Municipal Employees’ Annuity and Benefit Fund of Chicago A Pension Trust Fund of the City of Chicago Chicago, Illinois 2012 Comprehensive Annual Financial Report For the Fiscal Year Ended December 31, 2012 A Pension Trust Fund of the City of Chicago Chicago, Illinois 2012 Comprehensive Annual Financial Report For the Fiscal Year Ended December 31, 2012 Prepared by Administrative Staff of the Municipal Employees’ Annuity and Benefit Fund of Chicago 321 North Clark Street, Suite 700 Chicago, Illinois 60654 Introductory Section Table of Contents Introduction Section Certificate of Achievement 1 Retirement Board 2 Organizational Chart and Consultants 3 Administrative Staff 4 Letter of Transmittal 5 Financial Section Independent Auditor’s Report 15 Management’s Discussion and Analysis 17 Financial Statements Statements of Plan Net Position 24 Statements of Changes in Plan Net Position 25 Notes to Financial Statements 26 Required Supplementary Information Schedule of Funding Progress (Pension) 48 Schedule of Employer Contributions (Pension) 48 Note to Schedules of Funding Progress and Employer Contributions (Pension) 48 Schedule of Funding Progress (Post-employment Healthcare) 49 Schedule of Employer Contributions (Post-employment Healthcare) 49 Note to Schedules of Funding Progress and Employer Contributions (Post-employment Healthcare) 49 Schedule of Funding Progress (Post-employment Healthcare-Staff Retiree Healthcare) 50 Schedule of Employer Contributions (Post-employment Healthcare-Staff Retiree Healthcare) 50 Note to Schedules of Funding Progress and Employer Contributions (Post-employment Healthcare-Staff Retiree Healthcare) 50 Schedule of Administrative and OPEB Expenses 51 Schedule of Professional and Consulting Costs 52 Schedule of Investment Management Compensation 53 Investment Section Investment Report – 2012 57 Master Custodian’s Certification 59 Investment Authority and Responsibility 60 List of Investment Managers 62 Performance Returns 65 Investments (Fair & Book) 68 Investment Asset Allocation 69 Domestic Equity Portfolio Summary 71 International Equity Portfolio Summary 72 MEABF Comprehensive Annual Financial Report 2012 i Introductory Section Table of Contents (continued) Investment Section (continued) Fixed Income Portfolio Summary 74 Domestic Equity Brokerage Commissions 75 International Equity Brokerage Commissions 76 Investment Fees 77 Actuarial Section Actuarial Certification 79 Additional Disclosures required by Actuarial Standards of Practice 81 Summary of Actuarial Valuation 82 Discussion of Valuation Results 84 2012 Experience Analysis 89 Funding Analysis 92 Summary of Basic Actuarial Values 95 Actuarial Reserve Liabilities and Statutory Reserves 96 Actuarial Accrued Liability Prioritized Solvency Test 97 Development of Actuarial Values of Assets 98 Annual Required Contributions of Employer and Trend Information 99 Retirees and Beneficiaries Added To and Removed From Payrolls 100 Active Participating Member Valuation Data 101 Actuarial Methods and Assumptions 102 Statistical Section Changes in Plan Net Position 108 Summary of Changes in Plan Net Position 110 Additions to Net Assets By Source 111 Deductions from Net Assets By Type 112 Refunds By Type 113 Benefits By Type 114 History of Average Pension Benefit Payment to New Retirees 116 Average Employee Retirement Benefits Payable 117 Covered Employees By Age & Years of Service 117 Current Retirees By Range of Pension Amounts 118 MEABF Staff Retiree Healthcare (OPEB) 118 History of Retirees and Beneficiaries By Type of Benefit 119 Retirees and Beneficiaries By Type of Coverage - Health Insurance Subsidy 119 10-Year History of Plan Membership 120 10-Year History of Covered Employees 121 Appendix A Legislative Changes in Plan Provisions 1993 through 2012 122 MEABF Comprehensive Annual Financial Report 2012 ii Introductory Section The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the Municipal Employees’ Annuity and Benefit Fund of Chicago for its 2011 Comprehensive Annual Financial Report. MEABF has received the award for each of the last twenty-three years. MEABF Comprehensive Annual Financial Report 2012 1 Introductory Section RETIREMENT BOARD As of June 1, 2013 Martin J. Durkan Amer Ahmad Stephanie D. Neely President Vice-President Treasurer Elected Trustee Ex-Officio Trustee Ex-Officio Trustee (Comptroller, City of Chicago) (Treasurer, City of Chicago) Timothy G. Guest Anthony C. Clancy Recording Secretary Elected Trustee Elected Trustee A five-member Retirement Board is the governing body of the Municipal Employees’ Annuity and Benefit Fund of Chicago (MEABF). By statute, the Retirement Board shall consist of two ex-officio members, the City Comptroller and the City Treasurer, and three members who are employees and elected by the contributing members. The Retirement Board is ultimately responsible for the operation, administration and management of all the activities of MEABF. Having oversight of the investment activities, the Retirement Board sets investment policies and objectives, hires investment managers and investment consultants and reviews investment performance. The Retirement Board also approves the MEABF operating budget and approves or denies benefit claims. The Retirement Board appoints the Executive Director, and retains consultants for investment, actuarial, audit, legal and other provisional services necessary for the transaction of business. The Retirement Board meets monthly and holds special meetings as needed. As members of the Retirement Board, they receive no compensation. MEABF Comprehensive Annual Financial Report 2012 2 Introductory Section Organizational Chart Retirement Board Investment Investment Custodian Legal Actuary Professional Managers Advisor Bank Services Administrative Staff Consultants Investment Consultant Legal Advisors Auditors Brian Wrubel Mary Pat Burns Gerard J. Pater, C.P.A. James R. Wesner Burke, Burns & Pinelli, Ltd Bansley & Kiener, L.L.P. Marquette Associates Chicago, IL Chicago, IL Chicago, IL Master Custodian Actuary Medical Advisor Rita Curtin Alex Rivera, F.S.A., M.A.A.A. Terence Sullivan, M.D. The Northern Trust Company Amy Williams, A.S.A, M.A.A.A Chicago, IL Chicago, IL Gabriel Roeder Smith & Company Chicago, IL Custodian Stephanie D. Neely City Treasurer Chicago, IL Investment Managers and Investment Fees - are listed on pages 62-64 and 53-55 Brokers used by Investment Managers - are listed on pages 75-76 MEABF Comprehensive Annual Financial Report 2012 3 Introductory Section Organizational Chart As of June 1, 2013 RETIREMENT BOARD Administrative Staff Jim Mohler Executive Director Deputy Executive Director Finance and Accounting Investments Benefits Tess Toledo Michael Walsh Jane Tessaro Comptroller Chief Investment Officer Benefits Manager Contributions Performance Analysis Pension Benefits General Ledger Cash Management Counseling Annuitant Services Investment Accounting Applications Information Systems Health Insurance Administrative Services Disability Benefits Appointed by the Retirement Board, the Executive Director and his staff are responsible for the day-to-day administration and operation. The administrative staff also implements the investment policies and decisions of the Retirement Board and the benefit provisions of the Plan. The administrative staff of forty-eight (48) employees serves 31,326 actively contributing members; 24,120 retirees and surviving beneficiaries; and 13,465 inactive members. MEABF Comprehensive Annual Financial Report 2012 4 Retirement Board Martin J. Durkan Municipal Employees’ Annuity and President (Elective Member) Benefit Fund of Chicago Amer Ahmad 321 North Clark Street, Suite 700, Chicago, Illinois 60654 Vice President (City Comptroller, Ex-Officio Member) Telephone: 312-236-4700 Fax: 312-527-0192 Stephanie D. Neely www.meabf.org Treasurer (City Treasurer, Ex-Officio Member) Jim Mohler, Executive Director Timothy G. Guest Recording Secretary (Elective Member) Anthony C. Clancy Trustee (Elective Member) LETTER OF TRANSMITTAL June 1, 2013 To the Retirement Board of the Municipal Employees’ Annuity & Benefit Fund of Chicago We are pleased to submit to you the Comprehensive Annual Financial Report (CAFR) for the Municipal Employees’ Annuity and Benefit Fund of Chicago (“MEABF” or the “Plan”), a pension trust fund of the City of Chicago, for the fiscal year ended December 31, 2012. The CAFR provides an overview of the Plan and comprehensive information on the financial operations of the Plan for the fiscal year. A full version of the report is posted on our website at meabf.org and printed copies are also readily available. Management takes full responsibility for the preparation, accuracy, completeness and fairness of the presentation, including all disclosures, made in this report. To the best of our knowledge and belief, the information contained in this report is complete; all disclosures necessary to enable the reader to gain an understanding of MEABF activities have been included. Bansley and Kiener, LLP, Certified Public Accountants, have issued an unqualified (“clean”) opinion on the Plan’s financial statements for the fiscal year ended December 31, 2012. The independent auditor’s report is located at the front of the Financial Section of this report. Management’s discussion and analysis (MD&A), which immediately follows the Independent Auditor’s Report in the Financial Section, provides an additional narrative introduction, and an