Wayne County Employees' Retirement System Defined Benefit Planwcers.org/financial_pubs/DB FY End Sept 30, 2012 and 2011.pdf · Retirement System Defined Benefit Plan (the “Plan”),

Year Ended September 30, 2012 and 2011

Financial Statements

Wayne County Employees' Retirement System

Defined Benefit Plan

WAYNE COUNTY EMPLOYEES' RETIREMENT SYSTEMDEFINED BENEFIT PLAN

Table of Contents

Page

Independent Auditors' Report 1

Management's Discussion and Analysis 4

Financial StatementsStatement of Plan Net Assets 9Statement of Changes in Plan Net Assets 10Notes to Financial Statements 12

Required Supplementary InformationSchedule of Funding Progress 26Schedule of Employer Contributions 26

Rehmann Robson

675 Robinson Rd. Jackson, MI 49203 Ph: 517.787.6503 Fx: 517.788.8111

www.rehmann.com INDEPENDENT AUDITORS' REPORT

January 23, 2013

To the Wayne County Board of Commissionersand the Wayne County Retirement Commission

Detroit, Michigan

We have audited the accompanying statement of plan net assets of the Wayne County Employees’Retirement System Defined Benefit Plan (the “Plan”), a pension trust fund of the County of Wayne,Michigan, as of September 30, 2012 and 2011, and the related statement of changes in plan net assetsfor the years then ended. These financial statements are the responsibility of the Plan’s management.Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United Statesof America. Those standards require that we plan and perform the audits to obtain reasonable assuranceabout whether the financial statements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.

As discussed in Note 1, the financial statements present only the Plan and do not purport to, and do not,present the financial position of the County of Wayne, Michigan as of September 30, 2012 and 2011, andthe changes in its financial position for the years then ended, in conformity with accounting principlesgenerally accepted in the United States of America.

In our opinion, the financial statements referred to above present fairly, in all material respects, theplan net assets of the Plan as of September 30, 2012 and 2011, and the changes in its plan net assets forthe years then ended, in conformity with accounting principles generally accepted in the United Statesof America.

Accounting principles generally accepted in the United States of America require that the management’sdiscussion and analysis and the schedules of funding progress and employer contributions as listed in thetable of contents be presented to supplement the basic financial statements. Such information, althoughnot a part of the basic financial statements, is required by the Governmental Accounting StandardsBoard, who considers it to be an essential part of financial reporting for placing the basic financialstatements in an appropriate operational, economic, or historical context. We have applied certainlimited procedures to the required supplementary information in accordance with auditing standardsgenerally accepted in the United States of America, which consisted of inquiries of management aboutthe methods of preparing the information and comparing the information for consistency withmanagement’s responses to our inquiries, the basic financial statements, and other knowledge weobtained during our audit of the basic financial statements. We do not express an opinion or provide anyassurance on the information because the limited procedures do not provide us with sufficient evidenceto express an opinion or provide any assurance.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

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Management's Discussion and Analysis

Financial Highlights

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Overview of the Financial Statements

This section of the annual report of the Wayne County Employees’ Retirement System Defined Benefit Plan (the“Plan”) presents management’s discussion and analysis of the Plan’s financial performance during the plan yearsthat ended on September 30, 2012, 2011 and 2010. Please read it in conjunction with the Plan’s financialstatements, which follow this section.

The Plan’s total net assets increased during fiscal 2012 by $32.7 million (nearly 5%); the prior year decreasewas $113.2 million (about 14%). Net assets are held in trust to meet future benefit payments.

The Plan’s benefits are funded by contributions from Wayne County and active members, as well as by theinvestment income earned on the Plan’s assets. As of September 30, 2010 and 2011, the funded ratios for thePlan were 60% and 50%, respectively, for pension benefits, based on the most recent actuarial valuations (i.e.,a valuation has not yet been completed for the year September 30, 2012, as explained in the accompanyingrequired supplementary information).

Total additions to net assets, excluding appreciation (depreciation) in the fair value of investments, increasedby $46.1 million from $45.3 million for the year ended September 30, 2011 to $91.4 million for the year endedSeptember 30, 2012. The increase is primarily attributable to the amount actually contributed to the plan.County contributions actually paid into the plan were reduced by $26 million in 2011 by the County by using anoffset (as further described in Note 5 to the financial statements), while contributions paid into the plan wereonly reduced $6 million in 2012 related to the offset. The County's actuarially determined contribution ratealso increased from 30.26% for 2011 to 39.68% for 2012, which increased employer contributions. During thecurrent year the County allowed some employees to purchase service credits and to transfer to the WayneCounty Hybrid Retirement Plan Option #5 and Wayne County Hybrid Retirement Plan Option #6, whichincreased employee contributions. The Airport Authority offered a retirement incentive that allowed someemployees to purchase service credits and to transfer to the Wayne County Hybrid Retirement Plan Option #5.The Airport Authority also contributed an additional $2.0 million in employer contributions to the Plan to fundthis incentive.

Total deductions from net plan assets increased by $1.6 million, increasing from $135.6 million for fiscal 2011to $137.2 million for 2012. The change was due to an increase in the cost of pension benefits for the currentyear.

The change in the fair value of investments increased by $101.4 million, going from a net depreciation of $22.9million for 2011 to a net appreciation of $78.5 million for 2012. The net appreciation in the fair value ofinvestments for the current year is attributable to the improving financial markets and the Plan recovering thelosses of the prior plan year. There was a net gain of $34.2 million for fiscal 2010.

This annual report contains the Plan’s financial statements, which consist of the statements of plan net assets andstatements of changes in plan net assets. These financial statements report information about the Plan as a wholeusing accounting methods similar to those used by private-sector pension plans. The statements of plan net assetsinclude all of the Plan’s assets and liabilities. All of the current year’s increases and decreases in the Plan’s netassets are accounted for in the statements of changes in plan net assets, regardless of when cash is received orpaid.

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Financial Analysis of the Plan as a Whole

2012 2011 2010Assets

Investments 710.7$ 693.6$ 802.2$ Other assets 20.5 5.1 14.4

Total assets 731.2 698.7 816.6

Liabilities 3.1 3.3 8.0

Net assets held in trustfor pension benefits 728.1$ 695.4$ 808.6$

Net Assets (in millions)

The Plan’s total assets as of September 30, 2012 were $731.2 million and were mostly comprised of cash andinvestments. Total assets increased by $32.5 million, or 4.6%, from the prior year. Total assets for the fiscal yearsending September 30, 2011 and 2010 were $698.7 million and $816.6 million. This increase was attributable to theimproving financial markets and the County paying more of the required employer contributions into the Plan forthe current year. The overall rate of return on investments for the year ended September 30, 2012 was a gain of16.75%, compared to a loss of 1.41% for 2011 and a gain of 6.53% for 2010.

Other assets include $2.3 million and $2.1 million that were due from the Plan’s broker for securities sold as ofSeptember 30, 2012 and 2011, respectively, and liabilities include $1.3 million and $1.8 million that were due tothe Plan’s broker for securities purchased as of September 30, 2012 and 2011, respectively. The amounts due toand from the broker are a result of security purchase and sale transactions initiated before September 30 of eachyear, but not completed until after October 1 of each year. Other assets as of September 30, 2012 also include$14.8 million of equity in Wayne County pooled cash. The Plan’s equity in Wayne County pooled cash as ofSeptember 30, 2011 and 2010 was $1.7 million and $9.9 million, respectively.

Total net assets held in trust for benefits at September 30, 2012 increased by $32.7 million from 2011, primarilydue to the improving financial markets and the higher contributions into the Plan from the employer andemployees for the year. In 2011, total net assets held in trust decreased by $113.2 million from 2010, primarily dueto the volatile financial markets that decreased significantly at the end of the fiscal year and the lowercontributions into the Plan from the employer and employees for the year.

The notes to the financial statements, as listed in the table of contents, explain some of the information in thefinancial statements and provide more detailed data. Additional six-year historical trend information, designed toprovide information about the Plan’s progress in accumulating sufficient assets to pay benefits when due, ispresented in the required supplementary information.

These financial statements report the Plan’s net assets and how they have changed. Net assets represent thedifference between the Plan’s assets and liabilities, and they represent one way to measure the Plan’s financialhealth, or position. Over time, increases or decreases in the Plan’s net assets are an indicator of whether itsfinancial health is improving or deteriorating.

Below are the condensed statements of plan net assets as of September 30, 2012, 2011, and 2010:

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2012 2011 2010Additions

Contributions 72.0$ 29.3$ 64.9$ Investment income:

Net appreciation (depreciation)in fair value of investments 78.5 (22.9) 34.2

Other investment income 19.4 16.0 20.8 Total additions 169.9 22.4 119.9

DeductionsBenefit payments and distributions 134.2 132.4 131.7 Administrative expenses 3.0 3.2 3.0

Total deductions 137.2 135.6 134.7

Change in net assets 32.7 (113.2) (14.8)

Net assets held in trust for pension benefits:

Beginning of year 695.4 808.6 823.4

End of year 728.1$ 695.4$ 808.6$

Change in Net Assets (in millions)

Total contributions for 2012 increased by $42.7 million compared to the prior year. Employer contributions weremade at the actual rate of 31.97, 9.42 and 27.82 percent of covered payroll during the years ended September 30,2012, 2011 and 2010. Employer contributions were $47.7 million, $13.4 million and $35.4 million for the yearsended September 30, 2012, 2011 and 2010, respectively.

Other investment income (including securities lending income) was $2.3 million and consistent with the prior year.Other investment income was $2.6 million and $5.0 million for the years ending September 30, 2011 and 2010.

Investment expenses were $3.1 million for the year ending September 30, 2012, compared to $4.6 million and $4.2million for the years ending September 30, 2011 and 2010. WCERS worked with some investment managers toreduce the rate charged by the managers for fees and changed some of the managers that had high fees, whichresulted in $1.5 million in savings for the current year.

The reserves needed to finance pension benefits are accumulated through the collection of employee and employercontributions and through earnings on investments. Contributions and net investment income, excludingappreciation/depreciation, for the year ended September 30, 2012 totaled $91.4 million. Contributions and netinvestment income, excluding appreciation/depreciation, totaled $45.3 and $85.7 million for the years endedSeptember 30, 2011 and 2010, respectively. The investment return exceeded our assumed rate of return of 7.75%,and these results will have a positive effect on the actuarial valuation of the Plan.

Below are the condensed statements of changes in plan net assets for the years ended September 30, 2012, 2011,and 2010:

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Net Appreciation (Depreciation)

Deductions from Plan Net Assets

Economic Factors

Financial Contact

This financial report is designed to present its users with a general overview of the Plan’s finances and todemonstrate the Plan’s accountability for the funds it holds. If you have any questions about this report or needadditional financial information, contact the Wayne County Employees’ Retirement System, 28 West Adams, Suite1900, Detroit, Michigan 48226.

The financial markets have been volatile over the last several years. The current year saw improving financialmarkets and the Plan recovering the losses of the prior plan year during the current plan year. Managementbelieves that the Plan is in a financial position to meet its pension benefit obligations. It is anticipated that thefinancial position can improve with a prudent investment strategy and return to more stable market conditions.

The deductions of the Plan include the payment of pension benefits to members and beneficiaries and the costs ofadministering the Plan. Total deductions for the year ended September 30, 2012 were $137.2 million as comparedto prior year’s deductions of $135.6 million, an increase of 1.2% over the prior year. The change was due to anincrease in the cost of pension benefits for the current year. Total deductions were $134.7 million for the yearended September 30, 2010.

Net appreciation in the fair value of investments was $78.5 million for the year ended September 30, 2012,compared to net depreciation of $22.9 million and net appreciation of $34.2 million for the years endedSeptember 30, 2011 and 2010. The net appreciation or depreciation in the fair value of investments is added to ordeducted from plan net assets. The net appreciation in the fair value of investments for the current year isattributable to the improving financial markets and the Plan recovering the losses of the prior plan year.

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BASIC FINANCIAL STATEMENTS

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Statements of Plan Net AssetsSeptember 30, 2012 and 2011

2012 2011Assets

Investments, at fair value (Note 3):Equity securities and mutual funds 427,986,598$ 389,875,268$ Debt securities and mutual funds 99,005,703 112,799,770 Money market funds 21,492,551 17,409,568 Other investments 162,224,243 173,540,164

Total investments 710,709,095 693,624,770

Equity in Wayne County pooled cash (Note 3) 14,793,461 1,726,401

and funds 1,970,149 12,800 Accounts receivable 156,625 244,903 Due from broker for securities sold 2,284,546 2,065,629 Accrued interest and dividends 1,214,817 1,035,717 Prepaid expense 21,686 16,320 Depreciable capital assets, net (Note 4) 9,774 14,576

Total assets 731,160,153 698,741,116

LiabilitiesAccounts and contracts payable 649,571 680,927 Due to broker for securities purchased 1,343,480 1,789,713 Accrued wages and benefits 226,589 205,867 Obligation for unfunded other postemployment benefits 855,717 618,930

Total liabilities 3,075,357 3,295,437

Net assets held in trust for pension benefits 728,084,796$ 695,445,679$

The accompanying notes are an integral part of these financial statements.

Due from other Wayne County component units

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Statements of Changes in Plan Net AssetsFor the Years Ended September 30, 2012 and 2011

2012 2011Additions

Contributions:Employer 47,676,230$ 13,427,952$ Members 24,308,321 15,874,203

Total contributions 71,984,551 29,302,155

Investment income:Net appreciation (depreciation) in fair value of investments 78,451,874 (22,851,967) Interest 12,650,510 12,154,878 Dividends 7,533,194 5,896,180 Securities lending income 452,525 530,825 Other investment income 1,896,733 2,075,107

Total investment income (loss) 100,984,836 (2,194,977)

Investment expenses (3,091,235) (4,639,798)

Net investment income (loss) 97,893,601 (6,834,775)

Total additions 169,878,152 22,467,380

DeductionsParticipant benefit payments and distributions 134,184,464 132,438,324 Administrative expenses 3,054,571 3,183,680

Total deductions 137,239,035 135,622,004

Change in net assets 32,639,117 (113,154,624)

Net assets held in trust for pension benefitsBeginning of year 695,445,679 808,600,303

End of year 728,084,796$ 695,445,679$

The accompanying notes are an integral part of these financial statements.

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NOTES TO FINANCIAL STATEMENTS

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Notes to Financial Statements

1. PLAN DESCRIPTION

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Member contribution percentages under the various plan options are as follows:

Plan Option 1

Sheriff Command Officers and Sheriff Deputies: Five percent of annual compensation.Others: Contributions are based on credited service, depending on the bargaining unit in which themember participates, as follows:

Contributions. The Plan’s basic benefits, as described in the Pension Ordinance and various collectivebargaining agreements, are funded by contributions from the County and active members, as specified bythe plan option selected, and by the investment income earned on the Plan’s assets.

General. The Wayne County Employees’ Retirement System Defined Benefit Plan (the “Plan”) is acontributory single-employer defined benefit public employee retirement plan governed by the WayneCounty Employees’ Retirement System (“WCERS”) and created under Enrolled Ordinance No. 86-486(November 20, 1986), as amended (the “Pension Ordinance”), of the County of Wayne (the “County”).WCERS was established by the County to provide retirement, survivor, and disability benefits to theCounty’s employees, which includes the employees of the primary government (i.e., the general county) aswell as those of the discretely presented component units, including but not limited to the Wayne CountyAirport Authority and Wayne County Circuit Courts. WCERS is considered part of the County financialreporting entity and is included in the County’s comprehensive annual financial report as a collection offiduciary pension trust funds.

The administration, management and responsibility for the proper operation of the Plan, and forinterpreting and making effective the provisions of the Plan, is vested in the trustees of the Wayne CountyRetirement Commission (the “Retirement Commission”). The Plan is exempt from the requirements of Title1 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and, as such, is notsubject to the reporting and disclosure requirements of ERISA.

Effective October 1, 2001, WCERS established the Wayne County Hybrid Retirement Plan #5 (“Plan Option5”), which contains both a defined benefit component and a defined contribution component. Participantsin the plan options previously in existence (Plan Options 1, 2, 3 and 4) could elect to transfer their accountbalances to Plan Option 5 if authorized during specific time periods noted within collective bargainingagreements.

Effective October 1, 2008, WCERS established another hybrid defined benefit plan option (“Plan Option 6”),which contains both a defined benefit component and a defined contribution component. Participants inPlan Option 5 could elect to transfer their account balances to Plan Option 6, if authorized, during specifictime periods noted within collective bargaining agreements.

Effective October 1, 2001, only Plan Option 5 is available to new employees except for new executives, whomay continue to elect participation in Plan Option 4; Plan Options 1, 2 and 3 are closed to new hires.Because there is no legal requirement to segregate the assets relating to Plan Options 1, 2, 3, 5 or 6 inpaying benefits, the accompanying financial statements include the net assets and changes in net assetsrelating to Plan Options 1, 2 and 3, as well as the defined benefit component of Plan Options 5 and 6. Thedefined contribution portion of Plan Options 5 and 6 are included in the financial statements of the WCERSDefined Contribution Plan.

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CreditedService Contribution Rates

0-8 years 6.00 or 6.58 percent of compensation9-12 years 4.00 or 4.58 percent of compensation13-16 years 3.00 or 3.58 percent of compensation

17 or more years 2.00 or 2.58 percent of compensation

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Plan Option 3

Age 55 with 25 years of service, or age 60 with 20 years of service , or age 65 with five years of servicefor employees other than Sheriff Command Officers.

Any age with 25 years of service for Sheriff Command Officers.

Plan Option 5 - Any age with 30 or more years of service, or age 55 with 25 years of service, or age 60with 20 years of service, or age 65 with eight years of service.

Plan Option 2 - No member contributions.

Plan Option 6 - Four percent of annual compensation.

Pension Benefits. In general, employees who have eight or more years of credited service and haveattained the age specified by the specific plan option chosen are entitled to an annual pension. The servicerequirements for receiving a pension under the various plan options are based on the Pension Ordinance andcollective bargaining agreements and are as follows:

Plan Option 1

Any age with 30 years of service, age 50 with 25 years of service, or age 60 with five years of service foremployees other than Sheriff Command Officers and Sheriff Deputies.

Any age with 25 years of service for Sheriff Command Officers and Sheriff Deputies.

Plan Option 2 - Age 55 with 25 years of service, or age 60 with 20 years of service, or age 65 with eightyears of service.

Plan Option 3 - Three percent of annual compensation.

Plan Option 5 - Employees make either contributions equal to one or five percent of annualcompensation or no contributions at all, depending on each employee’s coverage group.

Plan Option 6 - Any age with 30 or more years of service, or age 55 with 25 years of service, or age 60with 20 years of service, or age 65 with eight years of service.

Amount of Pension Benefits. Benefits are paid monthly over the member or survivor's lifetime based onthe following percentages of average final compensation for each year of credited service:

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2012 2011Active participants:

Vested 1,349 1,324 Nonvested 947 958

2,296 2,282 Terminated vested 118 114 Retired and receiving benefits 5,553 5,627

7,967 8,023

Eligibility. Effective August 15, 1983, the County closed Plan Option 1 to new hires. Plan Option 2 wasavailable to all persons hired after August 15, 1983 and before October 1, 2001, and was also available toPlan Options 1 and 3 members who wished to transfer to this plan before October 1, 2001. Plan Option 3was available to all persons last hired prior to June 30, 1984. Plan Option 5 is available to all persons hiredafter September 30, 2001.

The number of plan participants as of September 30 is as follows:

Death and Disability Benefits. The Plan also provides non-duty death and disability benefits to membersafter 10 years of credited service for Plan Options 1, 2, 5 and 6, along with non-duty death benefits for PlanOption 3. The 10-year service provision is waived for duty disability and death benefits.

Plan Option 3 - Depending on the applicable collective bargaining agreement, either: (a) 2.0 percent foreach year up to 20 years, 2.5 percent for each year between 20 and 25 years, and 3.0 percent for eachyear over 25 years; (b) 1.5 percent for each year up to 20 years, 2.0 percent for each year between 20and 25 years, and 2.5 percent for each year over 25 years; or (c) 2.5 percent for all years of servicecontingent upon payment of $500 per year for each year of credited service up to 20 years. Themaximum County financed portion is 75 percent of average final compensation.

Plan Option 6 - 2.5 percent for each year of service. The maximum County financed portion is 75percent of average final compensation.

Plan Option 5 - Depending on the applicable collective bargaining agreement, either (a) 2.0 percent foreach year of credited service, or (b) 1.25 percent for each year up to 20 years, and 1.5 percent for eachyear over 20 years. The maximum County financed portion is 75 percent of average final compensation.

Plan Option 1 - Depending on the applicable collective bargaining agreement, either: (a) 2.65 percentfor each year; (b) 2.5 percent for each year; or (c) 2.0 percent for each year up to 20 years and 2.5percent for each year over 20 years. The maximum County financed portion is 75 percent of averagefinal compensation. The minimum pension is $5 per month, multiplied by the number of years ofservice.

Plan Option 2 - 1.0 percent for each year up to 20 years, and 1.25 percent for each year over 20 years.The maximum County financed portion is 75 percent of average final compensation.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2012 2011Reserved for (deficit):

Member contributions 132,064,494$ 120,721,766$ Employer contributions (535,131,899) (498,824,056) Pension payments 1,126,899,649 1,061,547,969 Inflation equity 4,252,552 12,000,000

728,084,796$ 695,445,679$

Reserve for Member Contributions. Members contribute at rates as stated in the Pension Ordinance orcollective bargaining agreements for the applicable option. Interest is credited at least annually to thereserve for member contributions. The balance represents active members’ contributions and interest,less amounts transferred to funds for retirement, amounts refunded to terminated members, andtransferred inactive accounts.

Net Assets Held in Trust for Pension Benefits. Net assets held in trust for pension benefits consist of thefollowing reserves:

Basis of Accounting. The Plan’s financial statements are prepared on the accrual basis of accounting usingthe economic resources measurement focus. Member contributions are recognized in the period in whichthe contributions are due. Employer contributions are recognized when due and the employer has made aformal commitment to provide the contributions. Benefits and refunds are recognized when due andpayable in accordance with the terms of the Pension Ordinance. Administrative expenses are financedthrough investment earnings.

Reserve for Employer Contributions. All employer contributions are credited to the reserve for employercontributions. Interest is credited at least annually, and transfers are made to the reserve for pensionpayments to fund the employer’s share of retirement allowances, as recommended by the Plan’sactuaries and approved by the Plan’s trustees.

Reserve for Pension Payments. This reserve represents the reserves for payment of future retirementbenefits to persons already on the retirement rolls. At retirement, a member’s accumulatedcontributions (with interest) are transferred to the reserve for pension payments from the reserve foremployer contributions and from the reserve for member contributions. Interest is credited at leastannually to the reserve for pension payments.

Reserve for Inflation Equity. This reserve represents the reserves for payment of supplemental pensionbenefits. Additions to the reserve are based on the investment results of the Plan. An annual distributionof a percentage of the balance in the reserve is made to each participant in the form of an additionalbenefit check (the “13th check”). The amount of the 13th check is calculated by the Plan’s actuariesand approved by the Plan’s trustees each year, in accordance with the distribution provisions of thePension Ordinance.

The reserve balances as of September 30 are as follows:

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Dividend income is recognized based on the ex-dividend date, and interest income is recognized on theaccrual basis as earned. All realized gains and losses on investments are recognized at the point of sale andare included in investment income. Purchases and sales of investments are recorded as of the trade date,which is the date when the transaction is initiated.

Capital Assets. Capital assets are recorded at historical cost or, for assets acquired before October 1, 2001,at the value appraised as of October 1, 2001. Depreciation is computed using the straight-line method overthe estimated useful lives (five years) of the related assets. Expenditures for maintenance and repairs arecharged to expense. Renewals or betterments which extend the life or increase the value of the propertiesare capitalized.

Valuation of Investments and Income Recognition. Investments are stated at fair value. Short-terminvestments are reported at cost, which approximates fair value. Securities traded on a national orinternational exchange are valued at the last reported sales price at current exchange rates. Fixed debtquotations are provided by a national brokerage pricing service. Real estate values are determined on thebasis of comparable yields available in the marketplace. Investments for which market quotations are notreadily available are valued at their fair values as determined by the custodian under the direction of theRetirement Commission, with the assistance of a valuation service.

Many of the Plan’s investments in private equity and real estate investments are invested in assets which donot have exchange quotations that are readily available. Such assets are valued initially at cost, withsubsequent adjustments to values that reflect meaningful third-party transactions, or to fair value asdetermined by the general partners or management of the investments. Factors considered in valuing theseindividual securities may include, but are not limited to, the purchase price, changes in the financialcondition and prospects of the issuer, calculations of the total enterprise value using discounted cash flowprojections, trading comparables of securities of comparable companies engaged in similar businesses,estimates of liquidation value, the existence of restrictions on transferability, prices received in recentsignificant placements of securities of the same issuer, and other analytical data relating to theinvestment. There are inherent limitations in any estimation technique. Because of the inherentuncertainty of valuations, these estimated values may differ significantly from the values that would havebeen used had a ready market for the investments existed, and the differences could be material.

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3. DEPOSITS AND INVESTMENTS

2012 2011Equity securities and mutual funds

Common stocks 280,083,177$ 263,965,042$ Equity mutual funds 145,522,744 120,168,381 International equities 2,380,677 5,741,845

427,986,598 389,875,268

Debt securities and mutual fundsCorporate bonds 36,841,353 38,377,564 Asset-backed securities 5,856,721 10,004,317 Mortgage-backed securities:

Commercial 12,409,280 13,781,655 Government agencies 19,237,875 16,081,672

Government agencies bonds 821,648 155,978 U.S. government bonds 16,972,567 22,056,355 State and municipal bonds 1,219,723 6,056,903 Foreign debt securities 5,646,536 6,285,326

99,005,703 112,799,770

Money market funds 21,492,551 17,409,568

Other investmentsReal estate investments (private trusts) 105,297,998 101,831,338 Hedge funds 24,855,547 24,827,981 Structured debt 18,038,174 23,322,573 Investments in private equity, net of valuation

allowance of $13,000,000 in 2012 and $1,000,000 in 2011 14,032,524 23,558,272

162,224,243 173,540,164

Total investments 710,709,095$ 693,624,770$

The authority for the purchase and sale of investments rests with the Retirement Commission. Investmentsmade are subject to statutory regulations imposed under the Michigan Public Pension Investment Act 314 of1965, as amended (Act 55, P.A. 1982), and investment policy established by the Retirement Commission. The Investment Act incorporates the prudent person rule and requires investment fiduciaries to act solely in theinterest of the Plan’s participants and beneficiaries. Accordingly, the Retirement Commission has authorityto invest the Plan’s assets in common and preferred stock; obligations of the United States, its agencies orUnited States government-sponsored enterprises; obligations of any state or political subdivision of a statehaving the power to levy taxes; bankers’ acceptances; certificates of deposit; commercial paper; repurchaseagreements; reverse repurchase agreements; real and personal property; mortgages; and certain otherinvestments.

The Plan’s investments are summarized as follows as of September 30:

The Plan’s deposits and investments are subject to various types of risk as discussed below.

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Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. ThePlan’s investment policy places no restrictions greater than what is allowed under Public Act 314 that wouldfurther limit its investment choices. Ratings are not required for U.S. treasuries or certain money marketfunds.

Credit Risk

Custodial Credit Risk

Deposits. Custodial credit risk for deposits is the risk that, in the event of a bank failure, the Plan’s depositsmay not be returned to the Plan. State of Michigan statutes require that certificates of deposit, savingsaccounts, deposit accounts, and depository receipts be made with banks doing business and having a placeof business in the State of Michigan that are also members of a federal or national insurance corporation.

The Plan’s carrying amount of deposits of $14,793,461 and $1,726,401 as of September 30, 2012 and 2011,respectively, are maintained in the County’s pooled cash account maintained by the Wayne CountyTreasurer. In accordance with the County’s investment policy and Public Act 314 of 1965, as amended, alldeposits are uncollateralized and held in the County’s name. The County evaluates each financial institutionand assesses the level of risk of each institution; only those institutions with an acceptable estimated risklevel are used as depositories. In addition, the County’s investment policy places concentration limits on thetotal amount deposited with a single financial institution. Due to the dollar amounts of cash deposits in theCounty’s pooled cash account and limits of FDIC insurance, Plan management believes it is impractical toobtain FDIC insurance for all bank deposits.

Investments. Custodial credit risk for investments is the risk that, in the event of the failure of thecounterparty, the Plan will not be able to recover the value of its investments that are in possession of anoutside party. Investment securities are exposed to custodial credit risk if the securities are uninsured, arenot registered in the name of the entity, and are held by either the counterparty, or the counterparty’strust department or agent, but not in the entity’s name.

The Plan’s investment policy and Public Act 314 of 1965, as amended, require that (a) investments are heldby a third-party safe-keeper in the Plan’s name; (b) investments are held by a trustee in the Plan’s name; or(c) investments are part of a mutual fund. The Plan’s investment policy also requires that the safekeepinginstitution shall annually provide a copy of its most recent report on internal controls (also referred to as a“SOC 1 report”). As of September 20, 2012 and 2011, none of the Plan's investments were subject tocustodial credit risk as they were held in accordance to its investment policy.

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Mortgage- U.S. State and

Corporate Asset-backed backed Government Municipal Foreign Debt

Bonds Securities Securities Agencies Bonds Securities

Standard & Poor's

AAA -$ 2,757,424$ 19,522,776$ 137,721$ -$ -$

AA 2,146,618 1,044,166 136,518 683,927 1,119,719 1,793,173

A 9,378,804 - 5,377,375 - - 1,478,309

BBB 15,633,518 - 4,788,366 - - 2,375,054

BB 1,575,202 - - - - -

D - - 29,395 - - -

Moody's - - - - - -

Aaa - 2,016,866 1,792,725 - - -

Baa 107,209 - - - - -

Unrated 8,000,002 38,265 - - 100,004 -

36,841,353$ 5,856,721$ 31,647,155$ 821,648$ 1,219,723$ 5,646,536$

Asset-backed Mortgage- U.S. State and Foreign

Corporate backed backed Government Municipal Debt

Bonds Securities Securities Agencies Bonds Securities

Standard & Poor's

AAA 66,311$ 7,877,984$ 16,304,998$ -$ 1,049,358$ -$

AA 2,555,902 - 872,467 155,978 - 1,177,632

A 12,185,582 - 8,130,255 - - 3,248,187

BBB 13,701,168 - 2,306,207 - - 1,859,507

BB 1,367,101 - 35,569 - - -

B 501,250 - - - - -

CCC - - 34,709 - - -

Moody's - Aaa - 2,071,588 2,179,122 - - -

Unrated 8,000,250 54,745 - - 5,007,545 -

38,377,564$ 10,004,317$ 29,863,327$ 155,978$ 6,056,903$ 6,285,326$

As of September 30, 2012 and 2011, the Plan’s money market funds were rated A1+ by Standard & Poor’swith weighted average maturities of 43 and 41 days, respectively.

The Plan’s investments in debt securities were rated at September 30, 2011 as follows:

The Plan’s investments in debt securities were rated at September 30, 2012 as follows:

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Less than 1 1-5 6-10 More than 10 Totals

2012

Corporate bonds 811,386$ 8,681,192$ 15,925,333$ 11,423,442$ 36,841,353$

Asset-back securities - 3,643,067 487,782 1,725,872 5,856,721

Mortgage-backed securities:

Commercial - - 16,346 12,392,934 12,409,280

Government agencies 32,439 587,722 1,229,062 17,388,652 19,237,875

Government agencies bonds 137,721 - - 683,927 821,648

U.S. government bonds - 7,777,251 3,271,488 5,923,828 16,972,567

State and municipal bonds 150,225 - - 1,069,498 1,219,723

Foreign debt securities - 2,673,043 2,611,730 361,763 5,646,536

1,131,771$ 23,362,275$ 23,541,741$ 50,969,916$ 99,005,703$

2011

Corporate bonds 2,327,826$ 6,862,912$ 17,201,919$ 11,984,907$ 38,377,564$

Asset-back securities 9,186 7,439,431 1,481,480 1,074,220 10,004,317

Mortgage-backed securities:

Commercial - - 37,178 13,744,477 13,781,655

Government agencies - 346,797 2,427,553 13,307,322 16,081,672

Government agencies bonds - - - 155,978 155,978

U.S. government bonds 6,975,507 1,116,329 8,393,961 5,570,558 22,056,355

State and municipal bonds 4,907,546 99,999 - 1,049,358 6,056,903

Foreign debt securities 70,648 4,015,431 1,192,949 1,006,298 6,285,326

14,290,713$ 19,880,899$ 30,735,040$ 47,893,118$ 112,799,770$

Investment Maturities (fair value by years)

Interest Rate Risk

Interest rate risk is the risk that the value of fixed income and debt security investments will varyunfavorably as a result of a change in interest rates. The Plan’s investment policy does not limit investmentmaturities as a means of managing its exposure to fair value losses arising from increasing interest rates.However, it is the practice of the Plan to manage this risk by purchasing a mix of short and long-terminvestments.

Maturities of the Plan’s debt securities as of September 30 were as follows:

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Fair Value (in U.S. dollars)

Investment/Country Currency 2012 2011

Foreign debt securitiesAustralia Australian dollar 946,892$ 984,184$ Belgium European euro 289,802 - Brazil Brazilian real 333,210 312,480 Canada Canadian dollar 1,088,568 289,245 France European euro 429,607 566,175 Italy European euro 396,900 329,089 Luxembourg European euro - 447,337 Mexico Mexican peso - 391,635 Netherlands European euro 75,618 69,506 Norway Norwegian krone 115,397 112,054 Spain European euro 421,938 400,479 Switzerland Swiss franc - 421,133 United Kingdom British pound 1,477,521 1,894,520 Venezuela Venezuelan bolivar 71,083 67,489

5,646,536 6,285,326

International equitiesAustralia Australian dollar - 63,360 Canada Canadian dollar 1,518,799 3,015,991 Cayman Islands Cayman Islands dollar 37,030 2,177,674 Netherlands European euro 522,854 305,422 Norway Norwegian krone 301,994 179,398

2,380,677 5,741,845

Total 8,027,213$ 12,027,171$

Foreign Currency Risk

Foreign currency risk is the risk that significant fluctuation in exchange rates may adversely affect the fairvalue of an investment. The System’s exposure to foreign currency risk is summarized as follows:

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2012 2011

Common stocks 95,695,213$ 112,066,645$

Corporate bonds 4,707,324 8,422,993

Government agencies bonds 146,209 -

U.S. government bonds 15,014,877 20,789,508

115,563,623$ 141,279,146$

The Plan has commitments to invest $27.3 million in private equities, structured debt and private real estate investments as of September 30, 2012, of which management believes $15.8 million is unlikely to be called.

The Plan has credit enhancement agreements totaling $44.0 million as of September 30, 2012 for which itreceives fees from the companies in exchange for the credit enhancements.

Concentration of Credit Risk

Concentration of credit risk is the risk of loss attributable to the magnitude of an entity’s investments with asingle issuer. Other than obligations issued, assumed, or guaranteed by the United States, its agencies, orUnited States government-sponsored enterprises, the Plan is prohibited by Public Act 314 of 1965, asamended, from investing in more than five percent of the outstanding obligations of any one issuer orinvesting more than five percent of the Plan’s assets in the obligations of any one issuer. The Plan places nolimit on the amount it may invest in any one issuer. As of September 30, 2012 and 2011, there were noinvestments that exceeded five percent or more of the Plan’s total investments, other than investments inmutual funds, similar pooled investments, or investments issued, assumed, or guaranteed by the UnitedStates, its agencies, or United States government-sponsored enterprises.

Securities Lending

A contract approved by the System’s Board, permits the System to lend its securities to broker-dealers andbanks (borrowers) for collateral that will be returned for the same securities in the future. The System’scustodial bank manages the securities lending program and receives predominantly cash as collateral. Thecollateral securities cannot be pledged or sold by the System unless the borrower defaults. Collateral cash isinitially pledged at 102 percent of the fair value of the securities lent for domestic securities and 105percent for international securities, and may not fall below 100 percent during the term of the loan. Thereare no restrictions on the amount of securities that can be loaned. Securities on loan at year-end aresummarized as follows:

At year-end, the System has no credit risk exposure to borrowers as the amounts the System owes theborrowers exceed the amounts the borrowers owe the System. The contract with the System’s custodianrequires it to indemnify the System if the borrowers fail to return the securities (and if the collateral isinadequate to replace the securities lent) or fail to pay the System for income distributions by thesecurities’ issuers while the securities are on loan.

Commitments

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4. CAPITAL ASSETS

Beginning EndingBalance Additions Reductions Balance

2012Furniture and equipment 431,434$ -$ -$ 431,434$ Accumulated depreciation 416,858 4,802 - 421,660

14,576$ (4,802)$ -$ 9,774$

2011Furniture and equipment 422,394$ 9,040$ -$ 431,434$ Accumulated depreciation 413,411 3,447 - 416,858

8,983$ 5,593$ -$ 14,576$

5. ANNUAL REQUIRED CONTRIBUTION

Capital assets consist of equipment, furniture, and fixtures. Depreciable capital asset activity for theyear ended September 30 is as follows:

Depreciation expense is included in administrative expenses in the accompanying statements of changesin plan net assets.

Based upon an ordinance enacted by the Wayne County Board of Commissioners (“WCBC”) onSeptember 30, 2010, the County’s actual contribution for fiscal 2012 was partially offset by using assetsfrom the Plan’s Reserve for Inflation Equity. Accordingly, for the year ended September 30, 2012, $6.0million of the total ARC of $51.7 million was reduced through the offset and only $47.7 million wasactually paid into the Plan. The Airport Authority paid $2.0 million above their ARC to help fund aretirement incentive they offered during the current year. For the year ended September 30, 2011,$26.2 million of the total ARC of $39.6 million was reduced through the offset and only $13.4 million wasactually paid into the Plan.

The WCERS filed a lawsuit against the WCBC and County challenging the legality of Ordinance 2010-514,and seeking an order requiring the WCBC to repeal the Ordinance and the County to contribute the fullamount of the ARC. The County filed a counter-claim asserting the Ordinance was legal as written andclaiming the Retirement Commission breached its fiduciary duties and committed unlawful acts inadministering the Reserve for Inflation Equity.

In September 2011, the Court ruled in favor of the County, declaring the ordinance to be legal aswritten. In December 2011, the Court dismissed the County’s counter-claim against the WCERS. Bothrulings are being appealed by the respective parties.

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6. FUNDED STATUS AND FUNDING PROGRESS

Actuarial valuation date September 30, 2011Actuarial cost method Entry age normalAmortization method contributions Level percent-of-payrollRemaining amortization period 28 years (closed)Asset valuation method 4-year smoothed market Actuarial assumptions:

Investment rate of return 7.75% (includes inflation at 3.5%)Projected salary increases 3.5-9.05% (includes inflation at 3.5%)Cost -of-living adjustments Not applicable

As of September 30, 2011, the most recent actuarial valuation date, the actuarial accrued liability usingthe entry age actuarial cost method was $1,595 million; compared to the actuarial value of assets of$795 million, the Plan had an unfunded actuarial accrued liability of $800 million for a funding ratio of 50percent. The unfunded actuarial accrued liability was 294 percent of covered payroll of $272 million.

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts andassumptions about the probability of occurrence of events far into the future. Examples includeassumptions about future employment and mortality. Actuarially determined amounts are subject tocontinual revision as actual results are compared with past expectations and new estimates are madeabout the future. The schedule of funding progress, presented as required supplementary informationfollowing the notes to the financial statements, presents multi-year trend information about whether theactuarial value of the Plan’s assets are increasing or decreasing over time relative to the actuarialaccrued liability for benefits.

The schedule of employer contributions, presented as required supplementary information following thenotes to the financial statements, presents trend information about the amounts contributed to the Planin comparison to the ARC (annual required contribution), an amount that is actuarially determined inaccordance with the parameters of GASB Statement 25. The ARC represents a level of funding that, ifpaid on an ongoing basis, is projected to cover normal cost for each year and amortize any unfundedactuarial liabilities (or funding excess) over a period not to exceed 30 years.

Projections of benefits for financial reporting purposes are based on the substantive plan (the planunderstood by the employer and plan members) and include the types of benefits provided at the time ofeach valuation and the historical pattern of sharing of benefit costs between the employer and planmembers to that point. The actuarial methods and assumptions used include techniques that aredesigned to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarialvalue of assets, consistent with the long-term perspective of the calculations.

Additional information as of the latest actuarial valuation includes:

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REQUIRED SUPPLEMENTARY INFORMATION

25


Required Supplementary Information

Schedule of Funding Progress (amounts in millions)

Actuarial Actuarial Actuarial UAAL as aValuation Value of Accrued Unfunded Funded Covered % of Covered

Date - Assets Liability AAL (UAAL) Ratio Payroll PayrollSeptember 30 (A) (B) (B-A) (A/B) (C) ((B-A)/C)

2006 895$ 1,000$ 106$ 89% 320$ 33%2007 948 1,170 222 81% 325 68%2008 985 1,339 354 74% 330 107%2009 971 1,444 473 67% 298 159%2010 901 1,502 601 60% 277 217%2011 795 1,595 800 50% 272 294%

Schedule of Employer Contributions (amounts in thousands)

Year Ended Percentage September 30 Required Actual Contributed

2007 15,398$ 15,398$ 100%2008 18,420 18,420 100%2009 32,559 32,559 100%2010 35,401 35,401 100%2011 39,666 13,428 34%2012 51,662 47,676 92%

Annual Contributions

Note: Consistent with previous years, the System expects that its actuarial valuation for the current year (in this instance, asof and for the year ended September 30, 2012) will be completed in August of the following year (August 2013, in this case).

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Documents

Wayne County Employees' Retirement System Defined Benefit Planwcers.org/financial_pubs/DB FY End Sept 30, 2012 and 2011.pdf · Retirement System Defined Benefit Plan (the “Plan”),