Comprehensive Annual Financial Report California Public Employees’ Retirement System Year Ended June 30, 2004 Fred Buenrostro, Chief Executive Officer
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Comprehensive Annual Financial Report Year Ended June 30, 2004 California Public Employees’ripple Retirement System effects Table of Contents Comprehensive Annual Financial Report California Public Employees’ Retirement System Year Ended June 30, 2004 Fred Buenrostro, Chief Executive Officer Introductory Section Chief Executive Officer’s Letter of Transmittal 2 CalPERS Organizational Chart 6 Financial Section Report of Independent Accountants 8 Management’s Discussion and Analysis 10 Basic Financial Statements Statement of Fiduciary Net Assets 30 Statement of Changes in Fiduciary Net Assets 32 Statement of Changes in Asset and Liabilities — Agency Fund 33 Statement of Net Assets — Proprietary Funds 34 Statement of Revenues, Expenses, and Changes in Fund Net Assets — Proprietary Funds 35 Statement of Cash Flows — Proprietary Funds 36 Notes to the Basic Financial Statements 37 Required Supplemental Schedules Required Supplemental Schedule of Funding Progress 56 Required Supplemental Schedule of Employer Contributions 58 Notes to Required Supplemental Schedules 60 Required Supplemental Schedule of Claims Development Information 61 Supporting Schedules Administrative Expenses — All Funds 66 Other Investment Expenses — All Funds 67 Consultant and Professional Services Expenses — PERF 69 Investment Section Chief Investment Officer’s Letter 72 Summary of Investments — PERF 73 Investment Performance — PERF 74 CalPERS Asset Allocations — PERF 75 Portfolio of California Investments at Market Value — PERF 76 Largest Stock and Bond Holdings at Market Value — PERF 77 Schedule of Commissions and Fees — PERF 78 Schedule of Fees and Costs for Private Equity Partners — PERF 81 Schedule of Fees and Costs for Private Equity Funds in California Emerging Venture Funds — PERF 83 Schedule of Fees and Costs for Absolute Return Strategies Program — PERF 85 Judges’ Retirement Fund II — Investments 86 Legislators’ Retirement Fund — Investments 87 Volunteer Firefighters’ Fund — Investments 88 Table of Contents (continued) Actuarial Section — Based on Actuarial Valuations as of June 30, 2003 CalPERS Actuarial Certification 90 CalPERS Actuarial Methods and Assumptions 91 Changes Since Prior Valuation 94 Summary of Funding Progress 95 Exhibit A - Funding Progress — Unfunded Liability and Funded Ratios 96 Exhibit B - Funding Progress — Solvency Test 98 Exhibit C - Sample Pay Increase Assumptions for Individual Members 101 Exhibit D - Sample Non-Economic Assumptions 103 Exhibit E - Single Life Retirement Values 111 Exhibit F - History of Member Salary Data 111 Exhibit G - Members in Valuation 112 Exhibit H - Schedule of Retirees and Beneficiaries Added to and Removed from Rolls 117 Actuarial Certifications — Other Systems 118 Statistical Section Retirement Programs CalPERS Program Data 122 CalPERS Public Agency Employers 135 Judges’ Retirement System Program Data 149 Judges’ Retirement System II Program Data 151 Legislators’ Retirement System Program Data 153 Volunteer Firefighters’ Length of Service Award System Program Data 157 Other Programs Health Benefits Program 160 Deferred Compensation Program 171 Long-Term Care Program 172 Prepared by the staff of the California Public Employees’ Retirement System Introductory Section creating communities Our investment in a 1,200-acre master-planned community, Whitney Ranch, in Rocklin, California is having a ripple effect on a growing Northern California region. The effect is widespread, as many of the local improvements necessary to build, the new community will benefi t everyone who lives and works in the surrounding area. 1 CEO Letter of Transmittal December 17, 2004 Members of the CalPERS Board of Administration: I am pleased to present the CalPERS Comprehensive Annual Financial Report (CAFR) and accompanying Operations Summary for the year ended June 30, 2004. By virtually any measure, fiscal year 2003-04 was a year of meaningful progress for our organization. It represented a year of solid execution and growth in our financial performance, more effective retirement and health benefits administration, and highly responsive customer service, for both members and employers. We worked hard during the year to achieve and deliver a significantly stronger financial performance, which resulted in a sound investment return of 16.6 percent. The ripple effect of our investment staff’s hard work will help stabilize employer rates. We also continued our national leadership role in advocating for corporate responsibility in our capital markets with a primary goal to make corporate boards accountable to shareowners. In addition, we pushed ahead to fight back against escalating health care costs by executing our health benefits cost and quality strategic plan, making significant strides in health care reform. We streamlined our customer service, improved our benefits administration, and provided strong, secure asset management. I am proud of the outstanding accomplishments presented in this report for fiscal year 2003-04. I would like to acknowledge the leadership of our Board, and the steadfastness of our management and staff and the many contributions to our excellence from our stakeholders. I speak for all 1,600 employees who work for CalPERS, when I say we are proud and honored to serve our more than 1.4 million members and our 2,500 employers, and the taxpayers of California. Fred Buenrostro, Chief Executive Officer 2 CEO Letter of Transmittal (continued) I encourage you to review the information in this report. It CalPERS has established and maintains a system of internal provides information on all the programs administered by controls designed to provide reasonable assurance that assets CalPERS: Public Employees’ Retirement Fund (PERF), are properly safeguarded, transactions are properly executed, Legislators’ Retirement Fund (LRF), Judges’ Retirement and financial statements are reliable. In addition, internal Fund (JRF), Judges’ Retirement Fund II (JRF II), Volunteer audit personnel provide a continuing review of the internal Firefighters’ Length of Service Award Fund (VFF), State controls and operations of CalPERS, and the Chief of the Peace Officers’ and Firefighters’ Defined Contribution Plan Office of Audit Services regularly reports to the CalPERS Fund (SPOFF), Health Care Fund (HCF), Contingency Board of Administration’s Finance Committee. The Reserve Fund (CRF), Old Age & Survivors’ Insurance Committee reviews the audit findings and recommendations Revolving Fund (OASI), Replacement Benefit Fund (RBF), for improvements in internal control and operational Supplemental Contributions Program Fund (SCPF), efficiency and the actions of management to implement Long-Term Care Fund (LTCF), Deferred Compensation such recommendations. Fund (DCF), and Public Agency Deferred Compensation Program (IRC 457). Our independent external auditors, Deloitte & Touche LLP, have conducted an audit of the basic financial statements in Beginning in 1932, the System began providing services to accordance with auditing standards generally accepted in the State employees. In 1939, public agencies and school United States of America, performing such tests and other districts were allowed to contract with CalPERS to provide procedures as they deem necessary to express an opinion in retirement benefits for their employees. While primarily their report to the Board. The external auditors also have responsible for administering retirement, death, and health full and unrestricted access to the Board to discuss their benefits, CalPERS also administers supplemental retirement audit and related findings as to the integrity of the financial savings plans and long-term care insurance. As a service to reporting and adequacy of internal control systems. members and employers, a variety of educational workshops and seminars are also offered. Awards Management Responsibility for Financial Reporting The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate The CalPERS financial statements included in this CAFR of Achievement for Excellence in Financial Reporting to for the 2003-04 fiscal year have been prepared by System CalPERS for our Comprehensive Annual Financial Report management, which is responsible for the integrity and for the fiscal year ended June 30, 2003. This was the fairness of the data presented, including the many amounts eighth consecutive year that CalPERS has achieved this that out of necessity must be based on estimates and prestigious award. judgments. The accounting policies followed in preparation of these financial statements conform with accounting In order to be awarded a Certificate of Achievement, a principles generally accepted in the United States of government must publish an easily readable and efficiently America. Financial information presented throughout this organized comprehensive annual financial report. This Annual Report is consistent with these financial statements. report must satisfy both generally accepted accounting principles and applicable legal requirements. 3 CEO Letter of Transmittal (continued) A Certificate of Achievement is valid for a period of one Accounting System & Reports year only. We believe our current comprehensive annual report continues to meet the Certificate of Achievement Management is responsible for establishing and maintaining Program’s requirements, and we are submitting it to GFOA an internal control structure designed to ensure that to determine its eligibility for another certificate. CalPERS assets are protected from loss, theft, or misuse, and income is equally distributed.