STATE BOARD OF ADMINISTRATION GOVERNOR OF AS CHAIRMAN 1801 Hermitage Boulevard-Suite 100 CHIEF FINANCIAL OFFICER Tallahassee, Florida 32308 AS TREASURER (850) 488-4406 BILL McCOLLUM ATTORNEY GENERAL Post Office Box 13300 AS SECRETARY 32317-3300 COLEMAN STIPANOVICH EXECUTIVE DIRECTOR

Executive Director’s Report Fiscal Year 2005-2006

Dear FRS member: There are four key reasons why the FRS Pension Plan is considered to be one of the best pension plans in the At the State Board of Administration of Florida (SBA), nation: investing for Florida’s future is serious business. With a focus on maximizing long-term returns subject to • The SBA Trustees, which during this reporting period vigorous risk control, we manage a carefully balanced consisted of Governor , Chief Financial Officer portfolio that includes a broad spectrum of U.S. and Tom Gallagher and Attorney General Charlie Crist, global stocks, as well as bonds, real estate and private provided strong leadership, set high standards and held equity investments. the Executive Director and SBA staff fully accountable. As fiduciaries, the Trustees and staff are required to FRS PENSION PLAN act solely in the best interest of FRS members and I am pleased to report that the Florida Retirement System beneficiaries. The results of their actions are exemplary. (FRS) Pension Plan remains fully funded, in sharp contrast • The SBA staff has achieved its core mission which is to the majority of public pension funds in the United to provide top-tier investment and trust services States. In the fiscal year ended June 30, 2006, the Plan while adhering to the highest ethical, fiduciary and had assets of more than $118 billion and a surplus, professional standards. As a consequence, the SBA is meaning that its asset base was more than sufficient to highly regarded as one of the nation’s leading public fulfill its mission of providing secure retirement funds for sector investment organizations. the Plan’s nearly one million members and beneficiaries. • The Florida Legislature has served the people of The FRS Pension Plan also had the highest funded ratio Florida well by instituting and supporting good public (actuarial valuation of assets to liabilities) among the ten policies that are fiscally sound and strike a reasonable largest public pension plans in the U.S., according to a balance among the competing interests of the various recent comprehensive survey. Of all public pension funds stakeholders in the system. in the survey, regardless of asset size, the FRS Pension • The Florida Constitution requires that no increase can Plan’s funded ratio ranked third. be made in retirement benefits unless provision is made The FRS surplus at the time of the study (July 1, 2005) to fund the cost on an actuarially sound basis. was $9 billion, which The FRS Pension Plan’s translated into a funded FRS Pension Plan Funded Status financial status illustrates ratio of 108.8%. That’s an 20 years ago, FRS assets were roughly half the value of how sound public policy, 118.1% 117.9% 115.0%

important achievement its liabilities, representing a substantial funding deficit. 114.2% 113.4% 112.1%

Today the plan has a surplus of 7.0%. 108.8% prudent governance and 107.0% since, at that time, 93% 106.0% 100% risk-conscious investment

or 109 of the 117 public 91.3% management can result pension plans in the 83.8% 77.0%

73.1% in a well-funded defined survey had a funding 69.4% 64.3% benefit retirement plan 59.5% 57.3% 56.8% 56.0% 55.5% deficit and the median 55.1% 54.3% that provides a secure funded ratio across all source of retirement plans was just 84.9%. (As income for its members shown in the chart to the Actuarial Assets as % of Liabilities without unduly burdening right, the surplus is slightly taxpayers or incurring less today since some of 0% excessive risk. the surplus has been used 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Note: Amounts are interpolated for 1986, 1988, 1990, 1992, 1994 and 1996 because As of July 1 of Indicated Year to reduce required actuarial valuations were conducted biennially prior to 1997. employer contributions.) The net asset value of the FRS The SBA’s objectives for Cumulative Performance History Pension Plan increased to a Fiscal Years 1976 Through 2006 strengthening corporate year-end record high of $118.4 1800% governance at public billion as of June 30, 2006, 1600% companies include establishing

1400% Cumulative Net Return on FRS Pension after paying a total of $5.2 Plan Assets independent boards, majority billion in benefits to plan 1200% voting for directors, SBA's Long-Term Return Objective members and beneficiaries 1000% (currently 4.0% plus inflation) performance-based executive during the year. The net 800% Actuarial Return Assumption (currently compensation, accurate 7.75%) investment return of 10.56% 600% accounting and auditing for the year beat the SBA’s 400% practices, transparent board investment benchmark by 200% procedures, formal policies to

53 basis points. This solid 0% support succession planning 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 investment performance Fiscal Year Ending June 30 and meaningful shareholder resulted in $579 million in Returns are net of investment manager fees for periods after December 1984. participation. Without question, added value, over and above we believe that fostering $10.9 billion earned in broad better corporate governance market returns. As s ets Under S B A Management enhances shareholder value $160

$151.1 and ultimately supports $139.5

Billions $140 Other Funds FRS INVESTMENT PLAN $134.2 our long-term investment $128.2 $125.6

FRS Pension Plan $120.9 $118.1 As a voluntary alternative to $120 $116.7 objectives. Top number indicates total $104.6 the FRS Pension Plan and assets under management $100 In closing, I want to thank the modeled after 401(k) plans, $85.1 $80 Trustees for their outstanding the FRS Investment Plan $70.3

$60 $58.9 leadership and support during $51.0 $118.4 provides eligible members $49.4 $109.9 $106.6 $102.4 $41.3 $98.2 this fiscal year. I also want to $96.4 $90.4 $89.5

$40 $36.0 with diverse investment $83.4 $31.4 $26.0 $67.1 thank the SBA staff for their $22.7 $20.5 $54.0 options from which to choose, $20 $16.8 $44.7 $12.2 $36.3 $8.7 $34.5 dedication and hard work in $28.6 $23.7 $20.5 $17.5 $14.4 and the significant advantage $13.7 $11.8 $8.8 $0 $6.3 making us one of the best of portable retirement 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 public investment boards in the benefits. During the year, Net as s et value as of J une 30 of indicated year nation. I am extremely proud enrollment in the FRS to be part of the SBA team Investment Plan continued to and privileged to serve the FRS rise, supported by a retirement education program that members and beneficiaries. provides professional, unbiased financial guidance to members at no cost to them. By year’s end, 9.5% of all For a full copy of the investment report, go to FRS-covered employees were enrolled in this plan, up www.SBAFLA.com and click SBA 2005-2006 from 7.8% a year earlier. Investment on the home page.

Total FRS Investment Plan assets increased to Sincerely, approximately $2.3 billion from $1.4 billion a year earlier due to higher enrollments, payroll contributions, benefit transfers from the FRS Pension Plan and gains in the financial markets. Coleman Stipanovich Executive Director CORPORATE GOVERNANCE The SBA continued to play an active role in supporting sound governance of corporations, both domestic and foreign. Through proxy voting and other actions, the SBA is working to encourage companies to adhere to high ethical standards and industry best practices. During the fiscal year, the SBA cast votes through 3,478 public company proxies, expressing its position on a wide range of issues.