Comprehensive Annual Financial Report ForWith the Independent fiscal year Auditors’ ended ReportDecember for Fiscal 31, Years2015 Ended December 31, 2015 and 2014 Commonwealth of Pennsylvania 2015 State Employees’ Retirement System A Component Unit of the Commonwealth of Pennsylvania Prepared by the staff of the Pennsylvania State Employees’ Retirement System David E. Durbin Executive Director Anthony J. Faiola Chief Financial Officer State Employees’ Retirement System 30 N 3rd St, Suite 150 Harrisburg, PA 17101-1716 1.800.633.5461 www.SERS.pa.gov Comprehensive Annual Financial Report ForWith the Independent fiscal year endedAuditors’ December Report for 31, Fiscal 2014 Years Ended December 31, 2015 and 2014 Commonwealth of Pennsylvania 20142015 State Employees’ Retirement System A Component Unit of the Commonwealth of Pennsylvania Prepared by the staff of the Pennsylvania State Employees’ Retirement System David E. Durbin Executive Director Anthony J. Faiola Chief Financial Officer State Employees’ Retirement System 30 N 3rd St, Suite 150 Harrisburg, PA 17101-1716 1.800.633.5461 www.SERS.pa.gov INTRODUCTORY SECTION Table of Contents Introductory Section Actuarial Section GFOA Award Certificate i Actuary’s Certification 69 PPCC Award Certificate ii Summary of Actuarial Assumptions and Methods 73 Transmittal Letter iii Schedules of Active Member Valuation Data 75 SERS Board v Schedule of Retirees and Beneficiaries Added to and SERS Mission, Vision, and Organizational Chart vii Removed from Rolls 79 Solvency Test 80 Financial Section Analysis of Financial Experience 81 Independent Auditors’ Report 1 Schedule of Funding Progress 82 Management’s Discussion and Analysis (unaudited) 3 Schedule of Contributions Under Previous Reporting Basic Financial Statements: Standards 83 Statements of Fiduciary Net Position 12 History and Projection of Contribution Rates and Statements of Changes in Fiduciary Net Position 13 Funded Ratios 84 Notes to Financial Statements 14 Summary of Plan Provisions 85 Required Supplementary Information (unaudited): Schedule 1- Schedule of Changes in Net Pension Statistical Section Liability and Related Ratios 31 Statistical Section Narrative 87 Schedule 2 - Schedule of Employer Contributions 32 Schedule of Trend Data 89 Schedule 3 - Schedule of Investment Returns 32 Schedule of Additions to Fiduciary Net Position 90 Supplementary Information: Schedule of Deductions from Fiduciary Net Position 91 Schedule 4 - Schedule of Administrative Expenses 33 Schedule of Benefit and Refund Deductions from Schedule 5 - Summary of Investment and Fiduciary Net Position by Type 92 Consultant Expenses 34 Schedule of Total Changes in Fiduciary Net Position 93 Schedule of Investment Income 94 Investment Section Schedule of Active Member Statistics 95 Report on Investment Activity 35 Schedule of Retired Members by Type of Benefit 96 Investment Policy and Objectives 37 Schedule of Retired Members by Option 97 Investment Returns 39 Schedule of Average Monthly Benefit Payments 98 Fund Values and Annual Returns 40 Schedule of Average Annual Benefit Payments 99 Largest Assets Held 41 Schedule of Employer Participation 100 Schedule of Trading Broker Commissions 43 Investment Summary 44 Alternative Investments 45 Global Public Equity 58 Real Assets 60 Diversifying Assets 64 Fixed Income/Liquidity Reserve 66 INTRODUCTORY SECTION GFOA Award Certificate i INTRODUCTORY SECTION PPCC Award Certificate ii June 1, 2016 Mr. David R. Fillman Chairman, State Employees’ Retirement Board Commonwealth of Pennsylvania 30 North Third Street, Suite 150 Harrisburg, PA 17101 Dear Chairman Fillman, Each year, the Pennsylvania State Employees’ Retirement System (SERS) produces a Comprehensive Annual Financial Report (CAFR) to provide the governor, legislature, system members and annuitants, as well the general public with a clear accounting of its operations and financial position.We are pleased to present the 2015 edition for the calendar year ending December 31, 2015, and hope you will find this financial, investment, actuarial, and statistical material to be both interesting and useful. The CAFR remains the cornerstone of our commitment to ensure delivery of accurate, meaningful information to policymakers and SERS members, as well as to provide context for our independently audited financial statements, which are required to be published on or before July 1 of each year. KPMG has conducted an independent audit of SERS 2015 financial statements, which are prepared in accordance with U.S. generally accepted accounting principles. Because the cost of a control should not exceed the benefits to be derived, the objective is to provide reasonable, rather than absolute, assurance that SERS financial statements are free of any material misstatements and fairly presented.As is our standard practice, independent auditors have full and unrestricted access to you and the board to discuss their findings regarding the adequacy of SERS internal controls and the integrity of SERS financial reporting. SERS has again received an unmodified opinion in 2015. As of December 31, 2015, SERS had approximately $26.1 billion after paying out $3.1 billion in retirement benefits to nearly 125,000 retirees and beneficiaries; $2.8 billion – more than 90% – was paid to people living in Pennsylvania, stimulating local economies. In 2015, SERS served 104 agencies/employers, as well as over 235,000 total members. As such, our benefit payroll obligations, continue to steadily grow, from about $1 billion just two decades ago to our current payroll. Last year, SERS welcomed nearly 6,700 new retirees whose average annual benefit was about $26,100. More than 4,000 retirees, who had average annual benefits of about $14,600, were removed from the rolls. Continued volatility in the global markets impacted investment returns, yet SERS was able to earn nearly $88 million through investment earnings net of all fees and expenses. While the system’s 0.4% return fell short of the 7.5% assumed long-term rate of return, taxpayers and policy makers can remain confident that rigorous control and oversight are exercised in the administration of these public funds. Our earnings have been positive for 17 of the last 20 years, and actual earnings have exceeded the assumed long-term rate of return for 13 of them. Based on the actuarial methods used for financial reporting purposes as of December 31, 2015, the resulting net pension liability was $18.2 billion. SERS plan fiduciary net position as a percentage of the total pension liability was approximately 58.9%. Based on the actuarial methods used for funding purposes 30 NORTH 3RD STREET, SUITE 150 | HARRISBURG, PA 17101-1716 P: 1.800.633.5461 | F: 717.237.0346 | www.SERS.pa.gov iii as of December 31, 2015, the unfunded actuarial accrued liability was $19.5 billion. SERS funded ratio was 58.0%. Additional details, as well as a discussion of the continuing impact of Governmental Accounting Standards Board (GASB) Statement No. 67, Financial Reporting for Pension Plans – an amendment of GASB Statement No. 25 (GASB 67), which was implemented in 2014, are discussed in greater detail in Management’s Discussion and Analysis. Within the next two budget cycles, we anticipate that Act 2010-120 collars will no longer apply to employer contributions, which is expected to further improve the health of the SERS Fund. Additionally, employer contributions are expected to decline from that point forward. SERS continues major initiatives to improve services to our stakeholders, as well as improving efficiencies in the delivery of benefits and reducing cost in the administration of the system to our employers. Reducing investment fees has been an ongoing goal for SERS. Since 2010, we have reduced fees and expenses for our investment program by more than $69 million. In an effort to be more responsive to our members and reduce transaction costs, we continue to increase the volume of electronic funds transfers for benefit payments. This initiative also has reduced waiting periods for benefit payments and increased the security of delivery of our member’s money. In addition, we continue to enhance our member materials, making the information contained within more understandable and accessible to a range of employees. This year alone, we redesigned two major publications and several fact sheets that will help members understand their options and make informed decisions. It should also be noted that SERS is in the midst of a multi-year benefits processing system upgrade that is expected to further improve how we interact with our members, their account-related transactions, and payment processing. SERS continues to carefully manage the funds entrusted to the Board, and SERS’ members can be assured that their retirement system is well managed. We are solely responsible for the contents of this report, however we do wish to acknowledge the significant contributions of many SERS professionals whose work to compile, quality assure, and produce it are essential. Nearly 200 SERS employees’ daily work enables our organization to maintain effective internal controls to assure that assets are safeguarded, transactions are properly executed, and financial statements conform to U.S. generally accepted accounting principles – all while providing effective, high-quality member services. In addition to assisting with annual independent audits and preparation of this CAFR, these are the same professionals whose work last year, again, earned SERS the Public Pension Coordinating Council Standards