Comprehensive Annual Financial Report Oregon Public Employees Retirement System An Agency of the State of Oregon For the Fiscal Year Ended June 30, 2015 Oregon Public Employees Retirement System An Agency of the State of Oregon Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2015 Steven Patrick Rodeman Executive Director Kyle J. Knoll Chief Financial Officer 11410 SW 68th Parkway, Tigard OR 97223 Mailing Address – PO Box 23700, Tigard OR 97281-3700 – Phone 503-598-7377 Website – http://oregon.gov/pers Table of Contents INTRODUCTORY SECTION ACTUARIAL SECTION 2 Letter of Transmittal 82 Actuary’s Certification Letter 6 Public Employees Retirement Board 87 Actuarial Assumptions and Methods 7 Organizational Chart 96 Schedule of Active Member Valuation Data 8 Certificate of Achievement 96 Schedule of Retirees and Beneficiaries Added to 9 Public Pension Standards Award and Removed From Rolls 97 Schedules of Funding Progress by Rate Pool FINANCIAL SECTION 98 Analysis of Financial Experience 12 Independent Auditor’s Report 100 Solvency Test 17 Management’s Discussion and Analysis Plan Summary Basic Financial Statements 102 Summary of Plan Provisions 26 Statement of Fiduciary Net Position - Pension and Other Postemployment Plans STATISTICAL SECTION 28 Statement of Changes in Fiduciary Net Position - 110 Statistical Notes Pension and Other Postemployment Plans 111 Fiscal Year Additions by Source - Retirement 30 Statement of Net Position - Proprietary Fund Programs 31 Statement of Revenues, Expenses, and Changes in 112 Fiscal Year Deductions by Type - Retirement Net Position - Proprietary Fund Programs 32 Statement of Cash Flows - Proprietary Fund 113 Fiscal Year Changes in Net Position - Retirement 33 Notes to the Financial Statements Programs 114 Fiscal Year Additions by Source - OPEB Required Supplementary Information 115 Fiscal Year Deductions by Type - OPEB 61 Schedule of Changes in Net Pension 116 Fiscal Year Changes in Net Position - OPEB Liability/(Asset) 117 Calendar Year Additions by Source - Retirement 61 Schedule of Investment Returns Programs 62 Schedule of Defined Benefit Pension Plan 118 Calendar Year Deductions by Type - Retirement Contributions Programs 64 Schedule of Funding Progress 119 Calendar Year Changes in Net Position - 65 Schedule of Employer Contributions Retirement Programs 66 Schedule of Claims Development Information 120 Calendar Year Additions by Source - OPEB Other Supplementary Information 121 Calendar Year Deductions by Type - OPEB 67 Schedule of Plan Net Position - Defined Benefit 122 Calendar Year Changes in Net Position - OPEB Pension Plan 123 Schedule of Benefit Expenses by Type 68 Schedule of Changes in Plan Net Position - 123 Schedule of Earnings and Crediting Defined Benefit Pension Plan 123 Schedule of Average OPEB Benefits for 69 Schedule of Administrative Expenses - All Funds Retirement Health Insurance Account 69 Schedule of Payments to Consultants and 123 Schedule of Average OPEB Benefits for Retiree Contractors Health Insurance Premium Account 70 Summary of Investment Fees, Commissions, and 124 Schedule of Average Defined Benefit Pension Expenses Payments 124 Schedule of Benefit Recipients by Benefit Type INVESTMENT SECTION 125 Schedule of Retirement System Membership - 72 Investment Officer’s Report Calendar Year 74 Description of Investment Policies 125 Schedule of Retirement System Membership - 75 Investment Results Fiscal Year 76 Investment Target and Actual Allocations 125 Schedule of Principal Participating Employers 126 Schedule of Participating Employers 77 List of Largest Assets Held 78 Schedule of Fees and Commissions 78 Schedule of Broker Commissions 79 Investment Summary • i • Introductory Section Oregon Public Employees Retirement System Letter of Transmittal Public Employees Retirement System Headquarters: Oregon 11410 S.W. 68th Parkway, Tigard, OR Mailing Address: Kate Brown, Governor P.O. Box 23700 Tigard, OR 97281-3700 (503) 598-7377 TTY (503) 603-7766 http://oregon.gov/PERS/ December 1, 2015 Public Employees Retirement Board Oregon Public Employees Retirement System 11410 SW 68th Parkway Tigard, Oregon 97223 We are pleased to submit the Comprehensive Annual Financial Report (CAFR) of the Oregon Public Employees Retirement System (PERS or the System) for the fiscal year ended June 30, 2015. This report includes all funds over which the Public Employees Retirement Board (Board) exercises authority. These funds were established to provide retirement, death, and disability benefits to members; administer retiree health insurance programs; and oversee the state-sponsored deferred compensation program. As of June 30, 2015, PERS provided services to 910 employers and to nearly 346,000 active, inactive, and retired members and beneficiaries. The CAFR is intended to fulfill the legal requirements of Oregon Revised Statute (ORS) 238.630. PERS management is responsible for both the accuracy of the data and the completeness and fairness of the presentation, including all disclosures. Macias Gini & O’Connell LLP (MGO) has audited the accompanying financial statements in accordance with generally accepted auditing standards, and the independent auditor’s report is included in this report. Management’s Discussion and Analysis Management’s Discussion and Analysis (MD&A) provides a narrative introduction, overview, and analysis to accompany the basic financial statements. This letter of transmittal is designed to complement MD&A and should be read in conjunction with it. We would like to direct your attention to MD&A that begins on page 17. Economic Condition and Major Initiatives The economic condition of PERS is affected primarily by investment earnings. A comparative analysis of investment rates of return is presented on page 25 of this report. Major Initiatives Strategic Management System In 2012, PERS developed an outcome-based management system to improve its operational performance and organizational alignment. The system uses a process-based orientation that integrates problem solving and decision making with active engagement from the front-line staff that perform the daily work. The management system was reevaluated in 2015, where it was confirmed that the PERS’ Mission remains relevant as serving as the foundation for PERS’ 2015-2020 Strategic Plan. Four strategic priorities were identified, with several areas of focus and specific, achievable goals and objectives related to the focus areas: • 2 • Oregon Public Employees Retirement System 1. Organization Management and Development, 2. Member Services and Communications, 3. Data Reliability, and 4. Information Technology For each of the four strategic priorities, PERS will use its existing strategic and operational planning function to prioritize and allocate resources for each of the strategies identified. Strategies will be executed with a variety of approaches, including problem solving, project management, breakthrough initiatives, and integration into core business practices. Specific performance metrics will be identified for tracking our progress as part of strategy initiation. Supporting our goals are six core operating processes and six core supporting processes. Each process has an owner and outcome measures to monitor and document our progress. Quarterly target review meetings are held to review our progress and identify areas for improvement. Customer Satisfaction Survey Our member and employer customer satisfaction surveys conducted in fiscal year 2015 show overall improvement from 2014, continuing the positive trend of year-to-year improvement over the ten-year survey period. Over 92 percent of the member survey respondents and 88 percent of the employer survey respondents rated our overall customer service as “good” or “excellent.” Impact of Legislation On April 30, 2015, the Oregon Supreme Court declared Senate Bills 822 and 861 unconstitutional in so far as they affect retirement benefits earned before May 6, 2013. Senate Bill 822 was enacted during the 2013 Oregon regular legislative session to lower the cap on the cost-of-living adjustment (COLA) from 2 percent to 1.5 percent, and eliminate the tax remedy benefit for recipients who do not pay Oregon state income taxes because they do not reside in Oregon. The tax remedy benefit portion of Senate Bill 822 was upheld by the Oregon Supreme Court. Senate Bill 861 was enacted during a special legislative session in September 2013, and modified subsequent yearly COLAs for all PERS benefit recipients. The decision reduced PERS’ funded status and negated a large portion of the cost savings for PERS employers that were factored into 2015-2017 contribution rates. The potential financial impact of this decision increases the present value of future benefits by $5.1 billion. PERS has executed a project to restore COLA payments to benefit recipients and enhance its systems to implement the new COLA allocation going forward. Changes in Accounting Standards GASB Statement No. 73 Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68 establishes requirements for defined benefit pensions that are not within the scope of GASB Statement No. 68, Accounting and Financial Reporting for Pensions (Statement 68), as well as for the assets accumulated for purposes of providing those pensions. In addition, it establishes requirements for defined contribution pensions that are not within the scope of Statement 68, also amends certain