not toll certain limitations periods under the federal securities law.

FUNDING ISSUES The TRS Trust Fund (Fund) earned a return of 8.9% and ended the 2013 fiscal year (08/31/13) at a market value of $117.4 billion compared to a market value of $111.4 billion for the fiscal year ending 08/31/12. The Fund is actuarially sound and can pay off its unfunded liability in 28 years. The funding period is expected to increase slightly over the next few years before declining again.

237

The Fund’s actuarial soundness comes not only from strong investment returns but also from benefit adjustments and increased contribution rates in recent legislation (SB 1458 – May 2013). Despite the improved funding status, the Unfunded Actuarial Accrued Liability increased slightly due to the payment of the Cost of Living Adjustment granted by the Legislature and recognition of investment losses from 2008-09.

TRS Trust Fund Valuation 08/31/13 08/31/12

Unfunded Actuarial Accrued Liability $28.9 billion $26.1 billion

Funded Ratio 80.8% 81.9%

State Contribution Rate 6.8% 6.4%

Member Contribution Rate 6.4% in FY 2014 increasing to 7.7% by FY 2017 6.4%

Funding Period (years) 28 years Never

Are contributions sufficient to fund future liabilities? Yes No

Annual Required Contribution (ARC) 8.67% 8.62%

MODEL PRACTICES Strategic Plan The Executive Director envisions a Strategic Plan that is both relevant and meaningful to every TRS employee. The Strategic Plan should be used as a guiding document that not only establishes goals, but also provides stronger metrics to gauge success throughout the year. To prepare for the increased emphasis on the Strategic Plan, the Division of Strategic Initiatives (DSI) was established to raise the profile of the goals in the Strategic Plan. Building upon TRS’ core values, members of the TRS Executive Council were tasked with formulating specific goals and objectives for the organization. At the beginning of 2014, a Strategic Planning Team comprised of employees from every level and various divisions of the agency was appointed to build upon the goals and objectives. The Strategic Planning Team was responsible for developing strategies and tactics for each of the goals and objectives. This collaborative process resulted in a document known as the GOST (Goals, Objectives, Strategies and Tactics). The GOST includes 5 goals, 12 objectives, 44 strategies, and 148 tactics. Organizational Change Management (OCM), a department within the Human Resources division, will assist DSI with the roll-out and change management aspects of the GOST in the coming months. OCM and DSI are developing a learning map with the goal of ensuring all TRS employees know how their work both fits into the strategic plan and drives the mission of TRS. DSI will work with Human Resources to incorporate performance of tactics into job descriptions and performance management, as well as monitor the progress of GOST implementation. Additionally, TRS is exploring the

238

possibility of incentive payments related to successful completion of certain projects associated with the accomplishment of GOST strategies and tactics.

INVESTMENT ACTIVITY/INITIATIVES In June of 2014, Chief Investment Officer (CIO) Britt Harris and the Strategic Asset Allocation (SAA) team presented preliminary results of their completed 2014 SAA Study. They plan to present final recommendations to the TRS Board of Trustees in September and will then implement the proposed changes, pending Board approval. Among the Study’s findings are the following:

• Projected long-term asset class returns are generally below historical averages. • Due to low yields coupled with a possible rising interest rate environment, global fixed income is no longer

projected to contribute meaningfully to the Trust’s total return objective of 8%. • The current Investment Policy (with alpha) is projected to achieve the total return objective over the duration

of the TRS pension liability of 24 years. • Intermediate-term investment returns may be lower than the 8% objective.

As a result of this Study, the CIO and the SAA team recommended the following changes to the Trust’s strategic asset allocation targets:

• Increase the Trust’s allocation to illiquid investments, including Private Equity and Real Assets, by 5%. • Increase the Trust’s allocation to the Risk Parity strategy by 5%. • Fund these increased allocations, in part, by reducing the Trust’s allocation to fixed income.

The goal underlying these recommendations is to increase the probability that the Trust meets its total return objective of 8%.





45.3 % 17.5 % 11.9 % 22.2 % 3 % 0.1 % 27 % 73 %

22.2% Alternatives 11.4% Private Equity 9.1% Hedge Funds 1.7% Energy and Natural Resources 0.1% Other 0.1% Commodities As of March 31, 2014, the one year total return for the fund was 10.04 percent, with investment gains totaling $12.7 billion for the same one year period. For the three year period beginning March 2011, TRS investment earnings have exceeded $28.50 billion with investment returns per year averaging 8.6 percent.

239

DEFINED CONTRIBUTION PLANS TRS does not administer a defined contribution plan. However, we are required to maintain a list of 403(b) companies who certify to certain eligibility requirements, and a list of products offered by these companies, including all fees associated with the products. School districts that administer a 403(b) plan may enter into salary reduction agreements with employees only for products of companies on the lists maintained by TRS. Currently, there are 73 companies certified to provide TRS participants with 403(b) products. Product types include: fixed annuity, variable annuity, equity-based index annuity, and custodial account.

FUTURE DEVELOPMENTS / OTHER ISSUES External Counsel Legal Expenses In June 2014, the Board of Trustees adopted a new policy associated with the treatment of legal fees for external counsel related to certain investment deals. Prior to the change in policy, all external counsel legal expenses were budgeted and paid out of the TRS Operating Budget. These expenses have varied year-over-year while trending upward and have proven to be difficult to predict in the biennial budgeting process. Under the new policy, external legal investment expenses will be paid from investment fund accounts the same as other transaction costs. The benefits of charging legal expenses to investment trust accounts include the following:

• Results in more accurate portfolio return and incentive compensation results; • Creates incentives for portfolio managers to optimize legal spending; • Eliminates artificial constraints that could interfere with the exercise of fiduciary discretion in making

investment decisions; • Increases flexibility to allocate legal budget dollars where and when needed; • Increases transparency of legal expenditures; and • Creates clearer tracking and oversight of legal expenditures.

Actuarial Services Audit TRS is required by law to audit the trust fund’s actuarial status at least once every five years. The purpose of this audit is to review the actuarial work performed by the pension actuarial consultant (Gabriel, Roeder, Smith & Company) and ensure the validity of the actuarial condition of the trust fund. Segal Consulting (Segal) was selected to perform this audit. Segal is scheduled to report their findings to the Board of Trustees in September 2014. GASB 67 and GASB 68 TRS is a cost-sharing, multi-employer system with a special funding situation. TRS plans to prepare the Schedule of Employer Allocations and the Schedule of Collective Pension Amounts and post them on our website for employers, the State Comptroller’s Office and other entities to use. Our State Auditor’s Office plans to audit the schedules in accordance with the new AICPA standards. The State of Texas has an August 31st fiscal year end, and the State is tentatively planning to use the measurement date of 8/31/14 for their fiscal year 2015 reporting. TRS is planning to utilize one year of actual, historical contributions for the allocation. Based on the state’s contribution on behalf of public education school districts and higher education institutions, the state’s allocation is estimated to be between 70% and 80% of the liability.

240


State: Utah Retirement System: Utah Retirement Systems Executive Director: Dan Andersen Market Value of Assets: $25.1 B Assets as of: 12/31/2013 Number of Active Members: 102,256 Number of Annuitants: 53,433 Participants as of: 12/31/2013

LEGISLATION New requirement to post administrative expenses and aggregate compensation data on URS public website, which somewhat mirrors what traditional state agencies must put on the state transparency website.

FUNDING ISSUES 12/31/2013 80.2% funded with five year smoothing, up from 77% last year. $1.7bn in unrealized gains. All of losses from 2008 now accounted for.

INVESTMENT ACTIVITY/INITIATIVES 2013 return was 14.89%. Equities 37.5%, Fixed Income 22.6%, RE 6%, alts including private equity, hedge funds and real assets 34%. 86% managed externally, 14% internally with Large Cap Index and Emerging Markets large cap index.

DEFINED CONTRIBUTION PLANS 401(k), 457, IRS and Roth IRA totaling $4.3bn and approximately 160,000 participants. Internal record keeping. As personal saving becomes more critical URS implementing 3 programs: 1 – Target Date funds customized to URS demographics will be rolled out at end of year. 2 – Received a no-action letter from State Division of Securities and working with Sec for similar letter which will allow URS to increase its financial / investment education functions and working on new curriculum. 3 – Creating “easy button” for new employees to enroll in age appropriate TDF and 6% salary reduction into DC.

241

NASRA - Roll Call of the States State: Virginia Retirement System: Virginia Retirement System Executive Director: Robert P. Schultze Market Value of Assets: $63.6 B Assets as of: 3/31/2014 Number of Active Members: 342,622 Number of Annuitants: 176,694 Participants as of: 5/31/2014

LEGISLATION VRS has been busy implementing several rounds of pension reform legislation since 2010. In 2014, however, the Virginia General Assembly deliberately refrained from making any substantial changes in pension plan design. Minor provisions affecting the VRS 457 Plan were enacted in 2014 as follows: Roth 457 Plan: A Roth option for the VRS administered 457 plan will become effective July 1, 2015. Medicaid Dentists: Dentists who serve Medicaid patients will be able to defer contributions to the VRS 457 Plan from their Medicaid reimbursements, effective January 1, 2015.

TECHNOLOGY Modernization Project: The third phase of the Modernization Project was successfully implemented in November 2012. It provided for an online employer reporting system by which over 1,000 state/local employers submit monthly employer and employee contributions and corresponding enrollment/census data on behalf of their employers. Since the completion of Phase III, the project has been on hold in order to implement pension reform changes directed by the General Assembly, including the operation of a new hybrid plan and a new disability plan. Now that the pension reform project is complete, a fourth phase of the Modernization Project is about to begin which will implement new customer facing applications. A roadmap and project plan for this phase is near completion.

LITIGATION / CORPORATE GOVERNANCE VRS is co-lead plaintiff in securities litigation against MF Global.

FUNDING ISSUES Current Funded Status: Asset/liability ratios for the major defined benefit plans administered by VRS, as of June 30, 2013 are as show below: State Employees – 65.1% Teachers – 62.1% State Police – 59.4% Judicial – 62.4%

242

Virginia Law Officers – 54.1% Local Political Subdivisions (Aggregate) – 75.3%

Key actuarial assumptions include the following:

• Long-Term Investment Return (discount rate) – 7.0% • Rate of Inflation – 2.5% • Mortality Rates – RP-2000 tables projected to 2020 • Amortization of Legacy Unfunded Accrued Liabilities Over Closed 30-year Period • Amortization of New Unfunded Liabilities Over Successive Closed 20-Year Periods

Recent Trends in Funding Levels: Funding levels in 2013 improved slowly as employer contribution rates have risen and investment gains exceed the actuarial assumption on a 5-year smoothed basis. Developments Affecting Funding Condition: The 2014 Virginia General Assembly stuck to its 2012 funding plan by enacting a budget for the next two years that adopts employer contribution rates at approximately 80 percent of the ARC. This increase (from 70% of the ARC) aligns with the pension funding plan to phase toward 100% of the actuarial determined contribution rates as recommended by the VRS Board of Trustees by July 1, 2018. Increased contribution rates, together with investment gains well in excess of the 7.0% return assumption, bode well for continued improvements in funded status. Adoption of the new GASB mark-to-market rules will also provide a one-time increase in funded status as the market value of assets are substantially higher than the actuarial (smoothed) value. All other things being equal, the change to market value by itself will increase funding levels by about 5% in each plan in the next valuation.

INVESTMENT ACTIVITY/INITIATIVES As of March 31, 2014, the portfolio gained the following returns (net of fees): 1-year – 11.7% 3 years – 8.6% 5 years – 13.7% 10 years – 7.0% Internal Management: Since FY2012, the investment program has expanded the level of internal management from approximately 24% of the portfolio to 34% of the portfolio. Asset Allocation: A new asset allocation plan will be phased in over five years that will gradually decrease allocations to fixed income and credit strategies and increase allocations to private equity and real assets. Once fully phased in the asset mixed is expected to be the following: Global Public Equity – 42% Fixed Income – 15% Credit Strategies – 15% Real Assets – 15%

243

Private Equity – 12% Cash – 1%





43.8 % 18.7 % 0 % 7.9 % 0.9 % 28.1 % 66 % 34 %

(As of March 31, 2014) 43.8% Combined Domestic and Foreign Equities 18.7% Fixed Income 17.8% Credit Strategies 10.3% Real Assets 7.9% Private Equity 0.6% Other 0.9% Cash Assets managed internally: Public Equity – 35% Fixed Income – 100%

DEFINED CONTRIBUTION PLANS VRS administers six defined contribution plans, including the: 1) Virginia Deferred Compensation Plan (457), 2) Virginia Cash Match Plan (401(a)), 3) Optional Retirement Plan for Political Appointees (401(a)), 4) Optional Retirement Plan for Public School Superintendents (401(a)), 5) Supplemental Retirement Plan (401(a)), 6) Optional Retirement Plan for faculty of Institutions of Higher Education (401(a)), and 7) the DC component of the hybrid plan (457 and 401(a)). Except for #7, membership in the DC plans is voluntary. Participants in plans #3 through #6 elected these plans in lieu of membership in a DB plan. Participants in #1 and #2 elect membership as a supplemental tax deferred savings vehicle in addition to their primary DB retirement plan. Participants in #7 are also members of the DB component of the hybrid plan. The plan for Higher Education (#6) is a bundled record keeper arrangement administered by VRS but the record-keeping platforms are maintained by TIAA/CREF and Fidelity. All other plans are unbundled record keeper arrangements administered by VRS and maintained by ICMA-RC. The unbundled platform consists of 13 self-directed investment options including a target date portfolio and a brokerage account. One of those options allows for the purchase of unit shares in the VRS investment portfolio. The choices are organized into three general investment paths including: Do-It-For-Me, Help-Me-Do-It, and Do-It-Myself. Across all seven plans, VRS has about $2.5 billion in assets among 82,000 participants. New state employees are automatically enrolled in the Virginia Deferred Compensation Plan and the Virginia Cash match Plan (#1 and #2 above) with a mandatory contribution of $20 per pay period and a cash match of $10 per pay period. New hires are given 90 days to exercise a negative election before payroll deductions begin. Once deductions begin, they have another 90 window during which they can withdraw and receive a refund of their deferrals while forfeiting their cash match balance to the plan reserve account. The hybrid DC plan (#7 above) includes an auto-escalation element that automatically increases member contributions every three years, subject to opt-out by the member.

244

NASRA - Roll Call of the States State: Washington Retirement System: Washington State Department of Retirement Systems Executive Director: Marcie Frost Market Value of Assets: $75.4 B Assets as of: 3/31/2014 Number of Active Members: 298,023 Number of Annuitants: 156,501 Participants as of: 3/31/2014

LEGISLATION Removing Annual Rate Flexibility in the Plans 3 This law will remove the option for members of the hybrid DB/DC retirement plan for teachers to change their contribution rates each year during the month of January. The bill discontinues the option after January 2015. While this option also applied to general government employees and classified school employees in their hybrid plans, it was never implemented in those plans. The removal of the option in the teachers’ plan was deemed necessary by the Internal Revenue Service to ensure the hybrid plans retain tax qualification. Creating an Optional Life Annuity Benefit for LEOFF Plan 2 Members This bill allows members of the open retirement plan for police and fire fighters to use funds from certain tax-qualified savings plans, such as governmental 457 plans, to purchase a life annuity from the pension trust fund at the time of retirement. Correcting the Expiration Date of the Definition of Fire Fighter This bill eliminated the erroneous expiration date on the statutory provision in the definition of fire fighter that included emergency medical technicians (EMTs). The correction allows EMTs continued eligibility for membership in the retirement plan for police and fire fighters. Adding the Option to Purchase Individual Securities in a Public Deferred Compensation Program This bill allows the state or other local government authorizing entities the option of allowing employees participating in an employer sponsored deferred compensation plan to purchase individual securities within the plan investment options. It does not require plans to make this option available, it only allows it.

SYSTEM GOVERNANCE

245

TECHNOLOGY Using Agile in IT Operations – During the past 12 months DRS has incrementally implemented an Agile/Sprint/Scrum approach for small and medium sized IT projects, with good success. Product backlog is defined by an agency prioritized list of outstanding work requests. Business is actively engaged in development, providing input when clarity is needed. Daily “scrums” help track progress and identify barriers. Short morning meetings have increased team engagement, communication and accountability. Visual Management – DRS implemented a visual management system to ensure Retirement Specialists and supporting team members have the information they need to make in-the-moment decisions to prioritize their workload. Flat screen monitors throughout the work area display up-to-the-minute data about pending transactions and accomplishments, unique to the team members in that area. In addition to telephone queue information, Retirement Specialists can see information about the number of customer emails awaiting response and the number of pending requests for benefit estimates. Information is also posted regarding the number of benefit calculations and verifications that need to be completed before end-of-the-month cutoff. Team members also see the age of pending work, enabling them to focus on the right work to ensure customers’ expectations for responsiveness are met. Employer Reporting Application (ERA) and Business Process Management Suite (BPMS) Solution –DRS has taken important steps in re-architecting and modernizing its legacy systems. Last fall, the Department issued a Request for Proposals to procure a BPMS and replace the Employer Information System (EIS). But after evaluating and narrowing the bidder field, the process reached a contractual impasse. Unable to come to an agreement, and unwilling to compromise on core requirements, DRS canceled the procurement. Using the lessons learned from the first procurement, the Department is moving forward to secure funding and release a revised RFP in the coming year. This modernization effort continues to be a high priority.

LITIGATION / CORPORATE GOVERNANCE Repeal of gain sharing – In 2007, the Legislature repealed statutory gain sharing provisions that had allowed Public Employees’ Retirement System (PERS) and Teachers’ Retirement System (TRS) Plan 1 and PERS, TRS and School Employees’ Retirement System (SERS) Plan 3 members to share in “extraordinary investment returns” under certain conditions. Language in the repealed statutes had stipulated that gain sharing was not a contractual right and that the Legislature reserved the right to amend or repeal it. At the same time, the Legislature enacted new early retirement provisions for PERS, SERS and TRS Plan 2 and Plan 3 members with 30 or more service credit years, with the stipulation that the new early retirement factors will no longer be available if the gain sharing repeal is reversed or an alternate benefit is mandated by the courts. Members and retirees of Plans 1 and 3 challenged the gain sharing repeal. In Phase 1, the Superior Court ruled that the state did not have the right to repeal the gain sharing provision. In Phase 2, the court ruled that the state can terminate the new early retirement factors in the event gain sharing is ultimately restored. The Washington State Supreme Court heard oral arguments in this case on October 24, 2013, in conjunction with the case discussed below. As of late June, no decision from the court has been published. (WEA, et al. v. Department of Retirement Systems and the state of Washington, King County Superior Court, Case No. 07-02-17203-3) Discontinued annual benefit increases in closed plans – In 1995, the Legislature passed an annual benefit increase for retirees in PERS and TRS Plan 1 (plans which have been closed to new members since 1977). In 2011, the Legislature discontinued these annual benefit increases (except for those who qualify for the basic minimum benefit). The Washington Education Association, the Washington Federation of State Employees and the Retired Public Employees Council of Washington filed separate class actions challenging the cessation of the annual benefit increases, claiming (among other things) that the repeal was an unconstitutional impairment of contract. A trial court found that the Legislature improperly repealed the increases. When the annual increases

246

were originally approved in 1995, the Legislature specified that they were not a contractual right and that the state reserved the right to amend or repeal them. The trial court ruled, however, that the repeal was a violation of the state constitution. Along with the case discussed above, the Washington State Supreme Court heard oral arguments for this case on October 24, 2013. As of late June, no decision from the court has been published. (Thurston County Superior Court, Case No. 11-2-02213-4.)

FUNDING ISSUES As of the 2012 Actuarial Valuation Report (AVR) Washington State’s defined benefit plans had a combined funded ratio for all plans of 101 percent using the actuarial value of assets. The two lowest funded plans include PERS Plan 1 at 69 percent and TRS Plan 1 at 79 percent. Both PERS 1 and TRS 1 were closed to new members in 1977.

MODEL PRACTICES Customer Satisfaction - During the past year, approximately 90 leaders at DRS interviewed at least one recently retired customer each month to find out how well expectations were met as the individuals moved through the retirement process. Feedback from the 1,081 customers confirmed that expectations are met or exceeded more than 80 percent of the time. For example, customers often note the short wait times when they call, as well as the high quality of service they receive over the phone. They also appreciate the user-friendly Online Retirement Application, and timely and accurate benefit payments. The interviews have provided DRS with actionable information so that future customers’ expectations can continue to be exceeded. The top improvement opportunities are enhancements to the Online Retirement Application and requests for other online services, suggestions to clarify information on forms and in publications, more communication throughout plan membership and additional status updates as members move through the retirement application process. See the Priority Quadrant summary for how process improvements are prioritized. Priority Quadrant – The Priority Quadrant Team, consisting of team members representing all agency divisions, reviews system enhancement requests to determine the value of the improvement based on its impact on DRS’ five key goals: Engaged Team Members, Reliable Partner, Vigilant Resource Steward, Best Practice Leader and Elated Customers. The team member making the request for enhancement is included in the value-scoring process to ensure the scoring team has a full understanding of the request, and that all benefits and impacts are considered in the value score. The diversity of team members involved also increases transparency in the scoring process. Available IT resource areas review the list of scored enhancements, and the enhancements with the highest value score, which also match the skill of the resource area (web, mainframe, etc.), are worked on first. Enhancements that benefit customers and team members score higher, ensuring those improvements receive a high priority. To date, the Priority Quadrant Team has scored a total of 67 system enhancement requests, and 32 of those have been implemented. Quarterly Target Reviews/Business Mapping – During the past year, DRS continued to refine the Quarterly Target Review (QTR) process. Numerous performance measures in the QTR enable the agency to gauge its progress on key outcomes and processes. These measures are examined and discussed by the DRS Extended Leadership Team once each quarter, with a focus on providing resources and solutions to address processes that are not meeting targets. In an effort to reinforce the connection between team members, agency processes and the DRS commitment to Responsive, Respectful and Right (accurate) service to members, different process owners developed “Tier 2” fundamentals maps for individual processes. Customer Service Division Reorganization – The Department is one year into the most significant reorganization of its customer service division in nearly 40 years. DRS was created in 1976 by merging several boards together to manage the various retirement plans offered to public employees in Washington. Functionally,

http://osa.leg.wa.gov/Actuarial_Services/Publications/PDF_Docs/Valuations/12AVR/12AVR.pdf

247

the division was organized into teams of specialists only working on one or two of the eight separate systems administered by the agency (one team for teachers, one for public safety and one for general government, for example). The new model restructured the primary functions into a contact center and a processing center. Team members in the contact center focus on answering phone calls and email correspondence, and meeting with walk-in customers. The goal is that they answer questions related to all of the DRS-administered systems, plans and programs (including the state’s 457 plan). The Department is populating a knowledge management system to facilitate this broad knowledge requirement, as well as modifying the training program to teach on all the systems. Team members in the processing center focus on fulfilling formal estimate requests, audits of accounts and retirement inceptions. Again, the goal is to have any team member perform these functions for each of the DRS-administered systems, and the above changes to the training program and knowledge management system are helping to achieve this. As the Department moved to normalize the new job functions and workflow, we experienced an expected dip in performance as measured against customer service standards. With performance is steadily going back up, the Department is developing data-based staffing models based on predictive ebbs and flows in workload. These models will ensure more flexible and customer focused resource allocations.





39.4 % 21.71 % 12.87 % 22.75 % 1.78 % 1.48 % 78.29 % 21.71 %

DEFINED CONTRIBUTION PLANS Defined Contribution Component within a Defined Benefit Retirement Plan – Plans 3 in Washington’s Public Employees’ Retirement System (PERS), School Employees’ Retirement System (SERS) and Teachers’ Retirement System (TRS) are hybrid plans. These are defined benefit (401a) retirement plans with a dual benefit structure. Employer contributions fund a defined benefit component (1 percent benefit multiplier), and employee contributions fund a defined contribution component. Employee contributions are mandatory, but at the time of enrollment the employee selects a set contribution rate or age-based rate option ranging from 5 percent to 15 percent of wages. In these plans, members may self-direct their investments among a variety of funds that are pre-selected by the Washington State Investment Board, or they may opt to have some or all of their funds invested together with the state’s Commingled Trust Fund. Optional Deferred Compensation Program – DRS administers a 457 Deferred Compensation Program (DCP) for state government employees and for employees of local governments that elect to participate. As of May 31, 2014, DCP had $3.4 billion in assets and more than 63,000 participants. Under the plan, eligible employees elect to defer a portion of their current salary. DCP participants self-direct the investments within their accounts among a variety of funds that are pre-selected by the Washington State Investment Board. Distributions are only available after separation from employment, retirement, disability, death, or in the event of an unforeseeable financial emergency.

248

FUTURE DEVELOPMENTS / OTHER ISSUES Web CMS – DRS is currently implementing a Web Content Management System (WCMS) for the public portion of its website, moving all content (except for secure applications like online account access) to a cloud-based solution. With a WCMS, content can be securely managed from any location that has a web browser and internet access; it requires no special software for maintaining or creating basic content (pages are managed through a web browser interface); and it eliminates the need for in-house support of servers and tools. The move to WCMS is taking place during the month of July. LinkedIn launch – Following up on its debut of a Facebook page in 2013, DRS has now launched an account in the social media platform LinkedIn. The DRS LinkedIn page is primarily used to augment the Department’s talent recruitment efforts. Review of Independent Contractors and Retiree Return to Work – Following a series of investigative articles by The Associated Press regarding potential abuses in the state’s retirement plans for police and firefighters, DRS undertook a review of retirees who were hired as independent contractors by state and local government employers. To date, this review has identified approximately two dozen instances where retirees were misclassified as independent contractors (rather than employees returned to work) or as retirees returned to work in violation of certain early retirement provisions. DRS has invoiced employers and/or retirees for more than $1.5 million in pension overpayments.

249

NASRA - Roll Call of the States State: West Virginia Retirement System: WV Consolidated Public Retirement Board Executive Director: Jeffrey E. Fleck Market Value of Assets: $11.7 B Assets as of: 7/1/2013 Number of Active Members: 78,702 Number of Annuitants: 58,434 Participants as of: 7/1/2013

LEGISLATION The state is changing its payroll practices by changing from 24 pay periods per year to 26 effective January 1, 2015. The only other legislation in 2014 was "clean up" in nature.

SYSTEM GOVERNANCE The Consolidated Public Retirement Board of Trustees is comprised of 16 members. The Governor, State Treasurer, State Auditor and Cabinet Secretary of the Department of Administration serve on the Board by virtue of their positions. The remaining 12 members represent the 9 retirement systems administered by the WV CPRB. These 12 members are appointed by the Governor and serve 5 year terms. An orientation curriculum is provided for trustees upon appointment and fiduciary training is provided on an annual basis. Current Chairman of the Board, David Wyant, has served as the Chairman since 1996making him one of, if not the longest serving Chairman of a public retirement system in the country.

TECHNOLOGY After an extremely long procurement process, on March 12, 2014, the CPRB awarded its contract for a new line of business computer system to Deloitte Consulting. We are currently in the beginning stages of implementation. We have utilized LRWL Inc. as our consultant during the process. Also, during the past year, we moved away from physical Board books and are now utilizing tablets for our Board meetings. Over time, this will save money as well as staff time and resources.

LITIGATION / CORPORATE GOVERNANCE Wood, et. al. v. W. Va. Consolidated Public Retirement Board Five members of the West Virginia Public Employees Retirement System (PERS) initiated appeals in state court to overturn the CPRB’s interpretation of the PERS military service credit statute. The statute awards up to five years of military service credit at no cost to members for military service occurring during a “period of armed conflict,” defined as various specific periods such as World War I, World War II, the Korean conflict, the Vietnam conflict, and the Persian Gulf, each defined in turn with beginning and ending dates, and “any other period of armed conflict by the United States, including, but not limited to, those periods sanctioned by a declaration of war by the United States Congress or by executive or other order of the President.” The statute further provides that CPRB may award military service credit for military service after the end of an officially recognized conflict only if the member can establish that he or she served in hostile and dangerous territory during the time.

CPRB’s longstanding interpretation of the statute was that only those periods identified in the statute, in addition to post-September 11, 2001 service, adopted by the CPRB as an additional “period of armed conflict,” were

250

creditable “periods of armed conflict.” Notwithstanding the statute’s inclusion of specific “periods of armed conflict” with beginning and ending dates, and the provision for awarding credit beyond those dates only for service in a hostile and dangerous territory, the petitioners argued that a series of overlapping “periods of armed conflict” had occurred from 1981 to the present such that anyone with military service credit during that time, whether served in hostile and dangerous territory or not, was eligible for military service credit.

On March 28, 2014, the Supreme Court of Appeals of West Virginia ruled that the CPRB’s interpretation of the statute was too narrow, and accepted the petitioners’ argument, which relied on the dates for which Armed Forces Expeditionary Medals were generally awarded, as set forth in the VFW’s eligibility handbook. The decision is expected to increase the unfunded liability of the PERS plan substantially.

FUNDING ISSUES FUNDING % PLAN 7/1/13 7/1/12 PERS 79.7% 77.6% TRS 57.9% 53.0% STATE POLICE A 76.5% 72.0% STATE POLICE B 94.7% 87.9% JUDGES 133.8% 128.7% DEPUTY SHERIFFS 80.2% 74.9% EMS 84.2% 80.4% MUN. POLICE & FIRE 200.4% 224.4% The assumed rate of return for our plans continues to be 7.5%

MODEL PRACTICES The CPRB has added a 1-800 CPRB tip line for the report of fraud and abuse of retirement issues such as disability fraud, return to work abuse, etc. CPRB continues to improve on education initiatives to reach our members and payroll personnel throughout the state via annual outreach and payroll/benefit coordinator seminars and presentations.





50 % 20 % 10 % 20 % 0 % 0 % 100 % 0 %

DEFINED CONTRIBUTION PLANS CPRB continues to administer the Teacher’s Defined Contribution Plan. TDC is a closed plan that has 4,182 members as of 7/1/2013. The TDC market value of assets as of 7/1/2013 is $346.82 million. Assets are currently managed by Great West.

251

NASRA - Roll Call of the States State: Wisconsin Retirement System: Wisconsin Department of Employee Trust Funds Executive Director: Robert J. Conlin Market Value of Assets: $95.4 B Assets as of: 4/30/2014 Number of Active Members: 256,788 Number of Annuitants: 180,056 Participants as of: 12/31/2013

LEGISLATION A new law allows members to buy WRS credit for the time they served in the active military, the National Guard or the Reserves. In order to purchase the service the member must be currently working in a WRS position (not retired); and must have an honorable or general discharge.

SYSTEM GOVERNANCE The Wisconsin Retirement System is administered by the Wisconsin Department of Employee Trust Funds. The assets of the WRS are invested by the State of Wisconsin Investment Board.

TECHNOLOGY Law Changes The major technology-related efforts at the Department of Employee Trust Funds (ETF) over the last year have centered on modifying systems in order to implement 2013 law changes affecting rehired annuitants. ETF is also implementing a high deductible health insurance plan at the direction of the state legislature. Strategic Direction: Purchased Benefit Administration System This year ETF contracted with Vitech Systems Group, Inc. (Vitech) for the pension and insurance benefits administration system implementation, a project currently expected to last approximately four years. This system will replace both ETF’s legacy, custom-developed systems and purchased software (e.g., software used for records management, imaging and workflow). ETF will also add Customer Relationship Management and Business Intelligence software. Internally, we are calling this multi-year strategic initiative TIM – as we aim to Transform, Integrate and Modernize our benefits administration system and business unit processes; harness our shared knowledge and expertise; and deliver quality customer service. We have continued our engagement with a strategic partner specializing in this work to offer project oversight and consultation through the implementation of the benefits administration system. We also have a contract with a firm that specializes in data cleansing, to help us prepare for conversion to the new system. We are moving toward hosting our commodity IT infrastructure at a hosting service, in order to align technical staff and resources to work on the benefits administration system project. Financial Management Information System ETF successfully replaced its financial tracking tools (e.g., spreadsheets, personal databases, and older data reporting tools) with PeopleSoft Financials. This project was done in order to interface with the new benefits administration system. FMIS provides a unified and integrated accounting process and reporting system, and replaces disparate and manually intensive systems. ETF’s PeopleSoft Financials system will be the first release of the new state-wide financials and human resources system.

252

State of Wisconsin Investment Board SWIB initiated a review of its technology systems and related processes to explore options for enhancing management of increasingly complex investment strategies. SWIB conducted a request for proposals, evaluated vendors and selected Citisoft as its consultant. An assessment of SWIB’s current state is completed and a target environment is being defined based on SWIB’s strategic planning activities and interviews with staff across the organization. The target environment includes greater use of third party providers for operational and data management functions and the addition of more comprehensive risk, portfolio management and data management systems and capabilities. Information Systems Infrastructure: Operating systems: VMWare ESXi, Red Hat Enterprise Linux, z/OS, Windows Server 2003, Windows Server 2008, Windows 7 Databases: DB2, Microsoft SQL Server Platforms: Java 2 Enterprise Edition (J2EE), COBOL Open Source Software: Spring, Struts, Hibernate, Jasper, Log4J, etc. Security: Lightweight Directory Access Protocol (LDAP) using Active Directory and Novell eDirectory; on the Mainframe we use Resource Access Control Facility (RACF) Development Environment: WebSphere IBM RAD v7 (going to v8), COBOL, CICS, DB2 Stored procedures, SAS, JCL, AFP, Step2000 workflow, Jasper, Crystal Reports, JUnit, Jtest, WebLOAD, ERWIN, JIRA work item tracking, Confluence (team wiki).

LITIGATION / CORPORATE GOVERNANCE SWIB continues to enhance corporate governance through engagement of corporate management and boards of directors. Direct, focused communication provides opportunity to better understand company strategy and serves to mitigate risk. In 2013, SWIB dialogued with more than 300 management teams and boards. The issues most discussed include director independence and executive compensation. The advisory vote ratifying compensation, also known as "say on pay," has opened more lines of communication with management as votes are cast against the proposal. SWIB continues to work with several companies to address concerns and implement best practices in this area. The trend now is showing companies receiving either reasonably high levels of support for their plan or significantly low levels of support. The companies that previously received median levels of support have made positive changes to increase their support. Another trend we are seeing is the increase in integrating environmental and social proposals to the company’s business strategy. SWIB is spending more time researching and learning how this will affect SWIB investments. SWIB is actively involved with the Council of Institutional Investors, serving on the Board and International Governance Committee. SWIB is also actively involved with the International Corporate Governance Network, Institutional Shareholders Advisory Board, Broadridge Institutional Investors Committee, and several industry working groups. These organizations and committees allow SWIB to keep abreast of current issues and policies. SWIB voted more than 30,500 proposals from more than 52 countries in 2013, supporting management about 80%. Further, SWIB conducted dialogues with more than 300 companies in 29 different countries. The countries with the most engagement are the United States and Japan. SWIB is a class member in more than 450 securities class action litigation suits. In 2013, SWIB recoveries totaled more than $3 million. Monitoring of international cases continues to be a challenge, however the SWIB board recently approved participation in a United Kingdom-based lawsuit.

253

FUNDING ISSUES The plan remained funded at 99.9% based on the Frozen Entry Age actuarial cost method. Based on the GASB 67 valuation methodology, the plan’s funded ratio increased from 100.0% to 105.5%. The increase was due to greater than assumed investment earnings. No changes were made to actuarial assumptions this year.

MODEL PRACTICES Department of Employee Trust Funds Enterprise Business Model (EBM) As we plan, develop and launch projects under our multi-year TIM initiative (see Strategic Direction: Purchased Benefit Administration System, above), we are simultaneously developing an EBM. The purpose of the EBM is to, among other things, fully document business processes in order to ensure the highest-quality development of the new benefits administration system. In addition to the EBM, we have put in place TIM Project Governance, which will ensure the Department exercises appropriate oversight of associated projects, ultimately ensuring efficient and appropriate use of resources Continuity of Operations Plan (COOP) ETF’s COOP Plan, which serves as the blueprint for recovering all critical services following a disaster, reached a significant milestone in February 2014 with the completion of its full revision. The Plan was presented to ETF’s leadership and the State of Wisconsin’s Department of Administration, the agency which maintains oversight of all statewide COOP plan. It contains extensive response and recovery plans that include call trees, identification of all critical business functions and their dependencies, assignment of recovery teams and creation of checklists for all defined leadership roles in the COOP Plan. To ensure that ETF can continue its operations offsite, we have contracted with a sister agency to designate workspace for ETF should a disaster affect our buildings, and we regularly maintain the site’s readiness. In addition, several significant contingency plans were developed to respond to likely business service disruptions such as power outage and call center disruption. We are proud to report that the State of Wisconsin Department of Administration’s Continuity of Government touts ETF’s COOP Plan as a model for other agencies. Lean/Process Improvement Last year ETF developed the PIT (Process Improvement Team) Crew to promote a culture of continuous improvement, collaboration and innovation. PIT is still a young effort, but the various process improvement events to date have accomplished the following:

• Accounts Receivable: Reducing lead time and improving quality of customer experiences in the servicing of overpayment letters.

• Call Center: Creating protocols to recover call center functionality within 20 minutes of a disruption. This ensures quality customer service, and defined roles ensures predictability for call center staff.

• Retiree Services: Creation of a procedure manual greatly improved staff efficiency in managing workflow and ability to retrieve important documents, resulting in increased employee satisfaction and improved customer service.

• Innovation: The creation of two testing/training/innovation spaces to support a host of initiatives across the various divisions and offices. Improved testing and training environments support improved testing quality and learning experiences.

INVESTMENT ACTIVITY/INITIATIVES The Core Trust Fund one-year rate of return as of Dec. 31, 2013 was 13.6%. This included one-year returns of 26.2% in public equities, -2.1% in public fixed income,

254

-8.6% in inflation protection, 16.9% in real estate, 17.1% in private equity and 5.8% in multi-asset investments. The Variable Trust Fund one-year return as of Dec. 31, 2013, was 29.0%. SWIB continued implementation of over-the-counter (OTC) derivatives, including total return swaps, FX (currency) options and expanding the rebalancing overlay to include non-U.S. exposures. SWIB executed its first Total Return Swap on the Russell 1000 Index. Staff implemented a private equity co-investment program. A senior investment professional was hired in September 2013 and the program went “live” in January 2014. The program is targeting $100 million to three to five co-investments per year. SWIB expanded the venture capital program with the creation of 4490 Ventures. In March 2013 SWIB and the Wisconsin Alumni Research Foundation (WARF) announced the creation of 4490 Ventures, an early-stage venture capital fund focused on information technology. The private fund, capitalized jointly by SWIB and WARF, is intended to generate attractive returns and build value for state retirement fund participants and WARF’s primary beneficiary, the University of Wisconsin–Madison. The fund’s general partner was hired in early 2014.

ASSET ALLOCATION Core Trust Fund only as of April 30, 2014:

• Combined Domestic & Foreign Equities: 49.9% (U.S. Equities: 85% managed internal, 15% external; Foreign Equities: 53% internal, 47% external)

• Fixed Income: 26.4% (49% managed internal, 51% external) • Inflation Protected: 7.2% (89% managed internal, 11% external) • Real Estate: 6.7% • Private Equity: 7.7% (Private Markets (real estate & private equity): 16% managed internal, 84% external) • Multi-Asset: 7.2% (15% managed internal, 85% managed external) • Cash: 0.4%

Assets Managed Internally: 56% Assets Managed Externally: 44% As of April 30, 2014, the assets under management of the Wisconsin Retirement System were $95.4 billion. Returns History Core Trust Fund (As of April 30, 2014): 1-year: 9.9% 3-year: 7.9% 5-Year: 13.5% 10-year: 7.7% 20-year: 8.5% Variable Trust Fund (As of April 30, 2014): 1-year: 18.2% 3-year: 10.8% 5-year: 18.1% 10-year: 7.8% 20-year: 8.6%

255

DEFINED CONTRIBUTION PLANS Name of plan: Wisconsin Deferred Compensation Program (WDC). Plan Type: Voluntary IRC Section 457 deferred compensation plan for state and local public employees. Assets as of 12/31/13: $3.65 billion Number of participants as of 12/31/13: 55,271 state and local government employees; 33,001 are state employees and 22,270 are employees of the 884 local employers offering the WDC. Participation: 45% of eligible state employees participate in the WDC and approximately 12% of eligible local employees participate. Administrator/Record keeper: Great-West Financial The plan offers 22 investment options that include six target retirement date (“lifecycle”) funds, fixed income funds, bond funds, equity funds and international funds. In addition, the plan offers a self-directed option (SDO) through Schwab and a managed account option. The plan website was redesigned in 2013; a mobile app was added in early 2014.

FUTURE DEVELOPMENTS / OTHER ISSUES SWIB As part of SWIB’s strategic plan, work is underway to implement a comprehensive risk management solution that will enhance and optimize risk, performance and cost management across all portfolios, asset classes and strategies. SWIB’s investment strategy priority is to continue to develop strategies that will maintain the Core Fund’s 7.2% actual return (over the long term) seeking value added for specific investment strategies while seeking to decrease the variability of return using cost effective approaches. SWIB will work to continue to manage risk by seeking opportunities to increase fund level leveraging of low volatility assets and the expansion of inflation-sensitive assets. A strategic planning team worked closely with SWIB’s external consultant to design and oversee the strategic planning process. Input from the Trustees, employee and retiree organizations, and SWIB staff was used by senior managers and the strategic planning team to craft revised mission, vision and values statements as well as three-year strategic goals for the organization. One year objectives will be incorporated into the 2014 work plans for all employees.

256

NASRA - Roll Call of the States State: Wyoming Retirement System: Wyoming Retirement System Executive Director: Ruth Ryerson Market Value of Assets: $7.46 B Assets as of: 12/31/2013 Number of Active Members: 42,240 Number of Annuitants: 25,510 Participants as of: 1/1/2014

LEGISLATION Continuing with a strategy to gradually adjust to the necessary contribution rates for three pension plans, lawmakers approved rate increases in the Public Employee; Game Warden, Patrol & DCI; and Paid Fire B pension plans by approving House Enrolled Act 11 (HEA 11). HEA 11 modifies the amount of the increases and phase-in periods from last year’s law, which also increased contributions to these three plans. No other plans will be impacted. The following is an overview of the increases. Public Employee Pension Plan – Impact of House Enrolled Act 11 (House Bill 46) The total increase to employer and employee contributions is 2.0 percent, although the 0.5 percent increase to the employer contribution was already passed by the legislature last year. HEA 11 moved the effective date of the 0.5 percent employer contribution increase to July 1, 2014 rather than Sept. 1, 2014. The employee contribution will increase by 0.75 percent July 1, 2014 and the employer contribution will increase by an additional 0.75 percent starting July 1, 2015. Game Warden, Patrol, and DCI Pension Plan – Impact of House Enrolled Act 11 (House Bill 46) The total increase to the employee contribution and employer contribution will be 2.94 percent, although the 0.9 percent increase was already passed by the legislature last year. HEA 11 moved the effective date of the 0.9 percent employer contribution increase to July 1, 2014 rather than Sept. 1, 2014. The employee contribution will increase by 1.02 percent July 1, 2014 and the employer contribution will increase by an additional 1.02 percent starting July 1, 2015. Paid Fire B Pension Plan – Impact of House Enrolled Act 11 (House Bill 46) The employee contribution will increase 0.52 percent on July 1, 2014. There is no increase to the employer contribution. Three retirement-related bills were introduced to the state legislature but did not pass. All three of these topics will be interim study topics for the Joint Appropriations Committee.

• Emergency Medical Technician Pension Plan (HB 41): This bill called for funding the plan with a dedicated portion of the fire insurance premium tax.

• Firemen’s Pension Plan A Benefits (HB 51): This bill called for changes in the cost of living adjustment for retirees and required payments from employers and the state.

• State Parks Peace Officer Benefits (HB 70): This bill would have given state park rangers who work for the Department of State Parks and Cultural Resources the same death and disability benefits as those provided in the Law Enforcement Pension Plan.

257

SYSTEM GOVERNANCE Culminating a nationwide search that started during the summer of 2013, Sam Masoudi joined the Wyoming Retirement System as its new chief investment officer. During his 20 years of investment experience, Masoudi has worked with a wide variety of investment types including public equities, private equity, fixed income, real estate and hedge funds. Prior to WRS, Masoudi was a managing director of the endowment investment office of Tulane University, a position he held for five and a half years. Masoudi also spent seven years as portfolio manager and founder of Silver Peak Capital Management, an investment fund located in New York City; three years as director at Veronis, Suhler & Associates, a private equity fund in New York City; and four years as assistant vice president in the real estate investment banking group at Kidder Peabody and PaineWebber in New York City. Masoudi holds the Chartered Financial Analyst (CFA) and Chartered Alternative Investment Analyst (CAIA) designations. Masoudi graduated with a bachelor’s degree in finance and investments from Babson College in 1992. WRS is in the process of hiring a new deputy director to succeed Harry Wales, who will be retiring from WRS after 32 years with WRS—15 years as deputy director.

TECHNOLOGY On May 20, 2014 Wyoming Retirement System launched a new pension administration system, Retirement Administration & Investment Network (RAIN). RAIN will replaces the previous pension administration system, which had been in use since 2000. RAIN provides online, secure account access to members and employers; modernizes WRS business practices; provides clean and accurate data; results in superior customer service; and enables self-service for members and employers. RAIN enables employers to submit new employee information, employee information changes and contribution processing electronically, which will increase accuracy and speed of information transfers. Members have immediate access to needed services and information, and will be able to obtain estimates of future retirement benefits, make changes to personal information, request refunds and apply for benefits.

LITIGATION / CORPORATE GOVERNANCE WRS continues to serve as co-lead plaintiff with the Wyoming Treasurer’s Office in: In re IndyMac Mortgage-Backed Securities Litigation.

FUNDING ISSUES Annual results for the funding status of each of the 7 pension plans WRS oversees came in more favorably than anticipated due to higher than expected investment earnings along with gains on assumptions such as salary increases (which were less than projected). The Public Employee Pension Plan, which is the largest of all WRS plans, had a funded ratio of 77.62% compared to 72.80% last year when assumption changes are included. Projections show a 114.7% funded ratio in the year 2044. Although there is a current contribution rate shortfall in this plan, it is projected to diminish and the board will not pursue further contribution increases or benefit changes at this time. The projected trends of the plan lead to full funding in 2036. Because projections are dependent on actual experience being the same as assumptions, future actuarial analysis may identify different trends.

258

The Paid Firefighter A Plan had a 68.32% funded ratio compared to 67.20% last year. The actuary has indicated that the 3% annual Cost of Living Adjustment (COLA) required by state law is not affordable without additional funding for the Plan. This has been brought to the attention of the plan members and the legislature. The remaining plans also had better than anticipated actuarial results and show improved funding trends. The report for each plan can be found on the WRS Web site at http://retirement.state.wy.us and a summary table follows. The actuary found no plan met the requirement of full funding, including a margin for future adverse experience, needed to fund a COLA. The process for awarding COLAs was statutorily changed in 2012 and made more stringent. In order for a COLA to be granted from pension plan funds, state law now requires the funded ratio of the plan to remain above 100% plus a margin after the COLA. In addition, the actuary must deem the award affordable. The board may then recommend a COLA from internal funds to the legislature. The final determination for any COLA award would be made through legislation except in the case of the Paid Firefighter A Plan. WRS also administers a pension plan for volunteer firefighters and a pension plan for volunteer emergency medical technicians. The Volunteer Firefighter Plan had a funded ratio of 92.24% compared to 87.60% last year. The Volunteer EMT Plan is currently 131.70% funded, but does not have a long-term funding source. This has been brought to the attention of plan members and the legislature. Contribution and Funded Ratio by Plan as of 1/1/2014 New Assumptions

(1)Effective July 1, 2014, the total contribution rate will be 15.87%. Effective July 1, 2015 the rate will increase to 16.62%. Based on the timing of the contribution increases in 2014, the one-year shortfall would decrease from 3.16% to 2.53% of pay.

Plan Current Contribution Rate

Contributions Shortfall/ (Surplus)

1/1/2014 Funded Ratio - New Assumptions

1/1/2013 Funded Ratio - New Assumptions

30 Year Projection of Funded Ratio

Public Employee (1) 14.62% 3.16% 77.62% 72.80% 114.70%

Warden, Patrol, & DCI (2) 26.50% 4.80% 77.44% 73.30% 95.70%

Law Enforcement 17.20% (0.93%) 92.41% 87.90% 122.80%

Judicial 23.72% (4.89%) 103.03% 102.10% 158.00%

Paid Fire B (3) 20.725% 0.80% 99.11% 94.90% 101.70%

Guard Fire 23.77% (6.37%) 89.15% 86.80% 173.60%

Paid Fire A (in $)(4) $0 $9,458,093 68.32% 67.20% 0.00%

Volunteer Firefighters (in$) (5) $2,227,300 ($666,583) 92.24% 87.60% 225.90%

Volunteer EMTs (in $)(6) $22,050 $85,802 131.70% 117.30% 0.00%

http://retirement.state.wy.us/

259

(2) Effective July 1, 2014 the total contribution rate will be 28.42%. Effective July 1, 2015 the rate will increase to 29.44%. Based on the timing of the contribution increases in 2014, the one-year shortfall would decrease from 4.80% to 3.84% of pay. (3)Effective July 1, 2014, the contribution rate will be 21.245%. Based on the timing of the increase in 2014, the one-year shortfall would decrease from 0.80% to 0.54%. (4)State law requires a minimum 3% yearly increase. (5)Includes member contributions of $12.50 per month. (6)Includes member contributions of $12.50 per month. The contribution shortfall will be paid for out of a set aside account having a balance of $274,113.

MODEL PRACTICES The WRS Board regularly updates its strategic planning document to ensure it aligns business activities to the system’s vision, mission and values as a way to better serve stakeholders. This document helps the system as a whole measure its performance, and helps supervisors identify what should be done and measured, and it helps the system execute those strategies. Major takeaways from the most recent strategic plan updates include emphasis on:

1. Retaining quality staff and leadership a. Sustaining and enhancing Board quality and engagement b. Preserving and protecting gains in WRS governance structure c. Effectively addressing investment complexity

2. Continuing to improve risk-adjusted investment performance 3. Enhancing further credibility and influence with legislature and beyond 4. Executing legislative liaison model and transition plan 5. Ensuring consistent and accurate benefit administration and recordkeeping 6. Identifying and managing WRS and the investment program in an enterprise risk aware approach

INVESTMENT ACTIVITY/INITIATIVES The Wyoming Retirement System portfolio produced an above average return for 2013 on an absolute basis and relative to the benchmark. The investment return for the system for the full year was 13.3 percent net of fees, exceeding the Assumed Investment Return (AIR) of 7.75 percent by 5.55 percent. Over the last three years, WRS’ compounded annual rate of return was 8.4 percent, or 0.65 percent above the AIR. Additionally, the five-year compounded annual investment return was 12.2 percent or 4.45 percent above the AIR. As of year-end 2013, combined pension plan assets were $7.46 billion, an increase of $688 million net of distributions over year-end 2012. The global stock market dominated headlines in 2013 by posting some of the largest gains in recent history as fundamentals improved somewhat and investors regained confidence. However, most of the investment gains last year were attributable to more monetary easing by developed world central banks and less to fundamental economic improvements. Last year also provided an unexpected spike in interest rates that sent most fixed income strategies into negative return territory for the year. Concerns about rising interest rates will likely make growth difficult for fixed income in the coming year.

260





54.4 % 24.2 % 3.5 % 4.7 % 3.6 % 9.7 % 100 % 0 %

DEFINED CONTRIBUTION PLANS WRS offers a 457 Deferred Compensation Plan, which allows participants self-direct investment choices from a menu of offerings. As of 12/31/13, Plan assets exceeded $500 million, which is an all-time high. The 457 Plan now offers free investment guidance and fee-based investment advisory services through Great West Retirement Services. This new service is completely optional and is designed for employees and retirees who are interested in investment guidance and advice. In an analysis of 457 Plan target date fund investors, WRS found that 70% of these were not in the age appropriate funds. The Board wanted to position investors for the investment outcomes needed for retirement, and therefore in June 2014 WRS directed our record keeper to conduct an optional mapping of assets and future allocations for target date fund investors. Plan Participants were automatically re-mapped to appropriate target date funds, unless they opted out.

FUTURE DEVELOPMENTS / OTHER ISSUES In order to continue to increase the retirement readiness of participants, the WRS Board is considering options to introduce default enrollment for the 457 Deferred Compensation Plan of employees at 457 Plan participating employers. Currently, employees at participating 457 Plan employers must opt-in to the 457 Plan. Under the proposed default enrollment, new employees would have to opt-out of the plan at the time they are hired or during a defined grace period after their hire date. Implementing default enrollment will require legislative approval, and the WRS Board and staff are working to refine details of the proposal to be presented to the legislature. WRS is in the process of working with an organizational consulting firm to analyze WRS’ organizational structure and manage organizational change resulting from the implementation of the RAIN pension administration system that launched on May 20. With the launch of RAIN comes a major change to WRS’ operational procedures and the resulting staff roles. With the help of the consultant WRS will look for needed changes to its org chart and staff roles.

Documents

Roll Call States - NASRA · Process improvements. The division has embarked on analyzing our processes using Lean and Six Sigma approaches. Already several processes have been restructured,