2011 Comprehensive Annual Financial Report for Fiscal Year Ended June 30, 2011
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A C O M P O N E NT U NIT OF THE S T AT E O F AR I Z O N A ● D E L I V E R I N G S E R V I C E W I T H P RIDE 2011 Comprehensive Annual Financial Report For Fiscal Year Ended June 30, 2011 Arizona State Retirement System A COMPONENT UNIT OF THE STATE OF ARIZONA Mr. David Byers, Chair Mr. Thomas Connelly, Vice Chair Report Prepared by the Staff of the Arizona State Retirement System Paul Matson, Director Comprehensive Annual Financial Report for Fiscal Year Ended June 30, 2011 TABLE OF CONTENTS I. Introductory Section Certificate of Achievement for Excellence in Financial Reporting 1 Public Pension Standards Award 2 Letter of Transmittal from the Director 3 Administrative Organization Organizational Chart 10 ASRS Board of Trustees 11 Executive Staff 12 Chief Outside Professional Services 13 Summary of 2011 Retirement Legislation 14 II. Financial Section Independent Auditors’ Report 22 Management’s Discussion and Analysis 24 Basic Financial Statements Combined Statement of Plan Net Assets 30 Combined Statement of Changes in Plan Net Assets 31 Notes to the Basic Financial Statements 32 Required Supplementary Information Schedule of Funding Progress 52 Schedule of Employer Contributions 53 Notes to Required Supplementary Information 54 Additional Supplementary Information Combining Schedule of Retirement Net Assets 60 Combining Schedule of Changes in Retirement Net Assets 61 Schedule of Additions by Source 62 Schedule of Deductions by Type 62 Schedule of Professional Consultant Fees 63 Schedule of Administrative Expenses 64 Schedule of Total Investment Expense by Manager 65 TABLE OF CONTENTS (CONTINUED) III. Investment Section Investment Report 70 Investment Results Performance Accounting / Computation Standards 73 Annualized Rates of Return 73 Historical Rates of Return 73 Ten Year Review of Investment Income 74 Net Income from Investments 74 Asset Allocation Summary of Investments 75 Equity Portfolio Profile Equity Sub-Sector Allocation 76 Ten Largest Domestic Equity Holdings 76 Distribution by Market Sector 77 Ten Largest International Equity Holdings 77 Summary of Broker Commissions 77 Fixed Income Portfolio Profile Distribution by Sector 78 Distribution by Maturity 78 Distribution by Coupon 78 Ten Largest Domestic Fixed Income Holdings 78 Portfolio Profile Ten Largest Real Estate Managers 79 Ten Largest Private Equity Managers 80 Opportunistic Managers 80 Schedule of Broker Commissions Domestic Equity Trades 81 Foreign Equity Trades 83 Schedule of Investment Fees Equity & Fixed Income 84 Real Estate 86 Private Equity 87 Opportunistic 88 TABLE OF CONTENTS (CONTINUED) IV. Actuarial Section Plan and HBS (combined) Actuarial Certification Statement 90 General Actuarial Information 97 Summary of the Benefit Provisions 100 Plan and HBS Schedules Statement of Actuarial Methods and Assumptions 106 Schedule of Plan Active Member Valuation Data – Last 6 Years 111 Schedule of Retirees Added to and Removed from Rolls: Plan - Last 6 Years 111 Schedule of Retirees Added to and Removed from Rolls: HBS - Last 2 Years 111 Schedule of Unfunded (Over) Accrued Liabilities – Plan – Last 10 Years 112 Solvency Test: Plan – Last 10 Years 112 Solvency Test: HBS – Last 10 Years 113 Schedule of Recommended vs. Actual Plan Contributions – Last 10 Years 113 Analysis of Financial Experience for the Plan – Last 10 Years 114 Analysis of Financial Experience for HBS – Last 10 Years 114 History of Contribution Rates 115 LTD Actuarial Certification Statement 116 General Actuarial Information 119 Summary of Benefit Provisions 120 Statement of Actuarial Methods and Assumptions 122 LTD Schedules Schedule of Benefit Recipients Added to and Removed from Rolls – Last 6 Years 124 Schedule of Unfunded (Over) Accrued Liabilities – Last 6 Years 124 Solvency Test – Last 6 Years 125 Schedule of Recommended vs. Actuarial LTD Contributions – Last 10 Years 125 Analysis of Financial Experience for LTD 126 Legislative Plan Changes Summary of Legislative Plan Changes 128 TABLE OF CONTENTS (CONTINUED) V. Statistical Section This part of the Arizona State Retirement System’s Comprehensive Annual Financial Report presents detailed information as a context for understanding what the information in the financial statements, note disclosures, and required summary information says about the ASRS’s overall financial health. Financial Trends Net Assets - Last 10 Fiscal Years 142 Changes in Net Assets - Last 10 Fiscal Years 143 Revenues Actual Contribution Rates - Last 10 Fiscal Years 145 Operations Members by Type of Benefit - As of June 30, 2011 146 Average Benefit Payments - Last 10 Fiscal Years 147 Principal Participating Employers - Current Year and Nine Years Ago 150 A C O M P O N E NT U NIT OF THE S T AT E O F AR I Z O N A ● D E L I V E R I N G S E R V I C E W I T H P RIDE Introductory Section 2011 CERTIFICATE OF ACHIEVEMENT FOR EXCELLENCE IN FINANCIAL REPORTING The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the Arizona State Retirement System for its comprehensive annual financial report for the fiscal year ended June 30, 2010. This was the 22nd consecutive year that the Arizona State Retirement System has achieved this prestigious award. INTRODUCTORY SECTION | 1 PUBLIC PENSION STANDARDS AWARD FOR PLAN FUNDING AND ADMINISTRATION The National Association of State Retirement Administrators (NASRA), National Conference on Public Employee Retirement Systems (NCPERS), and the National Council on Teacher Retirement (NCTR) awarded a Public Pension Standards Award to the Arizona State Retirement System for plan design and administration as set forth in the Public Pension Standards for 2011. The Public Pension Standards are intended to reflect minimum expectations for public re- tirement system management and administration, as well as serve as a benchmark by which all defined benefit public plans should be measured. This is the 7th consecutive year that the Arizona State Retirement System has received this prestigious award. 2 | 2011 COMPREHENSIVE ANNUAL FINANCIAL REPORT LETTER OF TRANSMITTAL FROM THE DIRECTOR ARIZONA STATE RETIREMENT SYSTEM 3300 NORTH CENTRAL AVENUE PO BOX 33910 PHOENIX, AZ 85067-3910 PHONE (602) 240-2000 7660 EAST BROADWAY BOULEVARD SUITE 108 TUCSON, AZ 85710-3776 PHONE (520) 239-3100 Paul Matson TOLL FREE OUTSIDE METRO PHOENIX AND TUCSON 1 (800) 621-3778 Director EMAIL ADDRESS: [email protected] WEB ADDRESS: WWW. AZASRS.GOV October 24, 2011 To: The Arizona State Retirement System Board of Trustees On the behalf of the ASRS staff, I am pleased to present the fifty-eighth Comprehensive Annual Financial Report of the Arizona State Retirement System (ASRS), a component unit of the State of Arizona, for the fiscal year ended June 30, 2011. Title 38 of the Arizona Revised Statutes requires the ASRS Board of Trustees (ASRS Board) to submit an annual report to the Governor and the Legislature within eight months of the close of each fiscal year. This report complies with the legal requirements governing the preparation and content of annual reports. Responsibility for both the accuracy of the data, and the completeness and fairness of the presentation, rests with the ASRS management. Management relies on a comprehensive framework of internal controls to provide reasonable, rather than absolute, assurance that the financial statements are free of any material misstatements. Heinfeld, Meech & Co., P.C. has issued an unqualified (“clean”) opinion on the ASRS financial statements for the year ended June 30, 2011. The Independent Auditors’ Report is located at the front of the financial section of this report. Management’s discussion and analysis (MD&A) immediately follows the Independent Auditors’ Report and provides a narrative introduction, overview, and analysis of the basic financial statements. MD&A complements this letter of transmittal and should be read in conjunction with it. History and Overview The ASRS was created in 1953 to provide defined contribution retirement benefits to employees of the state of Arizona, Arizona universities, and political subdivisions. During calendar year 1954, Arizona teachers voted to join the ASRS effective January 1, 1955. In 1970, the state legislature authorized the creation of a defined benefit plan, contingent upon the election to transfer a minimum 70 percent of the ASRS membership. More than 80 percent voted to transfer to the defined benefit plan, which became effective July 1, 1971. At June 30, 2011, total ASRS membership, including active, inactive, disabled and retired members is 538,774. There are 704 employer units participating in the ASRS, including school districts, charter schools, state colleges and universi- ties, and local, county and state government. Active non-state employees are also eligible to participate in an ASRS sponsored Supplemental Salary Deferral Plan (SSDP) and/or Supplemental Retirement Savings Plan (SRSP). The SSDP is a supplemental defined contribution plan INTRODUCTORY SECTION | 3 LETTER OF TRANSMITTAL FROM THE DIRECTOR (CONTINUED) qualified under 403 (b) and 457 (b) of the Internal Revenue Code. The SRSP is a supplemental defined contribution plan qualified under 401 (a) of the Internal Revenue Code. In addition to pension benefits, the ASRS provides a health insurance premium benefit and sponsors medical and den- tal coverage for retired and disabled members and their eligible dependents and children. Active members also re- ceive long-term disability insurance coverage equal