Fiscal Year 2007
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Working today for a secure tomorrow Comprehensive Annual Financial Report Kansas Public Employees Retirement System A component unit of the State of Kansas Fiscal year ended June 30, 2007 2007 Comprehensive Annual Financial Report Kansas Public Employees Retirement System A component unit of the State of Kansas Fiscal year ended June 30, 2007 Prepared by KPERS Staff 611 S. Kansas Ave., Suite 100 Topeka, KS 66603-3803 Glenn Deck, Executive Director Leland Breedlove, Chief Fiscal Officer Working today for a secure tomorrow Table of Contents GFOA Certificate 6 Required Supplementary Information — Retirement Plan Introductory Section Schedule of Employer Contributions 40 Transmittal Letter 8 Schedule of Funding Progress 41 Our Accomplishments 11 Actuarial Valuation Information 41 Board of Trustees 12 Required Supplementary Information — Executive Staff 12 Death and Disability Plan Organization Chart 13 Schedule of Employer Contributions 42 Auditors, Actuary, Investment Consultants, Schedule of Funding Progress 42 Investment Managers, Investment Custodian, Life Insurance Administrator, Other Supplementary Schedules Long-Term Disability Administrator 13 Schedule of Contributions 43 KPERS Staff 14 Schedule of Administrative Expenses 44 Financial Section Schedule of Investment Income by Asset Class 45 Independent Auditors’ Report 16 Schedule of Investment Fees and Expenses 46 Management’s Discussion & Analysis 17 Investment Section Basic Financial Statements Chief Investment Officer’s Review 48 Statement of Plan Net Assets 23 Equity Investments 50 Statement of Changes in Plan Net Assets 24 Fixed Income Investments and Treasury Inflation Protected Securities 53 Note 1: Plan Description 25 Real Estate Investments 55 Note 2: Summary of Significant Accounting Policies 27 Alternative Investments 57 Note 3: Funding Policy 35 Alternative Investment Initiated on or After July 1991 58 Note 4: Other Post Employment Benefit Plan — KPERS Death and Disability Plan 38 U.S. Equity Commissions 60 Note 5: Commitments and Contingencies 40 List of Largest Holdings 61 Investments Fair Value Summary 62 Table of Contents Working today for a secure tomorrow Table of Contents Actuarial Section Retirees and Beneficiaries – Changes in Rolls for All Systems 112 Retirement System Summary of Membership Data 113 Actuary’s Certification Letter 64 Actuarial Valuation Overview 66 Death and Disability Program Projected Contribution Rates 69 Actuary’s Certification Letter 114 Contribution Rates 70 Executive Summary 116 Experience – All Systems Combined 73 Experience 120 Summary of Change in Unfunded Actuarial Liability 78 Actuarial Assumptions 122 Summary of Changes in Actuarial Contribution Rate Actuarial Methods 124 by System 78 Plan Provisions 125 Summary of Historical Changes n Total System UAL 79 Schedule of Combined Employer Contribution Rates 127 Calculation of Excess (Shortfall) Investment Income for Actuarial Value of Net Assets • State 80 Statistical Section • School 80 • State/School Combined 81 Revenues by Source 130 • Local 81 • KP&F 82 Benefits by Type 131 • Judges 82 Expenses by Type 131 Development of Actuarial Value of Net Assets 83 Changes in Net Assets 132 Summary of Principal Results • All Systems Combined 84 Highlights of Operations Ten-Year Summary 134 • State 84 • School 85 Principal Participating Employers 136 • State/School Combined 86 Monthly Retiree Benefit Amounts as of December 2006 137 • Local 87 • KP&F 88 Benefit and Refund Deductions • Judges 89 from Net Assets by Type 137 Actuarial Assumptions 90 Number of Retired Members and Survivors by Type of Benefit 138 Actuarial Methods 100 Number of Retired Members and Survivors Plan Provisions 101 by Type of Payment Option 139 Short Term Solvency Test 110 Average Monthly Benefit by Years of Service 140 Schedule of Active Member Valuation Data 111 Membership Profile 112 2007 Annual Report Working today for a secure tomorrow Working today for a secure tomorrow Working today for a secure tomorrow Introductory Section Comprehensive Annual Financial Report Fiscal year ended June 30, 2007 2007 Annual Report 7 Working today for a secure tomorrow KANSAS PUBLIC EMPLOYEES RETIREMENT SYSTEM KATHLEEN SEBELIUS, GOVERNOR December 17, 2007 Dear Board of Trustees and Members: I am pleased to present the Kansas Public Employees Our profile Retirement System’s Comprehensive Annual Financial The Kansas Legislature created the Kansas Public Report (CAFR) for fiscal year 2007. The initiatives and Employees Retirement System in 1962 to secure a financial information included in this report represent financial foundation for those spending their careers in more than just a year of our work. They represent our Kansas public service. The Retirement System provides commitment to our mission … providing benefits. We work disability and death benefits to protect employees while every day to secure tomorrow for the members we serve. they are still working, and guarantees them a lifetime benefit when they retire. In addition to informing the Board of Trustees, members and employers, our annual report fulfills KPERS’ reporting We have three state-wide defined benefit retirement plans responsibilities defined in Kansas statute. Printed copies offered by about 1,450 state and local employers. Our are readily available to the public as well as a full version is membership totals over 250,000, including active, inactive posted on our web site, kpers.org. and retired members. Retirement System total revenues were over $2.8 billion with benefit payments approaching As the first item in the CAFR, this transmittal letter provides $1 billion for fiscal year 2007. Approximately 85 to 90 a high-level overview of the Retirement System. The percent of those benefits remained in Kansas. Management’s Discussion and Analysis section, beginning on page 17, provides a narrative introduction and analysis A nine-member Board of Trustees oversees the Retirement of our financial activities over the last two fiscal years. This System: four are appointed by the Governor, one is letter is intended to complement the MD&A and they should appointed by the President of the Senate, one is appointed be read together. by the Speaker of the House of Representatives, two are elected by Retirement System members, and one is the elected State Treasurer. The Board appoints an executive Ensuring accuracy director who manages a staff to carry out daily operations. Responsibility for the preparation, accuracy and completeness of this report, including all disclosures, The Board approves the System’s annual operating budget. rests firmly with KPERS management. Information is As a component unit of the State of Kansas, the budget is presented in accordance with generally accepted accounting also approved by the Kansas Legislature and Governor as principles. To the best of our knowledge, the enclosed data part of the regular legislative budgetary process. is accurate in all material respects and fairly presents our financial position and operating results. Financial position and funding outlook The Retirement System maintains a framework of internal According to the Retirement System’s most recent actuarial controls to establish reasonable assurance that assets are valuation (dated December 31, 2006), the System remains in safeguarded, transactions are completed accurately, and actuarial balance. The overall funded ratio is 69 percent, the financial statements are fair and reliable. We also have an same as the funded ratio for the year before. The System’s internal audit program that reports to the Board of Trustees. unfunded actuarial liability (UAL) increased as expected In addition to internal controls, the independent certified from $5.15 billion in 2005 to $5.36 billion as of December public accounting firms Allen, Gibbs & Houlik, L.C. and 31, 2006. This UAL amount is the gap between the actuarial Berberich Trahan & Co., PA, conducted an independent value of assets and the actuarial liability for service already audit of the Retirement System for 2007. earned by public employees. 8 Introductory Section Working today for a secure tomorrow Over the last six years, we have partnered with the The System’s portfolio as a whole outperformed the Policy Legislature and Governor on a long-term plan to address Index by 100 basis points, led by strong performance from the funding shortfall. Key steps have been taken to the real estate and alternatives areas. Several asset classes implement this plan. had solid returns, but slightly lagged their benchmarks. The • A series of employer contribution rate increases System’s return rate was 18.0 percent for the fiscal year, • Pension obligation bonds exceeding our long-term actuarial target of 8 percent. • Actuarial changes • Plan design changes for future employees While individual returns each year are important, healthy returns over time are essential for proper funding. For Although recent employer rate increases and pension the last decade, KPERS has a ten-year annual return obligation bonds have improved KPERS’ funding average of 8.8 percent. For more information about projections, significant challenges remain. The System’s KPERS diversified and disciplined approach to executing funding will remain leveraged for the next ten to 15 years our investment strategy and policies, please refer to the until future employer contributions reach the actuarially- investment section in this report, beginning on page 47. required contribution rates. During this time, the UAL will This section also provides details about our asset