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The State Treasurer’s Annual Report to the People of North Carolina 2008 North Carolina Department of State Treasurer • Fiscal Year 2007- 2008 Richard H. Moore | State Treasurer RICHARD H. MOORE Treasurer State of North Carolina Dear Fellow North Carolinians, I am proud to present to you the 2007- 2008 Department of State Treasurer’s Annual Report. For eight years, I have taken great pride in the trust and responsibility that has been given to me and this Department by the people of North Carolina. From overseeing the retirement system for more than 820,000 citizens and managing nearly $ 86 billion in assets to returning unclaimed property to people across the state, we have been committed to excellence in all our duties. This Department has worked diligently to be innovative in our thinking and ambitious in providing the highest levels of service to the people of North Carolina. Within this annual report, you will find details on the pension fund’s performance, which even in the midst of an economic downturn, ranked in the top 25 percent of public pension funds. Our conservative strategies and diversified investments continue to serve our members well. This year North Carolina’s pension fund was ranked second best in the country by Standard and Poor’s for the third year in a row and is one of just five pension funds in the nation that is fully funded. The Department also strives to provide the best customer service for members of our retirement systems and implemented ORBIT, a new web based system that improves efficiency. With these successes in management and administration, North Carolina public employees are secure in their retirement. This report also details the year’s debt and fiscal management activity. North Carolina maintained its “ Triple- A” rating from all three national rating agencies, continuing its distinction as one of only seven states to achieve top- tier rankings from all three agencies. The Financial Operations section of this report covers the efficient banking services that are provided to State agencies and institutions. The Department expanded its positive pay program, a service designed to detect counterfeit warrants ( checks), to all accounts increasing the security and flow of state funds in the course of conducting State business. Additionally, this report outlines the achievements of NC Cash, the unclaimed property fund. The program continues its aggressive efforts to return money to North Carolinians by implementing some of the latest technology and expanding outreach efforts. NC Cash also assists North Carolina students with paying for college by sending the interest earned on the fund to State Education Assistance Authority. I encourage all citizens to visit our website at www. nctreasurer. com to learn more about these activities and many other initiatives. Thank you for your interest in the Department of the State Treasurer. Sincerely, Richard H. Moore 325 NORTH SALISBURY STREET, RALEIGH, NORTH CAROLINA, 27603- 1385 ( 919) 508- 5176 FAX ( 919) 508- 5167 WEBSITE: WWW. NCTREASURER. COM Dear Fellow North Carolinians, I am proud to present to you the 2007- 2008 Department of State Treasurer’s Annual Report. For eight years, I have taken great pride in the trust and responsibility that has been given to me and this Department by the people of North Carolina. From overseeing the retirement system for more than 820,000 citizens and managing nearly $ 86 billion in assets to returning unclaimed property to people across the state, we have been committed to excellence in all our duties. This Department has worked diligently to be innovative in our thinking and ambitious in providing the highest levels of service to the people of North Carolina. Within this annual report, you will find details on the pension fund’s performance, which even in the midst of an economic downturn, ranked in the top 25 percent of public pension funds. Our conservative strategies and diversified investments continue to serve our members well. This year North Carolina’s pension fund was ranked second best in the country by Standard and Poor’s for the third year in a row and is one of just five pension funds in the nation that is fully funded. The Department also constantly strives to provide the best customer service for members of our retirement systems and implemented ORBIT, a new web- based system that improves efficiency. With these successes in management and administration, North Carolina public employees are secure in their retirement. This report also details the year’s debt and fiscal management activity. North Carolina maintained its “ Triple- A” rating from all three national rating agencies, continuing its distinction as one of only seven states to achieve top- tier rankings from all three agencies. The Financial Operations section of this report covers the efficient banking services that are provided to all State agencies and institutions. The Department expanded its positive pay program, a service designed to detect counterfeit warrants ( checks), to all accounts increasing the security and flow of state funds in the course of conducting State business. Additionally, this report outlines the achievements of NC Cash, the unclaimed property fund. The program continues its aggressive efforts to return money to North Carolinians by implementing some of the latest technology and expanding its outreach efforts. NC Cash also assists North Carolina college students with paying for loans and grants by sending the interest earned on the fund to State Education Assistance Authority. I encourage all citizens to visit our website at www. nctreasurer. com to learn more about these activities and many other initiatives. Thank you for your interest in the Department of the State Treasurer. Sincerely, Richard H. Moore Table of Contents I I Treasurer’s Letter ............................................................................................................................... .............................................. I Table of Contents ............................................................................................................................... .............................................. II Retirement Systems Division ............................................................................................................................... .. 1 Structure ............................................................................................................................... ....................................................... 2 Operational Highlights..................................................................................................................... ...................................... 3 The Basic Functions ............................................................................................................................... ............................... 3 Retirements Processing Section .............................................................................................................................. 4 Benefits Processing Section ............................................................................................................................... ....... 5 Accounting/ Data Control Section .......................................................................................................................... 5 Member Services Section ............................................................................................................................... ............ 6 Records Section ............................................................................................................................... ............................... 6 Significant Accomplishments ............................................................................................................................... ............ 7 Legislation ............................................................................................................................... ........................................... 7 Communications and Customer Service ............................................................................................................. 8 Operational ............................................................................................................................... ......................................... 8 The Retirement Systems and Trust Funds ................................................................................................................... 10 Actuarial Valuation ............................................................................................................................... ......................... 10 Actuarial Assumptions ............................................................................................................................... .................. 10 Funding of the Systems ............................................................................................................................... ............... 10 Funding Status of the Systems ............................................................................................................................... 1 1 Teachers’ and State Employees’ Retirement System of North Carolina .............................................. 1 2 Local Governmental Employees’ Retirement System of North Carolina ............................................. 1 3 Consolidated Judicial Retirement System of North Carolina .................................................................... 1 4 Teachers’ and State Employees’ Benefit Trust .................................................................................................. 1 5 Firemen’s and Rescue Squad Workers’ Pension Fund .................................................................................. 1 7 Retirees’ Health Premium Funds ............................................................................................................................. 1 8 Legislative Retirement Fund ............................................................................................................................... ...... 1 8 Legislative Retirement System ............................................................................................................................... . 1 9 Disability Income Plan ............................................................................................................................... ................... 1 9 Public Employees’ Social Security Agency ........................................................................................................ 20 National Guard Pension Plan ............................................................................................................................... ..... 20 Registers of Deeds’ Supplemental Pension Fund ........................................................................................... 20 Supplemental Retirement Income Plan of North Carolina .......................................................................... 2 1 North Carolina Public Employee Deferred Compensation Plan ............................................................... 2 1 Investment Management Division ..................................................................................................................... 22 Structure ............................................................................................................................... ....................................................... 23 Investment Objectives ............................................................................................................................... ........................... 24 Cash Management Program ............................................................................................................................... ...... 24 Trust Funds Investment Program ............................................................................................................................ 24 Investment Management Division ( continued) Operating Policy ............................................................................................................................... ....................................... 24 Overall Fund Strategy....................................................................................................................... ............................ 25 Review of the Past Year........................................................................................................................... ..................... 25 Looking Forward to the Year Ahead....................................................................................................................... 25 Cash Management Program Review .............................................................................................................................. 27 Short- Term Investment Fund ............................................................................................................................... ..... 27 Trust Funds Investment Program Review .................................................................................................................... 30 Total Trust Fund........................................................................................................................... .................................... 30 Structure...................................................................................................................... ........................................................ 32 Corporate Governance ............................................................................................................................... ................. 33 Sudan.......................................................................................................................... ........................................................... 33 Payday Lending........................................................................................................................ ........................................ 33 Trust Fund Fiscal Year Activity....................................................................................................................... .......... 33 Fixed Income ............................................................................................................................... .............................................. 34 Structure...................................................................................................................... ........................................................ 34 Fixed Income Fiscal Year Activity....................................................................................................................... .... 35 Fixed Income Market Fiscal Year Commentary................................................................................................. 36 Equity Investment Portfolio ............................................................................................................................... ................ 37 Structure...................................................................................................................... ........................................................ 37 Equity Fiscal Year Activity....................................................................................................................... ................... 38 Equity Market Fiscal Year Commentary................................................................................................................ 42 Real Estate ............................................................................................................................... ................................................... 43 Structure...................................................................................................................... ........................................................ 43 Real Estate Fiscal Year Activity....................................................................................................................... ......... 45 Real Estate Market Fiscal Year Commentary...................................................................................................... 45 Alternatives ............................................................................................................................... ................................................. 47 Structure...................................................................................................................... ........................................................ 47 Private Equity Fiscal Year Activity....................................................................................................................... ... 50 Alternative Market Fiscal Year Commentary...................................................................................................... 50 Ancillary Investment Programs Review ........................................................................................................................ 53 Escheat Investment Program ............................................................................................................................... .... 53 UNC and Public Hospitals...................................................................................................................... ..................... 54 OPEB Fund........................................................................................................................... .............................................. 54 State and Local Government Finance Division................................................................................... 55 Operational Highlights ............................................................................................................................... ........................... 57 The State of Tax- Exempt Financing ............................................................................................................................... 58 The Basic Functions ............................................................................................................................... ............................... 58 Debt Management ............................................................................................................................... .......................... 58 Fiscal Management ............................................................................................................................... ........................ 60 Table of Contents I I I State and Local Government Finance Division ( continued) Significant Accomplishments ............................................................................................................................... ............ 62 Debt Management ............................................................................................................................... .......................... 62 Fiscal Management ............................................................................................................................... ........................ 65 Projects in Progress ............................................................................................................................... ....................... 68 Financial Operations Division ............................................................................................................................... . 72 Operations Highlights ............................................................................................................................... ............................ 73 Banking Operations ............................................................................................................................... ................................ 74 Receiving State Moneys......................................................................................................................... ...................... 74 Disbursing State Moneys......................................................................................................................... .................... 74 Specialized Banking Functions...................................................................................................................... ........... 74 Banking Reconciliation Unit ............................................................................................................................... ................ 74 Statewide Operations ............................................................................................................................... ............................ 75 Investment Accounting..................................................................................................................... ............................ 75 Retirement and Escheat Fund Accounting......................................................................................................... 75 Departmental Operations..................................................................................................................... ....................... 75 Unclaimed Property and Escheats Division .......................................................................................... 76 Statistical Tables ............................................................................................................................... .................................... 77 Table of Contents I V The State Treasurer’s Annual Report Retirement Systems Division 1 Structure The Retirement Systems Division of the Department of State Treasurer administers the statutory retirement and benefit plans that cover public employees in the State, as authorized by the General Assembly of North Carolina. The administration of the several retirement systems requires a high level of fiduciary responsibility for the employees’ trust funds with prudent, honest and efficient use of employees’ and taxpayers’ contributions. The purpose of the retirement systems and benefit plans is to recruit and retain skilled employees for a career in public service by providing valuable post- employment benefits, including replacement income at retirement, during disability or for an employee’s survivors. The organizational structure herein shows the functional arrangement of the tasks performed in this Division. Retirement Systems Division BOARD DIRECTOR OF TRUSTEES ACTUARY POLICY DIRECTOR MEMBER SERVICES SECTION BENEFITS PROCESSING SECTION RECORDS SECTION RETIREMENT PROCESSING SECTION DEPUTY DIRECTOR OF OPERATIONS DEPUTY DIRECTOR OF POLICY & COMMUNICATIONS 2 ACCOUNTING SECTION Retirement Systems Division Operational Highlights n Presented recommendations and draft legislation during the 2008 session of the General Assembly that resulted in the enactment of laws to: – Provide cost- of- living adjustments equal to 2.2 percent to retirees of the Teachers’ and State Employees’ Retirement System ( TSERS), Consolidated Judicial Retirement System ( CJRS) and Legislative Retirement System ( LRS) and – Increase the monthly benefit payment to beneficiaries of the Firemen’s and Rescue Squad Workers’ Pension Fund from $ 1 67.00 to $ 1 70.00 per month. n Redesigned the Annual Benefits Statement to provide a comprehensive look at members’ retirement information, including Social Security benefits, as well as supplemental savings in the NC 401( k) and Deferred Compensation plans. n Launched the second phase of ORBIT ( Online Retirement Benefits through Integrated Technology), enabling active members to have online access to their personal retirement account information 24 hours a day, seven days a week. n Provided cost- of- living adjustments equal to 2.15 percent to retirees of the Local Governmental Employees’ Retirement System ( LGERS). n Processed benefits for 1 3 , 451 new retirees. n Processed refunds for 1 5 ,773 former public employees. n Established approximately 58,228 new active member accounts on ORBIT. Basic Functions The four major retirement systems administered by this Division are the: n Teachers’ and State Employees’ Retirement System n Local Governmental Employees’ Retirement System n Consolidated Judicial Retirement System n Legislative Retirement System The systems are governed by boards of trustees. The State Treasurer is ex- officio chairman of each board. The board of the Teachers’ and State Employees’ Retirement System is composed of 14 members, including seven actively working employees or retirees, as well as seven public and appointed members who also serve on the Local Governmental Employees’ Retirement System Board. The Local Governmental Employees’ Retirement System Board, while legally separate, is composed of the same seven ex- officio or public Teachers’ and State Employees’ Retirement System members plus seven members representing local governments. During the 2007- 2008 fiscal year, the Board of Trustees of the Teachers’ and State Employees’ Retirement System was the governing body of the Consolidated Judicial and Legislative Retirement Systems and all of the other programs listed herein, except for the Firemen’s and Rescue Squad Workers’ Pension Fund and the NC Public Employee Deferred Compensation Fund. The Firemen’s and Rescue Squad Workers’ Pension Fund is governed by a five- member board of trustees, including actively working employees, volunteers and a member of the public. During the 2008 session of the General Assembly, the Supplemental Retirement Board of Trustees was created in order to consolidate the administration of the NC 401( k) Plan and the 3 NC Public Employee Deferred Compensation Retirement Systems Division ( 457) Plan. This board, composed of nine members, including financial professionals and working and retired state employees, will administer both the NC 401( k) and Deferred Compensation ( 457) plans. The State Treasurer will be ex- officio chairman of this board. In addition to the four major retirement systems, the Division is also responsible for the administration of the following programs: n Firemen’s and Rescue Squad Workers’ Pension Fund n Public Employees’ Social Security Agency n Disability Income Plan n Legislative Retirement Fund n National Guard Pension Plan n Teachers’ and State Employees’ Benefit Trust n Supplemental Retirement Income Plan n Public Employee Deferred Compensation Plan n Registers of Deeds’ Supplemental Pension Fund n Contributory Death Benefit for Retired Members All retirement systems and other programs administered by this Division are operated on a calendar year basis from January 1 to December 3 1 , rather than the State’s fiscal year, except for the Firemen’s and Rescue Squad Workers’ Pension Fund. For this reason, much of the financial data shown for the Division is for the captioned year ending December 3 1 . Administrative figures, however, are generally collected on a fiscal year basis and are shown here as such. The administrative expenses of the Division are paid from the retirement trust funds. The Retirement Systems Director and his immediate staff are responsible for the overall operation of the Division and carry out the policies and directives of the State Treasurer and the governing boards. They provide assistance to legislators and committees of the General Assembly, including: n Drafting proposed legislation and acquiring of actuarial notes for introduced bills. n Managing action and administrative appeals by individual members of the retirement systems. n Maintaining a working relationship with associations and organizations of employees and employers. n Providing information to State agencies, institutions and local governments. The staff provides assistance to local governments for Social Security coverage and acts as the liaison between the State and the Social Security Administration. The staff also performs planning and research functions and directs special projects. Retirements Processing Section The mission of the Retirements Processing Section is to process applications for benefits in a prompt, accurate and efficient manner. This Section is responsible for the determination of eligibility for monthly retirement allowances and processing payment of benefits for all retirement systems governed by the boards of trustees and administered by this Department. For the period July 2007 through June 2008, 1 3 ,451 retirements were processed for payment. The calculation of service purchase costs under the provisions of the various retirement systems administered by the Division is performed by this Section. The Section performed a total of 5,733 cost and other calculations. During the last fiscal year, 5,637 benefit estimates were generated by the Retirements Processing Section. There was a reduction in the number of requests for benefit estimates compared to last year due to the increasing number of members who generated their own estimates through ORBIT. 4 Retirement Systems Division Benefits Processing Section This mission of the Benefits Processing Section is to deliver prompt contribution refunds, disability and death benefits to employees, retirees and their beneficiaries in an effective and efficient manner. The administration and determination of disability benefits through the Retirement System’s Medical Review Board under the provisions of the Disability Income Plan for teachers and State employees, as well as the determination of eligibility for disability benefits from the other retirement systems are incumbent upon this section. The Medical Review Board reviewed approximately 4,457 disability claims during the 2007- 2008 fiscal year. Responsibilities of this Section include the calculation and payment of monthly disability benefits as well as the calculation and payment of reimbursements for short- term disability benefits paid by the various employers under the provisions of the Plan. From July 2007 through June 2008, 62 short- term disability reimbursements were issued to employers, totaling $ 475,854.52. The various death benefit programs related to the retirement systems and the Separate Insurance Benefits Fund are managed by this Section. Responsibilities include the calculation and payment of death benefits, return of members’ contributions, survivor’s alternate benefits and other lump sum payments. Approximately 7,302 death reports were received and processed during fiscal year 2007– 2008. This Section also is responsible for the calculation and the payment of returns of accumulated contributions, known as refunds, to terminated employees. A total of 15,773 refunds were processed for the period July 2007 through June 2008. Accounting Section The mission of the Accounting/ Data Control Section is to provide accurate financial data and on- time benefit payment services in a customer driven environment. This Section is responsible for maintaining accounting records for the retirement systems and receiving and processing payroll contribution reports from more than 1 ,1 2 0 participating State and local units of government. Contribution information from the payroll reports is electronically posted to the individual accounts for more than 455,000 members. This Section also is responsible for the administration of the Contributory Death Benefit ( CDB), including the notification of eligibility under the Plan, enrollment of members electing coverage and collection of the required contributions. During fiscal year 2007– 2008, the Retirement Systems Division held an open enrollment period giving retired members another window of opportunity to sign up for the optional $ 10,000 benefit. A total of 22,228 CDB enrollments were processed from July 2007 to June 2008. Brief descriptions of the other functions performed by this Section are as follows: n Retirees’ Health Insurance – Duties pertaining to this program included receiving and processing 60,877 health insurance enrollment applications. n Direct Deposit Accounts – Activities involved in this area related to the receipt and processing of Electronic Funds Transfer ( EFT) account applications and changes to direct deposit accounts. During the fiscal year 2007– 2008, approximately 202,036 retirees’ benefits were processed through EFT. 5 Retirement Systems Division Member Services Section The mission of the Member Services Section is to provide public service employees and employers accurate and timely information and education in a manner intended to advance partnerships and relationships. This Section handles written correspondence and telephone inquiries with members and employers participating in the Retirement Systems and other benefit programs. The staff responds to a large number of questions about benefits. Accordingly, during 2007– 2008 the Section received more than 28,000 letters and e- mails, approximately 268,400 telephone calls through the call center and an additional 23,700 calls handled by the Interactive Voice Response Unit ( IVR). Annual pre- retirement planning seminars are conducted by the staff of this Section, as well as retirement and benefit conferences at the request of employers and employee associations. During the period from July 2007 through June 2008, almost 1 3 ,000 members attended 1 9 0 employee retirement information sessions. In 2007, employer education focused on four ORBIT introduction sessions in Hickory, Greensboro, Raleigh and Greenville. This extended into an additional 48 summer training sessions and 10 webinars. Total attendance for these sessions is estimated at over 2,200 human resources and benefits representatives from approximately 90 percent of the 1,200 reporting agencies. All visitors to the Division requiring individual counseling about their benefits are referred to the Member Services Section. Members nearing retirement may call to schedule an appointment with a retirement counselor. During 2007– 2008, there were 4,200 visitors with 1 , 3 00 members seen by benefit counselors. Another important function of this Section is coordinating the participation of local government employers electing to become members of the Local Governmental Employees’ Retirement System. This involves meeting with local governing bodies, collecting data for transmission to the Systems’ consulting actuary, enrolling eligible employees and explaining monthly reporting procedures. Ancillary to this function is assistance to local governments in the adoption of tax shelter and death benefit coverage agreements. During 2007– 2008, six local government employers became participants, enrolling their employees in the Local Governmental Employees’ Retirement System. Records Section The mission of the Records Section is to ensure timely and accurate processing, internal distribution, storage and protection of personal member information for the purpose of delivering benefits. The Records Section is primarily responsible for the creation, maintenance and storage of files for individuals who are currently, or have been at one time, members of any of the State- administered retirement systems. The Records Section increased the number of images committed to the system due to the annuity conversion process undertaken during the fiscal year. As a result, this Section now maintains 17.6 million records in an electronic document imaging system. All active and retired member jacketed microfiche records were converted to the imaging system, while all new records, plus updates to existing files, are now automatically processed as digital images. 6 Retirement Systems Division 7 Significant Accomplishments Legislation Prior to the convening of the 2008 session of the General Assembly, the Retirement Systems Director and staff identified all proposals for benefit enhancements and changes recommended by the various associations of educators, employees and retirees. Also identified were measures to enhance administrative ability. Cost estimates for the recommendations were acquired from the Division’s consulting actuary. The staff then assisted the State Treasurer and the Retirement Systems’ Boards of Trustees in forming their legislative recommendations. During the 2008 session, the Director and staff provided technical assistance and bill drafting services for the standing Senate and House Committees on Pensions and Retirement and communicated the Boards of Trustees’ recommendations. The staff also acquired, as provided by State law, 33 actuarial notes disclosing the fiscal impact of every bill that affected a State- administered retirement systems or pension plan. In its 2008 legislative recommendations, Treasurer Moore and the Board of Trustees advocated for a 4.1 percent cost- of- living adjustment for retirees of the Teachers’ and State Employees’ Retirement System, the Consolidated Judicial Retirement System and the Legislative Retirement System. The General Assembly modified the recommendation for cost- of- living benefits and also addressed other administrative enhancements recommended by the board, including: 1) providing, effective July 1, 2008, in the Teachers’ and State Employees’ Retirement System, a 2.2 percent cost- of- living adjustment ( COLA) for beneficiaries who commenced retirement on and before July 1 , 2007, and for beneficiaries who began retirement with effective dates of August 1, 2007 to June 1, 2008, a prorated portion of the 2.2 percent COLA based on the number of months a retirement allowance was paid; 2) providing, effective July 1, 2008, in the Consolidated Judicial Retirement System, a 2.2 percent COLA for beneficiaries who commenced retirement on and before July 1, 2007, and for beneficiaries who began retirement with effective dates of August 1, 2007 to June 1, 2008, a prorated portion of the 2.2 percent postretirement increase in their allowances based on the number of months a retirement allowance was paid; 3) providing effective July 1, 2008, in the Legislative Retirement System, a 2.2 percent COLA for beneficiaries who commenced retirement on or before January 1, 2008, and for beneficiaries who began retirement with effective dates of February 1, 2008 to June 1, 2008, a prorated portion of the 2.2 percent was paid; 4) increasing, effective July 1, 2008, the monthly benefit payment to beneficiaries of the Firemen’s and Rescue Squad Workers’ Pension fund from $ 167.00 to $ 170.00 per month; 5) creating the Supplemental Retirement Board of Trustees to consolidate the administration of the NC 40 1 ( k) Plan and the NC Deferred Compensation ( 457) Plan, which will administer both the NC 40 1 ( k) and Deferred Compensation plans; and, 6) adopting provisions allowing the Department to disclose the names and addresses of retired State employees and school personnel, local governmental employees and community college employees to certain North Carolina- based not- for- profit organizations. The Board of Trustees governing the Local Governmental Employees’ Retirement System enacted policies to: 1) provide, effective July 1, 2008, in the Local Governmental Employees’ Retirement System, a 2 .1 5 percent COLA adjustment Retirement Systems Division 8 for beneficiaries who commenced retirement on and before July 1, 2008, and 2) provide beneficiaries who began retirement with effective dates of August 1, 2007 to June 1, 2008, a prorated portion of the 2 .1 5 percent COLA based on the number of months a retirement allowance was paid. Communications and Customer Service The Division is committed to providing timely, effective communication to all members and employers on a wide range of topics. A major project for the year was the redesign of the Annual Benefits Statement to provide active members with a comprehensive look at their retirement future. The 2007 Annual Benefits Statement included a report on members’ retirement accounts and Social Security benefits, as well as savings in the NC 401( k) and Deferred Compensation plans. The updated statement also included a projection of the member’s unreduced retirement benefits and a gap analysis showing how much the member would need in retirement. With the launch of the ORBIT site for active employees, the Division was able to electronically capture and maintain up- to- date mailing addresses of active members. This enabled the Division to mail the 2007 Annual Benefits Statement directly to members’ homes for the first time in the history of the Department. The Division conducted a series of webinars to educate employers on how to read the newly-designed statement and prepare them for their employees’ questions. The webinars were well received with about 400 employers participating in the hour- long interactive information sessions. Employer manuals and member handbooks describing plan provisions of the Teachers’ and State Employees’ Retirement System, Local Governmental Employees’ Retirement System, Consolidated Judicial Retirement System, Firemen’s and Rescue Squad Workers’ Pension Fund and Legislative Retirement System were revised in January 2008 and updated on the Division’s Web page. The Division also re- launched the employer newsletter, Retirement Monitor, a monthly newsletter for public sector human resources and payroll specialists. More than 5,000 state and local human resources and payroll staff are now reached monthly with updates and best practices to help them provide superior customer service to their employees. In addition, Legislative Digest, a synopsis of 2008 legislative changes, was provided to all employing units for the State and Local systems and the Division’s association partners and was made available online. Retirees and active employees also received newsletters communicating the retirement systems highlights and other retirement- related matters. The Retirement Report, a bi- annual newsletter to retirees that delivers news regarding changes to retirement laws and policies as well as information about the financial health of the retirement systems, was distributed during 2007- 2008. On the Horizon, an annual publication to active members was also distributed. Operational In October 2007, the Division launched the second phase of ORBIT. The employers’ reports and active members’ information now reside in the Web- based system. As a result, active members have online access to their personal retirement account information 24 hours a day, seven days a week. Active members have the ability to view their years of service credit, view designated beneficiaries and calculate benefit estimates. Retirement Systems Division ORBIT also serves as a central repository for all Retirement Systems Division information and serves as an operating platform for retirement processing for the 820,000 members – active employees, retirees and beneficiaries. Transitioning to ORBIT enabled the Division to shut down the legacy mainframe systems that were relied on for more than 30 years. ORBIT provides flexibility to keep pace with the growth of the membership population by enabling the Division to collect more information from retirees and active members, improve accuracy of information stored and provided and enhance response time to inquiries. The North Carolina Retirement Systems also held open enrollment for the Contributory Death Benefit ( CDB) from February 1 to May 3 1 , 2008. Typically, retired members of the Teachers’ and State Employees’ Retirement System, the Local Governmental Employees’ Retirement System, the Consolidated Judicial Retirement System and the Legislative Retirement System have 60 days from the date of retirement to elect coverage under the Contributory Death Benefit. In 2007, the General Assembly passed legislation that made provisions for open enrollment for the CDB, a one- time $ 1 0,000 death benefit. This open enrollment gave retirees another window of opportunity to sign up for the optional benefit. A total of 22,228 CDB enrollments were processed during the 2007- 2008 fiscal year, an increase of 600 percent from the previous year’s enrollments. In the Local Governmental Employees’ Retirement System, six local governments elected to become participating employers with the System. The participation of these employers involved the staff of the Member Services Section meeting with their governing bodies and employees, acquiring pre- evaluations from the consulting actuary to determine an employer’s contribution rate and providing all legal documents and agreements for their execution. The Division continues to receive numerous verbal and written requests for information, from both attorneys and the general public, as to how the retirement law impacts individual members and their spouses with respect to the equitable distribution of their retirement income. Attorneys are required to submit proposed Domestic Relations Orders to the Retirement Systems for review by the Attorney General’s office before any payment of retirement income can be made to a member’s ex- spouse in a divorce situation. The office continues to process these requests on a timely basis, thereby providing financial certainty to all parties involved. 9 Retirement Systems Division Actuarial Valuation The actuarial valuation is prepared by an actuary to assess the funding progress of a retirement system and to determine the contribution rates necessary to sustain the system. An actuarial valuation is an inventory of the assets and liabilities of a retirement system at a specific point in time. Information collected covers all of the active ( both in- service and terminated) members and all of the retired members and other beneficiaries who are receiving benefit payments. In this way, everyone who has been promised a benefit from the system is included in the actuarial calculations to determine the present value of the system’s liabilities. These liabilities are then compared to the system’s assets, and calculations are made to determine what contribution rate is needed to fund the uncovered liabilities in the time period originally established. Annual valuations are made to permit gradual changes in the contribution level and/ or funding period and keep the funding on a proper course. The annual valuation is also used by the actuary to compare actual separation, compensation and investment experience with the actuarial assumptions used in the valuation of the liabilities of the system. The actuarial valuation balance sheets for each retirement system are included with the tables that follow. Actuarial Assumptions The economic assumptions used for the actuarial valuation of all retirement systems are an interest rate of 7.25 percent per year and average rates of salary increase of about 6 percent per year, varying at different ages. The assumed rates for mortality, withdrawals, disabilities and service retirements are based on actual past experience. The asset valuation method is based on a modified market related value. The retirement systems described in this report, except the Legislative Retirement System and Consolidated Judicial Retirement System, are being funded on a full actuarial reserve basis and use the entry age normal cost method as the actuarial cost approach. Under the entry age normal cost method, the normal contribution percentage rate is calculated on the basis of the adopted actuarial assumptions as the level percentage of the compensation of the average new member, which, if contributed throughout the entire period of active service, would be sufficient, together with his/ her contributions, to support all the benefits payable on his/ her account. The accrued liability is the difference between total liabilities and the present value of future normal cost contributions and the members’ future contributions. All experienced gains and losses are reflected in the amount of the unfunded accrued liability and thereby affect the period of liquidation, except in the Local Governmental Employees’ Retirement System, where they are reflected in the normal contribution rate. The Legislative Retirement System and Consolidated Judicial Retirement System are also being funded on a full actuarial reserve basis but use the projected unit credit cost method with unfunded accrued liability as the actuarial cost approach. Funding of the Systems All retirement systems are joint contributory, defined benefit plans with contributions made by both employees and employers. Each active member contributes 6 percent of his/ her compensation for creditable service by monthly payroll deduction. The only exception to this member contribution rate is the Legislative Retirement System to which each active member contributes 7 percent of his/ her compensation. Employers make monthly contributions based on a percentage rate of the members’ compensation for the month. Employer contribution rates are actuarially calculated. The Retirement Systems and Trust Funds 1 0 Retirement Systems Division 1 1 Funding Status of Systems The consistent use of conservative actuarial assumptions and an approved actuarial cost method over the years since the establishment of the retirement systems and the recognition of all promised benefits in the actuarial liabilities have resulted in retirement systems which can be labeled as “ actuarially sound.” In fact, North Carolina’s pension fund was named the second strongest in the nation for the third year in a row by Standard & Poor’s in February 2008. A simple measure for determining the funded status of a system is to relate the total present assets to total accrued liabilities to determine a funded ratio. The total accrued liabilities are found by adding the assets and the unfunded accrued liabilities. For purposes of comparison, the funded ratios for the major retirement systems are illustrated in Chart 1. When the ratio equals 100 percent, a system is considered to be “ fully funded” on a current basis. TEACHERS’ AND STATE LOCAL GOVERNMENTAL CONSOLIDATED JUDICIAL EMPLOYEES’ RETIREMENT SYSTEM EMPLOYEES’ RETIREMENT SYSTEM RETIREMENT SYSTEM 2000 – 1 1 2.8% 2000 – 99.3% 2000 – 1 0 8.4% 200 1 – 1 1 1 . 6% 200 1 – 99.3% 200 1 – 1 0 8.9% 2002 – 108.4% 2002 – 99.4% 2002 – 1 07.4% 2003 – 108.1% 2003 – 99.3% 2003 – 1 07.6% 2004 – 108.1% 2004 – 99.3% 2004 – 1 0 8.6% 2005 – 1 06.5% 2005 – 99.4% 2005 – 1 07.6% 2006 – 106.1% 2006 – 99.5% 2006 – 1 07.3% 2007 – 104.7% 2007 – 99.5% 2007 – 1 0 2.9% Chart 1: Funded Ratio of the Retirement Systems Retirement Systems Division 1 2 Teachers’ and State Employees’ Retirement System of North Carolina ( TSERS) N. C. G. S. 1 3 5- 1 Through 1 3 5- 1 8 .5 The Teachers’ and State Employees’ Retirement System ( TSERS) has the most assets and largest membership of the retirement systems administered by the Division. Created by the General Assembly effective July 1, 1941 , TSERS provides benefits to all full- time teachers and State employees in all public school systems, universities, departments, institutions and agencies of the State. This System began operations with a membership of 42,878 teachers and State employees, and with appropriations from the State of $ 1 , 838,000. The membership has grown over the years in proportion to the growth in size and complexity of the public schools and State government. The active membership at December 3 1 , 2007, was 338,490, and, in addition, there were 69,420 inactive members and 1 4 5,855 retired members and beneficiaries of deceased retired members. Invested assets at market value amounted to about $ 58.5 billion. The distribution of investments of the assets of TSERS as of December 3 1 , 2007, was: Long- Term Investment Fund: $ 20,294,814,474 Short- Term Investment Fund: $ 1 1 8,389,5 1 7 Real Estate Investment Portfolio: $ 3,307,962,8 1 2 Equity Investment Portfolio: $ 32,584,924,977 Alternative Investment Portfolio: $ 2,1 66,300,703 TOTAL: $ 58,472,392,483 Operations of TSERS during calendar year 2007 resulted in total receipts of $ 5,790,42 1 , 309 and total expenditures of $ 2,900,055,094. Chart 2 presents the distribution of revenues by source and expenditures by purpose. The latest Actuary’s Valuation Balance Sheet for TSERS, as of December 31, 2007, is shown in Table T10. Based on the latest actuary’s report, the General Assembly set the employer contribution rate at 3.05 percent of covered payroll, effective July 1, 2007 and at 3.36 percent of covered payroll, effective July 1, 2008. On this basis, the total of employee and employer rates of contribution is adequate to fund all future benefits presently authorized, based on current service, and to fund, over a period of nine years from January 1, 2008, the remaining accrued liability for past service. SOURCES OF FUNDS Employee Contributions: $ 797,724,1 9 0 ( 1 3 .78%) Employer Contributions: $ 388,477,830 ( 6.7 1%) Other Income: $ 3,622,875 (. 06%) Investment Income: $ 4,600,596,414 ( 79.45%) APPLICATIONS OF FUNDS Retiree Benefits: $ 2,808,1 5 3,1 67 ( 48.50%) Refunds: $ 76,907,353 ( 1 . 33%) Administrative Expenses: $ 1 4 ,963,775 (. 26%) Other Expenses: $ 30,799 (–) Addition to Reserves for Future Benefits: $ 2,890,366,2 1 5 ( 49.9 1%) Chart 2: Teachers’ and State Employees’ Retirement System of North Carolina Year Ended December 31, 2007 Retirement Systems Division 1 3 Local Governmental Employees’ Retirement System of North Carolina ( LGERS) N. C. G. S. 1 2 8- 2 1 Through 1 2 8- 38 The Local Governmental Employees’ Retirement System ( LGERS) is maintained for the employees of cities, towns, counties, boards, commissions and other entities of local government in North Carolina. Because participation by local governments is voluntary, the operation of LGERS is dependent upon the acceptance and continuing financial support of the governing bodies and employees of local governments. Approval and acceptance are evidenced by the fact that, as of December 31, 2007, a total of 874 cities, towns, counties and local commissions were participating in LGERS. This System began operations in 1945 with 18 participating local governments, 2,102 members and assets of $ 1 7 8,053. The active membership, as of December 31, 2007, was 127,959. In addition, there were 24,907 inactive members and 42,408 retired members and beneficiaries of deceased members. Invested assets at market value amounted to about $ 1 7.8 billion. The distribution of investments of the assets of LGERS as of December 31, 2007 was: Long- Term Investment Fund: $ 6,1 8 9,793,402 Short- Term Investment Fund: $ 36,1 5 0,206 Real Estate Investment Portfolio: $ 1,008,908,28 1 Equity Investment Portfolio: $ 9,938,201 , 401 Alternative Investment Portfolio: $ 660,708,371 TOTAL: $ 17,833,761,661 Operations of LGERS during the calendar year 2007 resulted in total receipts of $ 1,939,607,1 9 6 and total expenditures of $ 723,233,2 1 8 . Chart 3 presents the distribution of revenues by source and expenditures by purpose. The latest Actuary’s Valuation Balance Sheet for LGERS, as of December 31, 2007, is shown in Table T11. Based on the actuary’s latest report, the Board of Trustees set the employer normal contribution rate at 4.80 percent of covered payroll for general employees and at 5.27 percent of covered payroll for law enforcement officers, effective July 1, 2008. The accrued liability rate, if any, varies with each employing unit depending on the amount of prior service that was awarded to the members. In accordance with the provisions of the legislation that caused the merger of the Law Enforcement Officers’ Retirement System and the Local Governmental Employees’ Retirement System on January 1, 1986, the normal contribution rates are separate for each of the two groups of employees while the accrued liability rate is the same. SOURCES OF FUNDS Employee Contributions: $ 301 ,094,054 ( 1 5 .52%) Employer Contributions: $ 252, 1 6 5,044 ( 1 3 .00%) Other Income: $ 99,880 (. 0 1%) Investment Income: $ 1 , 3 86,248,2 1 8 ( 7 1 . 47%) APPLICATIONS OF FUNDS Retiree Benefits: $ 671,389,752 ( 34.62%) Refunds: $ 46,630,880 ( 2.40%) Administrative Expenses: $ 5 , 2 0 9 ,1 1 7 ( . 27%) Other Expenses: $ 3,468 (–) Addition to Reserves for Future Benefits: $ 1 , 2 1 6 ,373,979 ( 62.7 1%) Chart 3: Local Governmental Employees’ Retirement System of North Carolina Year Ended December 31, 2007 Retirement Systems Division 1 4 Consolidated Judicial Retirement System of North Carolina ( Judicial System) N. C. G. S. 135- 50 Through 135- 72 The Consolidated Judicial Retirement System was created by the 1983 session ( Regular Session, 1 9 84) of the General Assembly, effective January 1 , 1 985. This System was formed by combining the previously existing Uniform Judicial, Uniform Solicitorial and Uniform Clerks of Superior Court Retirement Systems. The Courts Commission was responsible for the design of the benefit structure of the previous systems, which was carried forward to the new consolidated system. The membership of the Judicial System is comprised of the elected judges and justices, district attorneys, clerks of superior court of the General Court of Justice and public defenders. As of December 31, 2007, there were 548 active members, 54 inactive members and 482 retired members and beneficiaries of deceased members. The invested assets at market value were about $ 457 million. The distribution of the investments of the Judicial System as of December 31, 2007, was: Long- Term Investment Fund: $ 1 5 8,023,674 Short- Term Investment Fund: $ 2,660,486 Real Estate Investment Portfolio: $ 25,757,1 4 3 Equity Investment Portfolio: $ 253,7 1 9 ,469 Alternative Investment Portfolio: $ 1 6 ,867,698 TOTAL: $ 457,028,470 Operations of the Judicial System during the calendar year 2007 resulted in total receipts of $ 49,641 , 6 85 and total expenditures of $ 25,640,466. Chart 4 presents the distribution of revenues by source and expenditures by purpose. The latest Actuary’s Valuation Balance Sheet for the Judicial System, as of December 31, 2007, is shown in Table T12. Based on the actuary’s latest report, the General Assembly set the employer contribution rate at 13.21 percent of covered members’ payroll, effective July 1, 2008. On this basis, the total number of member and employer rates of contribution is more than adequate to fund all future benefits present authorized based on current service. SOURCES OF FUNDS Employee Contributions $ 5,568,61 9 ( 1 1 .22%) Employer Contributions $ 8,224,364 ( 1 6.57%) Other Income $ 4,30 1 (. 01%) Investment Income $ 35,844,402 ( 72.20%) APPLICATIONS OF FUNDS Retiree Benefits $ 25,474,8 1 5 ( 5 1 . 3 2%) Refunds $ 9,79 1 (. 02%) Administrative Expenses $ 39,885 (. 08%) Other Expenses $ 1 1 5,974 (. 23%) Addition to Reserves for Future Benefits $ 24,00 1 , 220 ( 48.35%) Chart 4: Consolidated Judicial Retirement System of North Carolina Year Ended December 31, 2007 Retirement Systems Division 1 5 Teachers’ and State Employees’ Benefit Trust ( Benefit Trust) N. C. G. S. 135- 5( I); 143- 166.20; and 143- 166.60 The Benefit Trust was established January 1, 1980, by the Board of Trustees of the Teachers’ and State Employees’ Retirement System after enabling legislation was enacted in the 1979 session of the General Assembly. The Board of Trustees of the Local Governmental Employees’ Retirement System elected to become a participating affiliate in the Trust on the same date. The purpose of the Benefit Trust is to provide group death benefits for members of these two retirement systems. Formerly, identical type death benefits were provided directly by these retirement systems. All contributions to fund the death benefits plans are held separate and apart from any pension or retirement funds. The funding method adopted for the Benefit Trust is one year term cost. In 2007, the employer contribution rate to fund this benefit for members of the Teachers’ and State Employees’ Retirement System was 0.16 percent of covered payroll. The employer contribution rate for members of the Local Governmental Employees’ Retirement System is actuarially determined and varies among employers. The Benefit Trust further includes the Separate Insurance Benefits Plan for State and Local Governmental Law Enforcement Officers. The Plan provides additional death benefits to active and retired law enforcement officers and additional accident and sickness insurance coverage for law enforcement officers. These benefits were funded by a $ 1.00 cost- of- court assessment in each criminal case conviction in the State. This funding source ceased June 30, 2003. Additionally, the Benefit Trust includes the Retiree Death Benefit Plan. This plan is funded by participant contributions. Effective July 1, 2007, the benefit is $ 10,000 after 24 months of contributions. If a participant’s death occurs before 24 months of contributions, the benefit is limited to a refund of contributions plus interest. Chart 5 presents the distribution of revenues by source and expenditures by purpose. The number of deaths and amounts of benefit payments, according to member group, during 2007 were: RETIREMENT SYSTEM NUMBER OF PAYMENT MEMBERSHIP PAYMENTS AMOUNT Teachers’ and State Employees’ 606 $ 2 1 , 426,941 Local Governmental Employees’ 1 57 $ 5,334,100 Death Benefit Payments Calendar Year 2007 Retirement Systems Division 1 6 SOURCES OF FUNDS Local Governmental Employees Retirement System Death Benefit $ 4,28 1 ,067 ( 7.85%) Legislative Death Benefit $ 45,000 (. 08%) Retirees’ Death Benefit $ 10,502,727 ( 1 9 .26%) Teachers’ and State Employees’ Retirement System Death Benefit $ 20,737,029 ( 38.05%) Investment Income $ 1 8 ,952,98 1 ( 34.76%) APPLICATIONS OF FUNDS Local Death Benefits Paid $ 5,334,100 ( 9.78%) Death Benefits and Insurance Paid SIF $ 940,555 ( 1 .73%) Administrative Expenses $ 359,977 (. 66%) Retiree Death Benefits Paid $ 10,860,609 ( 1 9 .92%) State Death Benefits Paid $ 2 1 , 426,941 ( 39.30%) Legislative Death Benefit $ 45,000 (. 08%) Addition to Reserves for Future Benefits $ 1 5 ,55 1 , 622 ( 28.53%) Chart 5: North Carolina Teachers’ and State Employees’ Benefit Trust Year Ended December 31, 2007 Retirement Systems Division 1 7 Firemen’s and Rescue Squad Workers’ Pension Fund ( Pension Fund) N. C. G. S. 58- 86- 1 Through 58- 86- 90 The Firemen���s and Rescue Squad Workers’ Pension Fund ( Pension Fund) was created by the General Assembly in 1959 to provide benefits for certified firemen. The statutes were amended to include certified rescue squad workers beginning January 1, 1982. Both volunteer and paid personnel are included in the membership. Funded by an initial appropriation of $ 235,000, retroactive benefit payments amounting to $ 210,700 were made to 362 retirees during August 1962 to cover all benefits due and payable since July 1, 1961. As of June 30, 2008, the active membership of the fund was 36,160, while the number of retired members was 10,509. Invested assets at market value amounted to about $ 319.20 million. The distribution of the investment of the assets as of June 30, 2008 was: Long- Term Investment Fund: $ 1 1 8 ,596,550 Short- Term Investment Fund: $ 2,404,282 Real Estate Investment Portfolio: $ 20,690,758 Equity Investment Portfolio: $ 1 6 2,279,53 1 Alternative Investment Portfolio: _$ 1 5 ,1 8 5,796 TOTAL: $ 319,156,917 Operations of the Pension Fund during the 2007 fiscal year resulted in total receipts of $ 4,826,244 and total expenditures of $ 22,401,635. Chart 6 presents the distribution of revenues by source and expenditures by purpose. The latest Actuary’s Valuation Balance Sheet, as of June 30, 2008, is shown in Table T13. Based on the latest actuary’s report, the General Assembly appropriated $ 9,458,957 for the 2007- 2008 fiscal year. The yearly appropriation will fund all future benefits, based on current service, and will fund, over a period of nine years from June 30, 2008, the remaining accrued liabilities for past service. SOURCES OF FUNDS Appropriation $ 8,733,957 ( 30.36%) Member Contributions $ 2,459,738 ( 8.55%) Reduction in Reserves for Future Benefits $ 1 7,575,390 ( 61 .09%) APPLICATIONS OF FUNDS Pension Benefits $ 20,869,033 ( 72.54%) Refunds $ 347,88 1 ( 1 . 2 1%) Administrative Expenses $ 1 ,1 8 4,720 ( 4 .1 2 %) Investment Loss $ 6,367,45 1 ( 22 .1 3 %) Chart 6: Firemen’s and Rescue Squad Workers’ Pension Fund Year Ended June 30, 2008 Retirement Systems Division 1 8 Retirees’ Health Premiums Funds This fund is used as a conduit of transferring money from employers to pay individual coverage costs of retirees’ health insurance. This coverage is under the State’s health plan. Retirees from the Teachers’ and State Employees’, Consolidated Judicial and Legislative Retirement Systems are eligible for coverage. Legislation allows selected employers in the Local Governmental Employees’ Retirement System to participate in the Retiree Health Premiums Fund. The method of collecting the employers’ payments is a surcharge on active members’ payroll payable with the employer contribution rate to the affected retirement system. Financial Information for 2007 Beginning Fund Balance: $ 222,419,894 Additions: – Employer Contributions: $ 560,255,388 – Investment Income: $ 10,866,98 1 Deductions: – Health Premiums Paid: $ 496,1 76,1 8 1 – Administrative Expense: $ 1 8 9,008 Ending Fund Balance: $ 297,1 7 7,074 Legislative Retirement Fund ( Fund) N. C. G. S. 120- 4.1 Through 1 2 0- 4.2 The Fund was created by the 1969 session of the General Assembly as a retirement plan for members and elected officers of the North Carolina General Assembly. The Fund was abolished, prospectively, by the 1973 session ( second session 1974). The abolishing act preserved the vested and inchoate rights of the members in the Fund so that all members and former members of the General Assembly, who had qualified by virtue of service as of 1 974, are still in receipt of monthly allowances or may apply for and receive monthly allowances at age 65. In the year ended December 31, 2007, there were 1 9 former members and officers of the General Assembly in receipt of allowances with a cost of $ 27,900. The cost is funded by a contribution of 5 percent of compensation paid by members at retirement and an annual General Fund appropriation made to the General Assembly. The Fund is not operated as a retirement fund, but as an expendable trust fund. Retirement Systems Division 1 9 Legislative Retirement System N. C. G. S. 1 2 0- 4.8 Through 120- 4.29 The Legislative Retirement System was created by the 1 9 83 session of the General Assembly as a retirement plan for members of the General Assembly. The membership also includes: 1) members who were vested or had maintained contributions in the Legislative Retirement Fund; 2) those retirees receiving a benefit from the Legislative Fund who elect to transfer to the Legislative Retirement System. As of December 3 1 , 2007 the System had 1 70 active members, 86 inactive members and 265 retired members. Assets on that date totaled $ 33,226,776. Operations of the System during calendar year 2007 resulted in total receipts of $ 2,894,590 and disbursements of $ 1 , 866,762. Based on the latest actuarial report, the employer contribution rate was set by the General Assembly at 0.00 percent of covered payroll effective July 1, 2008. On this basis, the total of employee and employer rates of contribution is adequate to fund all future benefits presently authorized. Disability Income Plan N. C. G. S. 1 3 5- 100 Through 1 3 5 - 1 1 3 The Disability Income Plan of North Carolina was created in 1987 by the North Carolina General Assembly with an effective date of January 1, 1988. This plan replaced the former provisions for disability retirement under the Teachers’ and State Employees’ Retirement System and replaced the benefits provided under the former Disability Salary Continuation Plan. The purpose of this plan is to provide equitable replacement income for eligible teachers and State employees who become temporarily or permanently disabled for the performance of their duty prior to retirement. Based on the latest actuarial report, the General Assembly set the employer contribution rate to fund this benefit at 0.52 percent of the covered payroll of the members of the Teachers’ and State Employees’ Retirement System and the Optional Retirement Program, effective July 1, 2007. The following are certain statistics relating to the number of disabled members, number of new claims, employer contributions, investment earnings and amount of benefit payments during the calendar years 2006 and 2007. 2006 2007 Number of Disabled Members 5,902 6,072 New Claims During the Year 923 897 Employer Contributions $ 68,824,262 $ 73,342,244 Investment Income $ 1 0,822,041 $ 20,944,888 Amount of Benefit Payments $ 58,004,719 $ 66,462,928 Disability Income Plan Statistics Calendar Years 2006 and 2007 Retirement Systems Division 20 Public Employees’ Social Security Agency ( Social Security Agency) N. C. G. S. 1 3 5- 19 Through 1 3 5- 26 The Social Security Agency administers the State’s responsibility under the Social Security Agreement between the State of North Carolina and the United States Secretary of Health and Human Services. This Agreement was entered into on July 16, 1951, and executed pursuant to authority in Section 218 of the Federal Social Security Act and Article 2, Chapter 135, of the General Statutes of North Carolina. The provisions of the Agreement require the Social Security Agency to provide the mechanics of coverage for the State and its qualified political subdivisions and act as a liaison between the State and the Social Security Administration. National Guard Pension Plan ( Guard Plan) N. C. G. S. 127A- 40 The National Guard Pension Plan ( Guard Plan) was transferred to the Department of State Treasurer for payment of monthly benefits by the 1979 session of the General Assembly, effective July 1, 1979. This Division pays allowances based on the certification of eligibility of former National Guardsmen by the Secretary of the Department of Crime Control and Public Safety. The payments of benefits are funded by State General Fund appropriations by the General Assembly. As of December 31, 2007, there were 3,130 beneficiaries in receipt of monthly allowances from the Guard Plan at a cost that calendar year of $ 4,981,747. The 1983 session of the General Assembly enacted legislation, effective July 1, 1 9 83, creating a trust fund for financing National Guard Plan payments and requiring that the Plan be maintained on a generally accepted actuarial basis. Based on an actuarial study after passage of this legislation, the June 1 9 84 session appropriated $ 1 ,7 1 7,977 to begin actuarial reserve funding. The funding appropriated for 2007– 2008 was $ 7,007,443. Registers of Deeds’ Supplemental Pension Fund N. C. G. S. 1 61 - 50 Through 1 61 - 50.5 The Registers of Deeds’ Supplemental Pension Fund was created by the 1987 session of the General Assembly for the purpose of providing a supplement to the Local Governmental Employees’ Retirement System benefits for Registers of Deeds. The stated purpose of the Act was to attract the most highly qualified talent available within the State to that county office. In October 1987, each county board of commissioners began remitting monthly to the Department of State Treasurer an amount equal to 4.5 percent of the receipts collected pursuant to Article 1 of Chapter 161 of the General Statutes for deposit to the credit of the Register of Deeds’ Supplemental Pension Fund. Effective July 1, 2007 this funding was reduced to 1.5 percent. As of December 31, 2007, the Fund had total assets in the amount of $ 34,416,916. Benefits from the Fund became payable beginning July 1, 1 9 88. For the year ending December 3 1 , 2007, the Fund paid total benefits in the amount of $ 1 ,061 , 975. Retirement Systems Division 2 1 Supplemental Retirement Income Plan of North Carolina ( 401( k) Plan) N. C. G. S. 135- 90 Through 135- 95; 143- 166.30; and 143- 166.50 The 1983 session ( Regular Session, 1984) enacted enabling- type legislation creating the State’s Internal Revenue Code Section 401( k) Plan effective as of January 1, 1985. The Plan is a voluntary savings/ investment program designed to supplement members’ replacement income in retirement. The Plan is governed jointly by the State Treasurer and a Board of Trustees composed of members of the Boards of Trustees of the Teachers’ and State Employees’ and Local Governmental Employees’ Retirement Systems. Prudential Retirement, the Plan’s third- party administrator, is responsible, under the Plan document adopted by the Board and the terms of the contract with the Board, for all aspects of operating the Plan. This responsibility includes communications, record- keeping and monitoring investment products. The Plan’s number of participating members rose from 204,735 members as of June 30, 2007, to 2 1 3 ,400 members as of June 30, 2008, for an increase of 4.2 percent. Contributions by employers during this fiscal year totaled $ 1 5 9,537,288 while salary deferred contributions by members were $ 241 , 291,987. The total assets at market value of the Plan decreased by 1.72 percent to $ 4,148,01 1 , 855. Under the current contract, members may select from a stable value fund and eight mutual funds. As of June 30, 2008, 28.2 percent of the assets were invested in the Stable Value Fund and 71.8 percent were invested in the mutual funds. In addition, $ 35,655,682 was invested in the mutual funds that were previously offered in the Plan and the outstanding loan balances totaled $ 1 8 3,464,954. The North Carolina Public Employee Deferred Compensation Plan N. C. G. S. 143B- 426.24 The North Carolina Public Employee Deferred Compensation ( 457) Plan was established by its Board of Trustees on Executive Order from the Governor in 1974. The Plan is a voluntary tax-deferred savings/ investment program designed to supplement members’ replacement income in retirement. The Plan is governed by its Board of Trustees; the State Treasurer is the chairperson of the Board. Great- West Retirement Services is the Plan’s third- party administrator and is responsible under the Plan document adopted by the Board and the terms of the contract with the Board for most aspects of operating the Plan, including communications and record- keeping. As of June 30, 2008, the Plan’s number of participating members was 29,968. Contributions during this fiscal year totaled $ 41 ,1 05,802, and the total assets at market value of the Plan were $ 705,784,807. Under the current contract, members may select from 1 9 investment options. As of June 30, 2008, 7.5 percent of the assets were invested in one of the five fund- of- funds options, 42.1 percent were invested in the fixed and bond funds and 50.4 percent were invested in the mutual funds. The outstanding loan balances as of June 30, 2008, totaled $ 6,1 3 6,695. 22 The State Treasurer’s Annual Report Investment Management Division Investment Management Division Investment Management Division Structure The Investment Management Division serves as the investment arm for the Department of State Treasurer. The Division manages: 1) The combined assets of the North Carolina Retirement Systems, referred to as the Trust Fund Investment Program (“ the Trust Fund”). 2) The assets of the Cash Management Program. 3) The ancillary investment programs as authorized by the General Assembly. The State Treasurer administers both the Cash Management and Trust Funds Investment programs. The Treasurer is directed by statute to “ establish, maintain, administer, manage and operate” investment programs for all funds on deposit, pursuant to the applicable statutes. In doing so, the Treasurer “ shall have full power as a fiduciary” and shall manage the investment programs so assets “ may be readily converted into cash as needed.” At the fiscal year closing June 30, 2008, total assets of the Trust Fund Investment Program, Cash Management Program and ancillary investment programs were $ 85.9 billion. Assets of the Trust Fund Investment Program accounted for 84.2 percent of this amount, assets of the Cash Management Program accounted for 13.8 percent and ancillary programs comprised 2.0 percent. This total represents the aggregate assets of seven retirement systems, various other trust funds and the State’s General and Highway Funds. In establishing the comprehensive management program, the State Treasurer, utilizing a professional investment staff, has developed an investment strategy for each portfolio that recognizes the guidelines of the governing General Statutes and provides appropriate diversification. STATE TREASURER SOLE FIDUCIARY DEPUTY TREASURER CHIEF INVESTMENT OFFICER TRUST FUND INTERNAL ASSETS INVESTMENT OPERATIONS TRUST FUND EXTERNAL ASSETS 23 Investment Management Division Investment Objectives Cash Management Program The Cash Management Program’s objective is to maximize income consistent with the principals in preservation of capital and liquidity. Prudence in discharging this fiduciary obligation requires that all investments be reviewed continuously to ensure recognition of opportunities in the secondary markets that may improve the quality and/ or income stream. Trust Funds Investment Program The Trust Funds Investment Program’s objective is to generate returns that match or exceed those of the appropriate benchmarks on a trailing three- year basis, thereby assisting in maintaining actuarially sound funding levels for the retirement system assets ( the dominant participants) while maintaining the necessary diversification. Operating Policy In all transactions executed for any investment program managed by the State Treasurer, the objective is to transact such business in the best interest of the beneficial owners of the trusts’ assets. Within the Trust Fund, assets are divided into different classes of investments: Short- Term Investment Fund Long- Term Investment Fund Equity Investment Portfolio Real Estate Investment Portfolio Alternative Investment Portfolio Highly Liquid Money Market Instruments Longer Term Investments Equity Securities Real Estate Private Equity; Hedge Funds Internally Internally Externally Externally Externally Treasuries, Agencies, Short- Term Corporate Issues Investment Grade Corporate Securities, Treasuries, Agencies, GNMAs Fiduciary Relationships with experienced investment advisors Limited Partnerships managed by experienced real estate advisors Limited Partnerships managed by experienced private equity advisors, Hedge Fund of Funds Portfolio Investment Examples Managed Mandate 24 Investment Management Division Overall Fund Strategy The tradition of conservative fiscal management has served North Carolina’s public workers and taxpayers well through the years. The Trust Fund continues that tradition today with a heavy allocation in fixed income assets ( bonds) combined with minimal exposure to high- risk assets and an increasingly diversified portfolio. The result of this strategy is a fund that is a top performer in turbulent economic times and steady in bull markets. Recent reports and rankings demonstrate the wisdom of North Carolina’s long- term strategy. In Standard & Poor’s annual rankings of state retirement fund funding ratios, North Carolina ranked second for the third year in a row. It should also be noted that we have been able to avoid the problematic strategies utilized by other pension funds. More recently, Wilshire, the most widely accepted benchmark for the performance of institutional assets, reported that North Carolina was in the top quarter of performers for the fiscal year ending June 30, 2008. In a year when the average public fund lost 4.5 percent and the S& P 500 lost more than 13 percent, North Carolina’s Trust Fund lost only 2 percent. The strong performance in such a tough year demonstrates the success of the Investment Management Division’s effort to maintain a well- balanced portfolio that minimizes risk. Review of the Past Year The fiscal year ended June 30, 2008 saw significant turmoil and losses in markets across the globe. The mortgage crisis and tightening credit, declines in the stock market, a weakening dollar and increasing inflation made it a tough year for investors across the spectrum. However, the Trust Fund’s conservative investment strategy mitigated losses in the equity portfolio and provided solid returns from fixed income, alternatives and real estate. This allowed us to outpace the majority of our peer funds who are positioned to outperform in up market cycles. Many fixed income investors were hit particularly hard by collapses in certain mortgage- backed securities and other credit instruments. The Trust Fund avoided these pitfalls and took no direct losses from mortgage- backed securities, such as Collateralized Debt Obligations ( CDOs) and Structured Investment Vehicles ( SIVs). The Trust Fund’s staff declined offers to invest in these securities in earlier years, which proved to be a wise decision. The year did see the Trust Fund make a number of significant new investments and continue its effort to balance the portfolio with a greater emphasis on diversifying into alternative asset classes, increasing exposure to international and emerging markets, and reallocating passive investments to active strategies. Looking Forward to the Year Ahead Though the Trust Fund performed relatively well during the significantly volatile and arduous fiscal year in the financial markets, the Investment Division is committed to enhancing the portfolio to perform well in all types of market environments. Throughout the 2009 fiscal year, the Investment Division will continue to focus on reducing overall portfolio risk, while creating a stronger position to outperform in an up market environment. With the Federal Reserve Board holding the federal funds rate steady at a relatively low level as of the 2008 fiscal year end, the fixed income management team will focus on protecting its longer duration portfolio against a possible rising interest rate environment. The Investment Division will utilize more credit research resources to identify and capitalize on market inefficiencies during this possible difficult period for bond prices. In the equity market, growth- oriented securities outperformed value- focused securities considerably. The Trust Fund benefited from the growth stocks’ performance, but the Investment Division will evaluate the Fund’s bias to the growth equity style as the market potentially adjusts prices. The Investment 25 Investment Management Division Division will also concentrate on increasing its global equity management allocation within the Equity Investment Portfolio. By utilizing a global approach, external investment managers can increase their opportunity set when searching for strong investments. As companies increasingly participate on a global stage, this strategy allows managers to evaluate whether companies within industries and sectors would truly be strong investment opportunities on a global basis. In addition, given this flexibility in a portfolio, global equity managers can effectively reduce risk through diversification and position themselves for potentially greater returns. In the private equity market, the Investment Division was successful in securing high quality fund relationships throughout the fiscal year 2008. The private equity team will continue its concentration on opportunistic funds and co- investment opportunities with existing relationships. During the next fiscal year, the Investment Division will update the 2005 asset optimization study to reflect market revaluation and the Trust Fund’s liabilities. As the Investment Division seeks to increase allocations to strategies that, by themselves, might hold greater volatility, the Division remains steadfast in the fundamental concepts that these strategies’ low correlation with others provides the diversification to effectively reduce overall portfolio risk, while concurrently increasing the potential for better portfolio performance. 26 Investment Management Division Cash Management Program Review Short- Term Investment Fund The Short- Term Investment Fund ( STIF) is an internally managed portfolio of highly liquid fixed income securities. These securities are primarily money market instruments and short- to intermediate- term treasuries and agencies. All bank accounts of the State Treasurer are included in this portfolio, which serves as the main operating account for state agencies. Because the Treasurer’s cash balances are ultimately subject to disbursement upon presentation of valid warrants, the primary considerations in making investments are safety and liquidity; the secondary consideration is income. For the fiscal year 2008, the STIF generated a cash return of 5.2 percent. The objective of this portfolio is to provide maximum income within the parameters of the IRS regulations on bond arbitrage. 6.00% 4.00% 2.00% 0.00% 4.32% 3.22% 2.88% 3.56% 4.68% 5.19% STIF Fiscal Year Performance Fiscal Year Ending 2003 2004 2005 2006 2007 2008 27 Investment Management Division STIF Asset Allocation as of 6/ 30/ 08 U. S. Agencies, 73.0% U. S. Treasuries, 24.0% Corporates, 0.5% Certificates of Deposit, 2.5% STIF Asset Allocation as of 6/ 30/ 07 U. S. Agencies, 58.2% U. S. Treasuries, 40.0% Corporates, 0.4% Certificates of Deposit, 1.4% 28 Investment Management Division Bank of America Barclays Credit Suisse Deutsche Bank First Tennessee Bank Goldman Sachs HSBC Securities JPMorgan Chase Key Bank Lehman Brothers Loop Capital Merrill Lynch Mizuho Securities Morgan Keegan Morgan Stanley RBC Capital Markets RBS Greenwich SBK Brooks UBS Warburg Wachovia Capital Markets Williams Capital Group STIF Summary of Brokers Utilized During Fiscal Year 2008 29 ISSUER COUPON MATURITY DATE VALUE ($) FHLB Discount Notes 07/ 01/ 2008 3,004,326,357 U. S. Treasury Note 4.875% 08/ 31/ 2008 2,579,344,047 FHLMC 4.700% 07/ 1 1 / 20 1 3 2,086,7 1 4 ,3 1 3 FHLMC 4.500% 08/ 1 1 / 2014 2,056,41 8 ,730 FHLMC 4.7 1 0% 07/ 1 8 / 2014 1 , 822,463,990 FHLMC 4.730% 07/ 1 1 / 20 1 3 1 , 430,552,904 FHLMC 4.320% 04/ 29/ 201 3 1 , 366,003,957 FHLB 5.050% 1 1 / 1 9 / 201 2 1 , 1 39,574,057 FHLB 5.050% 1 1 / 1 3 / 201 2 874,770,750 FHLB 5.000% 1 1 / 1 4 / 201 2 65,499,335 STIF Top 10 Positions as of June 30, 2008 Investment Management Division Total Trust Fund As of June 30, 2008, the Trust Fund maintained a market value of $ 72.3 billion. For the fiscal year 2008, the Trust Fund returned - 2.1 percent, net of fees, outperforming its custom benchmark return of - 2.9 percent. Over longer time periods, the Trust Fund continued its strong relative performance as it outperformed the benchmark over all of the respective time periods. Trust Funds Investment Program Review 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% - 2.00% - 4.00% Total Trust Fund Annualized Performance Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year Total Trust Fund Custom Benchmark* * 50% Custom Equity Benchmark, 39.5% Custom Fixed Income Benchmark, 6% Custom Real Estate Benchmark and 4.5% Custom Alternatives Benchmark. 6.44% 8.2 1% 5.89% 6.08% 7.73% 5.68% - 2.07% - 2.86% 30 Investment Management Division 1- YEAR 3- YEAR 5- YEAR 10- YEAR TOTAL TRUST FUND - 2.1% 6.4% 8.2% 6.1% Total Pension Custom Benchmark1 - 2.9% 5.9% 7.7% 5.7% LONG TERM INVESTMENT FUND 8.4% 4.0% 4.1% 6.3% Custom Fixed Income Benchmark2 7.5% 3.5% 4.0% 6.0% EQUITY INVESTMENT PORTFOLIO - 1 0.5% 6.5% 10.4% 5.2% Custom Equity Benchmark3 - 1 2 .0% 6.2% 9.8% 4.0% REAL ESTATE INVESTMENT PORTFOLIO 8.7% 1 6 .2% 1 3 .7% 10.7% Custom Real Estate Benchmark4 9.5% 15.4% 14.3% 12.4% ALTERNATIVE INVESTMENT PORTFOLIO 7.6% 1 1 . 8% 8.8% 6.9% Custom Alternatives Benchmark5 - 1 .0% 7.5% 8.8% 5.3% 1) 50% Custom Equity Benchmark, 39.5% Custom Fixed Income Benchmark, 6% Custom Real Estate Benchmark and 4.5% Custom Alternatives Benchmark. 2) ML 40% Govt 5+ Yr, ML 35% Corp ( Investment Grade – BBB Max 25%) 5+ Yr and ML 25% Mortgage Master. 3) 68% Russell 3000 Index and 32% MSCI EAFE Index. 4) 90% NCREIF Open End Funds Index and 10% FTSE EPRA/ NAREIT Global Securities Index. 5) 70% Custom Private Equity Benchmark and 30% Custom Hedge Fund Benchmark. Custom Private Equity Benchmark is the Russell 3000 Index lagged 3 months + 250 bps. Custom Hedge Fund Benchmark is the U. S. T- Bill + ML 400 bps. Annualized Trust Fund Performance as of June 30, 2008 3 1 Investment Management Division Structure The Investment Management Division is constantly monitoring the overall Trust Fund in an effort to control risk. The following chart highlights revisions to strategic asset allocation targets. The Investment Management Division sustains consistent rebalancing to ensure the overall portfolio weights stay in line with the target weights. A disciplined approach to rebalancing ultimately controls the level of risk that an investment portfolio experiences. JUNE 2006 JUNE 2007 JUNE 2008 Fixed Income 39.5% 39.5% 39.5% Total Equity 54.5% 52.0% 50.0% U. S. 41 . 5% 36.0% 34.0% Non- U. S. 1 3 .0% 1 6 .0% 1 6 .0% Real Estate 3.5% 5.0% 6.0% Alternatives 2.5% 3.5% 4.5% Current and Historical Strategic Targets MARKET PORTFOLIO TARGET TARGET VALUE WEIGHT WEIGHT RANGE Fixed Income $ 28,534,5 1 8 ,609 39.5% 39.5% 35.0% – 44.0% Total Equity $ 36,1 2 1 , 1 3 1 , 936 50.0% 50.0% 45.0% – 55.0% Real Estate $ 4 ,1 8 2,444,878 5.8% 6.0% 5.0% – 7.0% Alternatives $ 3,466,433,043 4.8% 4.5% 3.5% – 5.0% TOTAL FUND $ 72,304,528,466 100.0% 100.0% --- Trust Fund Asset Allocation as of June 30, 2008 32 Investment Management Division Corporate Governance The Investment Management Division maintains a robust corporate governance program. The corporate governance movement followed on the heels of highly publicized scandals at companies like Enron, WorldCom and Tyco, when investors saw the clear results of poor governance standards. The pension plan works through proxy voting, shareholder resolutions, dialogue with corporate leaders and regulatory agencies and collaboration with other institutional investors to create positive change within portfolio companies. Some of the primary issues addressed by the pension plan include: n Ensuring greater transparency in executive compensation packages and stronger rights for shareholders to provide advisory votes on pay plans n Tying executive pay to performance n Creating stronger Board independence n Ensuring investor rights to nominate director candidates n Protecting the legitimacy of director elections by working to eliminate uninstructed broker votes from director election tallies n Ensuring companies develop sustainable environmental business practices Sudan The Trust Fund has developed a policy related to investments in companies that may be doing business with the government of Sudan. The policy incorporates engagement with companies to encourage positive change, with the possibility that non- responsive companies may be excluded from the Trust Fund portfolio. On November 1 , 2006, the Trust Fund announced that it had divested from, or prohibited future investment in, nine companies that were shown to be providing military or monetary support to the Sudanese government, but who had taken little or no interest in the humanitarian crisis. On August 30, 2007, the “ Act Providing for how the State Treasurer Shall Address Certain State Investments Relating to Sudan” ( House Bill 291) was signed into law, and the Department is following this legislation. Payday Lending The Trust Fund implemented a policy to exclude holdings of companies engaged in payday lending. Payday lenders typically offer short- term loans at high interest rates and may not legally operate in the State of North Carolina. As such, any company that in the primary course of business engages in such practices is excluded from the North Carolina investable universe. Trust Fund Fiscal Year Activity The Division conducts its activities in accordance with the Statement of Investment Policy approved by the Treasurer in consultation with the Investment Advisory Committee. This policy covers fiduciary standards of care, asset allocation ranges, rebalancing requirements and other issues. During Fiscal Year 2008, strategies were revised to increase long- term exposure to real estate and alternatives. The allocation to U. S. equity was lowered to provide funds for the additional allocation to real estate and alternatives. This strategic realignment effectively increased the Non- U. S. equity allocation within the overall Equity Investment Portfolio. The Division models a policy portfolio that should, over time, produce a return that exceeds the actuarial requirements with prudent risk guidelines. Specifically, the Trust Fund’s fixed income holdings posted an 8.4 percent return for the year, while the equity portfolio, or stocks, lost - 10.5 percent. The alternatives and real estate portfolios returned 7.6 percent and 8.7 percent, respectively. The relatively young real estate and alternatives investment programs will provide increasingly strong returns over the next several years, as these types of investments typically take several years to realize maximum results. These investments also diversify the overall portfolio, helping to produce steadier returns over the long term. 33 Investment Management Division Fixed Income 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% LTIF Annualized Performance Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year LTIF Custom Fixed Income Benchmark 3.95% 4.15% 6.27% 3.50% 3.95% 6.05% 8.35% 7.50% Structure The fixed income allocation of the Trust Fund is actively managed through the LTIF. The Investment Management Division utilizes the LTIF to help match the liabilities of the overall fund. Because of this approach, the duration of the portfolio tends to be fairly long. Duration is a measure of a bond’s price sensitivity to changes in interest rates. With rates dropping and spreads widening, the fixed income portfolio return of 8.4 percent was within expectations for the fiscal year. 34 The majority of the Trust Fund’s fixed income allocation is invested in the Long Term Investment Fund ( LTIF) and includes allocations to the STIF ($ 0.9 billion) and the Campbell Timber Fund III ($ 0.5 billion). As of June 30, 2008, the LTIF comprised a market value of $ 27.1 billion, representing 37.4 percent of the Trust Fund’s assets. For the fiscal year 2008, the LTIF returned 8.4 percent, net of fees, outperforming its custom benchmark return of 7.5 percent. Over longer time periods, the LTIF continues its strong relative performance and adds value to the Trust Fund as it outperforms the benchmark over all of the respective time periods. Investment Management Division Fixed Income Fiscal Year Activity During the fiscal year, the LTIF increased its overall position within the Trust Fund to 39.5 percent of the total assets. The LTIF added approximately $ 215.0 million in value to the Trust Fund by outperforming its benchmark. By adhering to its high quality structure throughout the fiscal year, the LTIF successfully avoided credit market difficulties associated with Special Investment Vehicles (“ SIVs”) and Subprime mortgages. In addition, the LTIF strategically added exposure to Treasury Inflation- Protected Securities (“ TIPS”) as fears of relatively higher inflation spread through the economy. LTIF Credit Quality* Allocation as of 6/ 30/ 08 BBB, 22.4% High Yield, 2% AAA, 4.5% AA, 2 9 .1 % * Credit Quality based on Moody’s Ratings A, 41 . 9 % LTIF Sector Allocation as of 6/ 30/ 08 Mortgages, 25.2% Cash, 0.7% Corporates, 36.4% Government, 37.7% 35 Investment Management Division CORPORATE ISSUER MARKET VALUE ($) % OF LTIF JPMorgan 367, 1 73,73 1 1 . 3% General Electric 344,1 1 9 ,50 1 1 . 2% Bank of America 323,680,408 1 . 1 % AT& T 307,9 1 9 ,879 1 . 1 % Citigroup 296,396,789 1 . 0% Wal- Mart Stores 258,1 3 2,036 0.9% Goldman Sachs Group 257,303,329 0.9% Verizon Comm 220,542,874 0.8% Morgan Stanley 1 85,357,41 8 0.6% Wachovia Bank 1 89,991,614 0.6% LTIF Top 10 Corporate Positions as of June 30, 2008 AG Edwards Bank of America Barclays Capital Bear Stearns Citigroup Countrywide Securities Credit Suisse Securities Deutsche Bank Securities First Tennessee Bank Goldman Sachs HSBC Securities JPMorgan Chase LaSalle Financial Lehman Brothers Loop Capital Markets KeyBanc Capital Markets Merrill Lynch Mizuho Securities Morgan Keegan Morgan Stanley RBC Capital Markets RBS Greenwich Capital Stifel Nicolaus Suntrust Capital Markets UBS Securities Wachovia Capital Markets Williams Capital Group LTIF Summary of Brokers Utilized During Fiscal Year 2008 Fixed Income Market Fiscal Year Commentary The beginning of the fiscal year saw the impact of the subprime mortgage meltdown take full effect as delinquencies and defaults began a sharp rise. Due to the subsequent credit crisis and escalating fears of a weakening economy, the fiscal year experienced a significant period of monetary easing by the Federal Reserve Board. Making some of the largest drops in monetary policy history, the Fed lowered the federal funds rate from 5.25 percent to 2.00 percent. High quality securities posted strong returns for the fiscal year due to a decrease in interest rates across the yield curve and a flight to quality. On the corporate side, spreads widened significantly throughout the year as the credit crisis intensified and the economy showed more signs of weakness. 36 Investment Management Division Equity Investment Portfolio As of June 30, 2008, the Equity Investment Portfolio ( EIP) maintained a market value of $ 36.1 billion, representing 50.0 percent of the Trust Fund’s assets. For the fiscal year 2008, the EIP returned - 10.5 percent, net of fees, outperforming its custom benchmark return of - 12.0 percent. Over longer time periods, the EIP continues its strong relative performance and adding value to the Trust Fund. Structure All investments of the Equity Investment Portfolio are managed externally according to one of three different strategies: passive, enhanced or active. Passive investments track existing indexes in relatively efficient markets. Enhanced indexes allow managers some flexibility to make decisions that deviate from the index, but maintain more control of market risk than active management. Actively managed funds give the manager discretion to make investment decisions within the parameters of the portfolio’s mandate. The EIP maintains prudent diversification within the broad equity market and is categorized into U. S. Large- Cap, U. S. Mid- Cap, U. S. Small- Cap and Non- U. S. investments. U. S. investments make up the large majority of equity investments, though the international investments have grown in recent years. Equity Style Allocation Growth, 48% Sector, 2% Value, 25% Core, 25% Equity Size Allocation U. S. Small- Cap, 7% U. S. Mid- Cap, 1 0 % Non- U. S., 33% U. S. Large- Cap, 50% Equity Strategy Allocation Passive, 32% Enhanced, 12% Active, 56% 37 Investment Management Division 1 5 .00% 10.00% 5.00% 0.00% - 5.00% - 1 0.00% - 1 5 .00% Equity Investment Portfolio Annualized Performance Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year Equity Investment Portfolio Custom Equity Benchmark 6.52% 10.38% 6.24% 5.2 1% 9.76% 4.03% - 10.45 %- 12.01% Equity Fiscal Year Activity Based on the implementation of an independent asset optimization analysis, strategic targets for the EIP were lowered to allow an increase in the Trust Fund’s diversification through the investment into other asset classes. However, over the past few years within the EIP, the Non- U. S. equity allocation was strategically increased; this has added significant value to the overall Equity Investment Portfolio. During the fiscal year, the EIP increased its Large- Cap Value position through an allocation to the investment advisor, Hotchkis & Wiley. The EIP strategically reallocated active exposure with U. S. Small- Cap by adding the investment advisor, Turner Investment Partners. During the year, the EIP also augmented its U. S. Mid- Cap position by selecting advisors, TimesSquare Capital and Angelo Gordon. The EIP continues to steadily build its exposure to the emerging markets as it hired Baillie Gifford during the fiscal year. Following is a list of the EIP’s investment managers as of June 30, 2008, as well as the EIP’s top 1 0 holdings. Decrease in Trust Fund’s Equity Allocation 100.0% 80.0% 60.0% 40.0% 20.0% 0.00% FYE 2001 2002 2003 2004 2005 2006 2007 2008 Equity Fixed Income Real Estate/ Alternatives 38 Investment Management Division 10.00% 5.00% 0.00% - 5.00% - 1 0.00% - 1 5 .00% 20.00% 1 0.00% 0.00% - 1 0.00% - 20.00% U. S. Equity Annualized Performance Non- U. S. Equity Annualized Performance Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year Total U. S. Equity Russell 1 0 00 Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year Total Non- U. S. Equity MSCI EAFE 4.62% 15.40% 8.83% 18.09% 4.42% 8.47% 4.73% 12.84% 8.37% 16.67% 3.5 1% 5.83% - 11.93% - 7.72% - 12.69% - 10.61% Increase in Non- U. S. Equity Allocation 100.0% 80.0% 60.0% 40.0% 20.0% 0.00% FYE 2001 2002 2003 2004 2005 2006 2007 2008 U. S. Non- U. S. 39 Investment Management Division U. S. EQUITY INVESTMENT ADVISORS STYLE MARKET VALUE First Citizens Large Cap Large- Cap Passive 3,004,326,357 Evergreen S& P 500 Large- Cap Passive 2,579,344,047 BOA Large Cap Large- Cap Passive 2,086,7 14,313 BGI Russell 3000 Alpha Tilts Large- Cap Active 2,056,418,730 Alliance Relative Value Large- Cap Active 1,822,463,990 Evergreen Mid Cap Mid- Cap Passive 1,430,552,904 Wellington Growth Large- Cap Active 1,366,003,957 Wellington Tech Eq Large- Cap Active 1,139,574,057 Wellington Mid Cap Intersection Mid- Cap Active 874,770,750 Evergreen Russell 200 Enhanced Large- Cap Active 841,845,236 Sands Large Cap Large- Cap Active 828,642,939 Turner Investments Large- Cap Active 8 1 5 ,962,57 1 BOA Mid Cap Mid- Cap Passive 614,885,038 SSGA S& P 600 Small- Cap Passive 564,2 1 8 ,997 Piedmont Strategic Core Large- Cap Active 435,520,987 Wellington S& P 600 Small- Cap Passive 4 1 5 ,937,826 Wellington Biotech Small- Cap Active 392,745,20 1 Hotchkis Mid Cap Value Mid- Cap Active 339,986,340 Earnest Partners Small Cap Value Small- Cap Active 298,700,393 Sterling Small Cap Value Small- Cap Active 261,561 , 578 Hotchkis Large Cap Value Large- Cap Active 253,809,1 97 Angelo Gordon SMID Growth Smid- Cap Active 225,839,0 1 1 Times Square Mid Cap Growth Mid- Cap Active 2 1 1 ,966,978 Numeric Small Cap Value Small- Cap Active 1 3 4,748,258 Turner Quant Micro Cap Small- Cap Active 99,433,604 Numeric Small Cap Growth Small- Cap Active 79,903,1 9 6 TimesSquare Mid Cap Focused Mid- Cap Active 65,499,335 U. S. Equity Investment Advisors ( FY ending 2008) 40 Investment Management Division NON- U. S. EQUITY INVESTMENT ADVISORS STYLE MARKET VALUE GMO Int’l Non- U. S. Active 1 , 549,276,41 3 Alliance ACWI ex- US Non- U. S. Active 1,389,026,520 BGI Non- US Alpha Tilts Non- U. S. Active 1,271,686,490 Capital Guardian Int’l Non- U. S. Active 1,265,933,636 Wellington Int’l Non- U. S. Active 1 ,1 9 3,977,805 Baillie Gifford EAFE Non- U. S. Active 995,237,278 BGI EAFE Index Fund Non- U. S. Passive 722,1 1 7,075 Mondrian EAFE Value Non- U. S. Active 701,769,53 1 Invesco Non- U. S. Active 690,450,741 Oeschle EAFE Growth Non- U. S. Active 652,777,554 Alliance Emerging Markets Non- U. S. Active 608,190,193 Walter Scott Int’l Non- U. S. Active 453,879,305 Baillie Gifford Emerging Non- U. S. Active 299,782,234 AGA Global Strategy Partners Global Active 236,327,086 Longview Global Equity Global Active 219,284,343 Non- U. S. Equity Investment Advisors ( FY ending 2008) COMPANY % of EIP Exxon Mobil 1 . 4% Microsoft 0.8% General Electric 0.7% Apple 0.7% Google 0.6% AT& T 0.6% Proctor & Gamble 0.6% Chevron 0.6% Cisco Systems 0.6% Johnson & Johnson 0.6% EIP Top 10 Holdings ( FY ending 2008) 41 Investment Management Division Equity Market Fiscal Year Commentary The equity markets contributed large negative returns for 2008��� s fiscal year as the Russell 3000 Index posted a - 12.7 percent return. The credit crisis stretched its detrimental impact to equity securities as investors made a flight to quality due to rising uncertainty in the markets and economy and hedge funds liquidating holdings to reach margin calls. The equity market experienced significant volatility as returns sank throughout the fiscal year. The factors affecting this rocky decline included rising unemployment, a weakening U. S. dollar, rising commodity prices, slowing consumer confidence, large corporate write- downs, tightening credit and a collapsing housing market. During this period, the EIP may attribute a portion of its outperformance over its benchmark to its overweight in growth- oriented securities. During the fiscal year, growth securities outperformed value securities as the Russell 3000 Growth Index returned - 7.1 percent and the Russell 3000 Value Index posted a - 9.6 percent return. Despite a weakening U. S. dollar, the international equity market posted sharp negative performance for the fiscal year 2008. Though the international markets somewhat resisted the initial onset of the crisis occurring in the U. S., it soon caught up and took a devastating toll. Though it seems the emerging markets weathered the global storm with a fiscal year return of 4.6 percent, recent performance has deteriorated most of the significantly high returns gained through the second half of 2007. 42 Investment Management Division Real Estate As of June 30, 2008, the Real Estate Investment Portfolio ( REIP) maintained a market value of $ 4.2 billion, representing 5.8 percent of the Trust Fund’s assets. For the fiscal year 2008, the REIP returned 8.7 percent, net of fees, underperforming its custom benchmark return of 9.5 percent. Structure The Trust Fund began investing in Real Estate on a limited basis in the early 1990’ s with investments in passive open- end core real estate funds. In the early 2000’ s, it was determined a more active real estate strategy could add considerable value over time. The REIP has grown from 1.9 percent of the Trust Fund in 2001 to 5.8 percent of the Trust Fund at the end of 2008’ s fiscal year. As of June 30, 2008, the REIP maintains $ 2.3 billion in outstanding commitments. The REIP is an actively managed portfolio of open and closed- end funds sponsored by leading management firms. The REIP also includes a limited number of separate accounts representing specific strategies such as timber and real estate investment trusts ( REITs). The Real Estate Investment Portfolio maintains strategic allocations to diverse strategies within real estate investment vehicles including core, value- added and opportunistic funds. In addition, the analysis of new investments focuses on location and property types and employs a moderate level of risk. The REIP continues its objective by expanding into a variety of property types including debt, industrial, land, lodging, multi- type, office, residential – multi- family, residential – single- family, retail and timber. The chart on the top of page 44 illustrates the REIP’s diversification into these types of property. 20.00% 1 6 .00% 1 2 .00% 8.00% 4.00% 0.00% Real Estate Investment Portfolio Annualized Performance Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year REIP Custom Real Estate Benchmark 16.19% 13.71% 10.67% 15.43% 14.29% 12.37% 8.74 % 9.51% 43 Investment Management Division Domestically, the REIP has a coastal focus with the greatest exposure to major cities on the West Coast, followed closely by Eastern and Southern markets with the remainder in the Midwest. International investment exposure is approximately 18.0 percent with the majority in Europe. A large majority of the European exposure is in France, Germany and the United Kingdom. Japan accounts for 45 percent of the Asian exposure, down from approximately 67 percent at the 2007 fiscal year end, as opportunities in Australia, China and Hong Kong develop. U. S. Geographic Allocation East, 27% Midwest, 10% West, 3 4 % South, 29% Global Geographic Allocation Asia, 7% Europe, 1 1 % Property Type Allocation Office, 32% Multi- Type, 10% Debt, 1% Other, 3% Res– Multi Family, 1 0 % Res– Single Family, 6% Retail, 1 0 % Timber, 4% Industrial, 8% Land, 2% Lodging, 14% 44 U. S., 82% Investment Management Division Real Estate Fiscal Year Activity During the fiscal year, the REIP increased from $ 3.5 billion to $ 4.2 billion. Based on the implementation of an independent asset optimization analysis, strategic targets for the REIP were increased to allow greater diversification within the Trust Fund. The REIP added eleven fund relationships during the fiscal year and will continue to focus on opportunities in land, agricultural funds, timber, core and value- added strategies, emerging markets, infrastructure, REITs and secondary funds. Real Estate Market Fiscal Year Commentary The real estate market continued its strong performance throughout the fiscal year and has currently weathered the credit crunch crisis. However, despite the small allocation of the residential mortgage market affected by subprime issues and that commercial and residential markets are separate, the commercial mortgage debt market is still impacted by spread increases and economic downturns. Total returns for the private real estate market moderated throughout the latter half of the fiscal year as the appreciation portion of returns has waned. In the hotel sector, uncertainty mounted as business and leisure travel slowed. Industrial warehouses faced a decline in product inventories due to a decrease in consumption, but the sector was offset as the increase in exports attributed to the declining U. S. dollar has pushed products through the warehouses and into ports. The office and retail sectors continued to outperform during the fiscal year as the apartment sector experienced signs of slowing appreciation. On the next page is a list of the REIP’s investment advisors and fund relationships as of June 30, 2008. 45 Investment Management Division REIP Investment Advisors and Fund Relationships as of June 30, 2008 REIP ADVISORS MARKET AND FUNDS VALUE MS Global RE Securities 294,980,477 Timberland Inv Res - Nahele 220,432,749 JPMorgan Strategic Property 1 9 6,807,41 6 RREEF Global OPP II 1 9 1 , 453,38 1 MSREF VI INTL 190,095,084 Starwood SOF VII 1 61,564,478 CBRE Strategic IV 1 56,958,582 Sentinel RE Fund 146,576,684 Prudential PRISA 1 39,935,377 DLJ RECP III 136,024,338 UBS RESA 1 3 1 ,7 7 1 ,1 3 2 Rockpoint RE II 1 1 8,932,1 3 9 Blackstone RE V 1 1 2 ,226,522 Starwood SOF VII Co- Inv 109,685,761 Shorenstein VII 105,006,991 UBS PMSA 104,901,654 DRA Growth & Income V 94,720,759 Blackstone RE VI 93,553,79 1 MSREV V INTL 93,041 ,079 Keystone Industrial Fund 86,335,038 Rockwood VII 83,297,22 1 Rockwood VI 78 ,1 9 6,689 Terra Firma Deutsche 74,273,608 JER REP IV 73,619,564 Warburg Pincus RE I 67,297,750 Shorenstein VIII 65,566,007 Value Enhmnt IV 61 ,059,766 Stag II 57,306,388 CIM URBAN REIT 55,644,473 Crow Holdings Realty IV 54 ,1 2 7,45 1 JER REP III 49,586,91 1 DRA Growth & Income IV 45,130,326 Sentinel Realty V 40,015,197 RLJ Fund II 39,918,699 Benson Elliot RE II 3 1 , 273,841 DB RE GLBL OPP IA 31,022,725 REIP ADVISORS MARKET AND FUNDS VALUE Rockpoint RE I 28,892,39 1 Shorenstein IX 26,451,707 Angelo Gordon Core Plus 26,324,076 Security Cap Focus Select 26,103,1 6 6 Penwood CSIP I 24,505,3 1 5 Angelo Gordon Core Plus II 23,902,01 8 DRA Fund V Co- Inv 22,2 1 3 ,508 FROGMORE RE 2 1 , 9 1 7, 3 3 1 Crossharbor Instl PT 2 1 ,777,000 Cherokee III 1 8 ,65 1 ,739 LEM RE Mezzanine II 16,329,436 Value Enhancement II 1 5 ,575,848 DRA Growth & Income VI 14,485,345 Crow Holdings Realty IV- A 13,508,209 CBRE Strategic V 12,130,000 RMK Emerging Timberland 11,827, 41 6 DLJ RECP IV 1 1 ,660,656 DLJ RECP II 10,999,922 DRA Growth & Income III 8,714,876 Westbrook RE IV 8,084,424 American Value Partners 5,591,458 Westbrook RE III 4,001 , 248 Westbrook RE II 3,070,544 Rockpoint RE III 2,070,590 Penwood PSIP II 1,372,269 DLJ RECP 426,659 CIGNA Open End Fund 295,296 Westbrook RE I 204,962 Hawkeye Scout I- A 1 5 2 ,1 4 1 Value Enchancmnt III - Cherokee IV - Crow Holdings Realty V - Keystone Industrial Fund II - NorthRock Core Fund - RLJ Urban Lodging I - RLJ RE Fund III - 46 Investment Management Division Alternatives As of June 30, 2008, the Alternative Investment Portfolio ( AIP) posted a market value of $ 3.5 billion, representing 4.8 percent of the Trust Fund’s assets. For the fiscal year 2008, the AIP returned 7.6 percent, net of fees, outperforming its custom benchmark return of - 1.0 percent. Over longer time periods, the AIP continues to add value to the Trust Fund by outperforming the custom alternatives benchmark on a one- , three-, five- and ten- year basis. 1 6 .00% 12.00% 8.00% 4.00% 0.00% - 4 .00% Alternative Investment Portfolio Annualized Performance Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year Alternative Investment Portfolio Custom Alternative Benchmark 1 1 .77% 8.83% 6.86% 7.46% 8.79% 7.60% 5.32% - 0.98% Structure The AIP has grown in recent years, starting with commitments of less than $ 50 million in 2001 and totaling approximately $ 3.5 billion at the end of the fiscal year. The AIP consists of actively managed Private Equity and Absolute Return Investments. Private Equity funds invest in interests of private corporations ( not listed on the stock exchanges). Absolute Return funds make investments by entering into commitments through specialized funds, such as hedge funds. AIP Structure Hedge Fund, 1 8 % Private Equity, 72% Hedge Fund Redemption, 1 0 % 47 Investment Management Division The hedge funds within the AIP can be categorized into various sub- strategies including event driven, relative value, hedged directional and tactical. Below is the allocation of the AIP’s hedge fund portfolio. While Absolute Return investments are capable of immediate positive returns, it should be noted that Private Equity investments are unlikely to provide positive returns in early years. Investment gains in Private Equity are typically realized in later years as assets of the fund mature and increase in value due to the efforts of the management company. The effect of this timing on fund returns is referred to as the “ J- Curve” effect. Specifically, the cost of management fees and write- downs of under- performing assets are borne by funds early, while the realization of gains comes with the eventual sale of assets after their value has increased. Private Equity investments may be categorized into various sub- strategies. The Trust Fund’s allocation to these sub- strategies is displayed below. Private Equity Sub- Strategy Allocation Venture Early, 1 2 % Distressed, 1 0 % Other, 1 0 % Co- Investment, 5% Large Buyout, 26% Venture Balanced, 5% Venture Late, 6% Small/ Mid Buyout, 22% Secondary, 4% Hedge Fund Sub- Strategy Allocation Event Driven, 32% Relative Value, 3 1 % Tactical, 8% Hedged Directional, 29% 48 Investment Management Division The heavier allocation to Private Equity investments greatly attributed to the outperformance of the total AIP. As illustrated below, the private equity portion of the AIP has posted strong performance relative to its custom benchmark. 20.00% 1 5 .00% 1 0.00% 5.00% 0.00% - 5 .00% Private Equity Annualized Performance Hedge Fund Annualized Performance Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year Total Private Equity Private Equity Custom Benchmark Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year Total Hedge Fund Hedge Fund Custom Benchmark 17.22% 6.96% 11.25% 6.15% 14.59% 7.18% 6.42% 7.63% 12.92% - 0.93% - 3.56% 8.61% 8.27% 7.52% N. A. 7.63% 10.00% 8 .00% 6 .00% 4.00% 2 .00% 0.00% - 2.00% 49 Investment Management Division Private Equity Fiscal Year Activity During the fiscal year, the AIP increased from $ 2.2 billion to $ 3.5 billion. Based on the implementation of an independent asset optimization analysis, strategic targets for the AIP were increased to allow greater diversification within the Trust Fund. Though the AIP did not gain new fund relationships over 2008’ s fiscal year, the AIP did increase its allocation to hedge directional and tactical strategies. Alternative Market Fiscal Year Commentary For the fiscal year ending in 2008, the private equity market experienced a considerable retreat from its large wave of buyout deals and announcements through the first half of 2007. The credit crunch that effectively froze the means for private equity buyout strategies to borrow severely hindered their ability to invest. Venture capital firms had to turn away from searching for deals and focus on keeping their portfolio companies afloat during the economic slowdown. As mergers and acquisition activity slowed dramatically, limited partners have seen limited returns as exit opportunities are lessening. Buyout purchase multiples dropped significantly throughout the year as access to credit is considerably more difficult to achieve. The hedge fund industry has experienced one of the most challenging and volatile markets in recent years. The credit crunch and drastic change in lending restrictions ignited a rise in volatility and financial deleveraging. The most notable impact was in relative value arbitrage in which many hedge funds maintained significant exposure to subprime mortgages and were forced to liquidate a variety of portfolios to cover recalled capital and meet margin calls. This sell- off permeated much of the financial marketplace. However, numerous market dislocations provided attractive opportunities for many hedge fund strategies including tactical hedge funds using dynamic trading techniques. The following page contains a list of the AIP’s investment advisors and fund relationships as of June 30, 2008. 50 Investment Management Division Private Equity Advisors and Fund Relationships as of June 30, 2008 PRIVATE EQUITY MARKET FUNDS VALUE Credit Suisse NC Inv Fund 148,348,746 Apollo Investment Fund VI 120,977,999 TPG Partners V 1 1 8,250,502 Terra Firma III 109,8 1 5,204 TPG Partners IV 105,691 ,1 49 Terra Firma II 98,873,963 Parish Capital I 86,207,799 CVC Euro Eq IV 78,240,444 AG Cap Recovery VI 75,000,000 GSO Capital Opportunity 61,834,470 KRG Capital Fund III 60,1 0 6,787 Parish Cap Europe I 59,927,838 LG & Bessemer II 58,993,25 1 Lexington Mid Market 56,678,465 WLR Recovery Fund IV 56,529,49 1 Quintana Energy 55,792,68 1 Parish Capital II 55,245,085 Warburg Pincus IX 52,1 9 9,649 Warburg Pincus X 5 1 , 997,592 AG Global Strategy RE 51,250,000 Matlin Patterson Glob Opp III 50,1 6 8,787 Elevation Partners 48,277,667 Longreach Capital I 45,150,442 Sheridan Partners 44,426,652 Avista Capital Partners 44,2 1 0,769 Perseus Market Opportunity 40,931,099 Castle Harlan Partners IV 38,390,865 Francisco Partners II 37,843,499 Markstone Capital Partners 32,304,598 Chapter IV Spec Sits 31,290,980 Access Cap II 30,876,1 9 5 WLR AHM Co- Inv 28,086,407 Harvest Partners IV 24,7 10,5 1 5 Burrill Life Sciences 23,894,524 AG Cap Recovery V 22,946,878 Credit Suisse NC Inv 22,223,661 Quintana Energy I Co- Inv 20,699,624 Angeleno Inv II 17,392,208 TCV VI 17,383,964 TPG Biotech II 14,408,379 Ampersand 2006 13,649,227 Novak Biddle III 13,196,343 Horsley Bridge Int’l IV 13,154,434 PRIVATE EQUITY MARKET FUNDS VALUE Tudor Ventures III 12,824,373 PCA SYN Investments 1 1 , 679,567 Synergy Life Science 1 1 , 414,394 CVE Kauffman I 1 1 ,034,632 Perseus Partners VII 10,830,789 Carousel Capital III 10,783,068 Aurora Ventures IV 10,361,451 Lehman Bros V 10,359,126 Burrill Life Sciences III 9,007,962 Pappas Ventures III 8,387,407 Quaker Bioventures II 8,096,342 Highland Consumer I 7,162,779 Harvest Partners V 7,080,62 1 Novak Biddle IV 6,685,880 NCEF Liquidating Trust 6 ,1 47,1 9 2 KRG Capital Fund IV 5,382,530 Intersouth Partners VI 5,253,574 Highland Capital VII 5,219,166 WLR AGO Co- Inv 5,150,000 KRG Capital Fund II 5,125,474 Aurora Ventures V 4,495,970 Halifax Cap Partners II 3,710,310 AV Mgmt IV 3,488,146 Highland Capital VI 3,425,474 NC Economic Opp Fund 3 ,1 3 1 , 9 0 1 ARCH Fund VII 2,471,403 Pappas Ventures II 2,226,383 Hatteras Venture Partners III 2,122,064 Novak Biddle V 1,699,960 DLJ MB II 1,600,789 Horsley Bridge IX 1 ,1 57, 8 1 5 Franklin Fairview I 9 1 3 ,3 1 4 Academy Venture Fund 335,033 CIGNA Open End Fund 295,296 Harbourvest III 246,40 1 Sprout Growth II 2 1 1 , 992 Sprout Capital VI 101 , 560 Intersouth Partners III 97, 1 1 8 Kitty Hawk Capital III 53,910 Carolinas Capital – Castle Harlan Partners V – Crestview Partners Fund II – Pappas Ventures IV – 5 1 Investment Management Division HEDGE FUND ADVISORS AND FUNDS MARKET VALUE Franklin Street Partners 464,963,385 Quellos – CARS 424,097,466 AIG DKR Relative Value 49,784,306 Broyhill Fund 1 2 ,675,847 Taconic Opp Fund 256,5 1 9 Taconic Capital II – Hedge Fund Advisors and Funds as of June 30, 2008 52 Investment Management Division Ancillary Investment Programs Review MARKET PORTFOLIO TARGET VALUE WEIGHT WEIGHT Fixed Income $ 479,908,764 84.2% 80.0% Total Equity $ 41 , 3 96,027 7.3% 1 2 .0% Real Estate $ 23,699,437 4.2% 4.0% Alternatives $ 24,776,787 4.3% 4.0% TOTAL FUND $ 569,78 1 ,0 1 5 100.0% 100.0% Escheat Asset Allocation as of June 30, 2008 Escheats Allocation Short
Object Description
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Title | State Treasurer's annual report to the people of North Carolina |
Date | 2008 |
Description | 2007/2008 |
Digital Characteristics-A | 1.07 MB; 98 p. |
Digital Format |
application/pdf |
Pres File Name-M | pubs_serial_arstatetreasurerpeoplenc20072008.pdf |
Pres Local File Path-M | \Preservation_content\StatePubs\pubs_borndigital\images_master\ |
Full Text | The State Treasurer’s Annual Report to the People of North Carolina 2008 North Carolina Department of State Treasurer • Fiscal Year 2007- 2008 Richard H. Moore | State Treasurer RICHARD H. MOORE Treasurer State of North Carolina Dear Fellow North Carolinians, I am proud to present to you the 2007- 2008 Department of State Treasurer’s Annual Report. For eight years, I have taken great pride in the trust and responsibility that has been given to me and this Department by the people of North Carolina. From overseeing the retirement system for more than 820,000 citizens and managing nearly $ 86 billion in assets to returning unclaimed property to people across the state, we have been committed to excellence in all our duties. This Department has worked diligently to be innovative in our thinking and ambitious in providing the highest levels of service to the people of North Carolina. Within this annual report, you will find details on the pension fund’s performance, which even in the midst of an economic downturn, ranked in the top 25 percent of public pension funds. Our conservative strategies and diversified investments continue to serve our members well. This year North Carolina’s pension fund was ranked second best in the country by Standard and Poor’s for the third year in a row and is one of just five pension funds in the nation that is fully funded. The Department also strives to provide the best customer service for members of our retirement systems and implemented ORBIT, a new web based system that improves efficiency. With these successes in management and administration, North Carolina public employees are secure in their retirement. This report also details the year’s debt and fiscal management activity. North Carolina maintained its “ Triple- A” rating from all three national rating agencies, continuing its distinction as one of only seven states to achieve top- tier rankings from all three agencies. The Financial Operations section of this report covers the efficient banking services that are provided to State agencies and institutions. The Department expanded its positive pay program, a service designed to detect counterfeit warrants ( checks), to all accounts increasing the security and flow of state funds in the course of conducting State business. Additionally, this report outlines the achievements of NC Cash, the unclaimed property fund. The program continues its aggressive efforts to return money to North Carolinians by implementing some of the latest technology and expanding outreach efforts. NC Cash also assists North Carolina students with paying for college by sending the interest earned on the fund to State Education Assistance Authority. I encourage all citizens to visit our website at www. nctreasurer. com to learn more about these activities and many other initiatives. Thank you for your interest in the Department of the State Treasurer. Sincerely, Richard H. Moore 325 NORTH SALISBURY STREET, RALEIGH, NORTH CAROLINA, 27603- 1385 ( 919) 508- 5176 FAX ( 919) 508- 5167 WEBSITE: WWW. NCTREASURER. COM Dear Fellow North Carolinians, I am proud to present to you the 2007- 2008 Department of State Treasurer’s Annual Report. For eight years, I have taken great pride in the trust and responsibility that has been given to me and this Department by the people of North Carolina. From overseeing the retirement system for more than 820,000 citizens and managing nearly $ 86 billion in assets to returning unclaimed property to people across the state, we have been committed to excellence in all our duties. This Department has worked diligently to be innovative in our thinking and ambitious in providing the highest levels of service to the people of North Carolina. Within this annual report, you will find details on the pension fund’s performance, which even in the midst of an economic downturn, ranked in the top 25 percent of public pension funds. Our conservative strategies and diversified investments continue to serve our members well. This year North Carolina’s pension fund was ranked second best in the country by Standard and Poor’s for the third year in a row and is one of just five pension funds in the nation that is fully funded. The Department also constantly strives to provide the best customer service for members of our retirement systems and implemented ORBIT, a new web- based system that improves efficiency. With these successes in management and administration, North Carolina public employees are secure in their retirement. This report also details the year’s debt and fiscal management activity. North Carolina maintained its “ Triple- A” rating from all three national rating agencies, continuing its distinction as one of only seven states to achieve top- tier rankings from all three agencies. The Financial Operations section of this report covers the efficient banking services that are provided to all State agencies and institutions. The Department expanded its positive pay program, a service designed to detect counterfeit warrants ( checks), to all accounts increasing the security and flow of state funds in the course of conducting State business. Additionally, this report outlines the achievements of NC Cash, the unclaimed property fund. The program continues its aggressive efforts to return money to North Carolinians by implementing some of the latest technology and expanding its outreach efforts. NC Cash also assists North Carolina college students with paying for loans and grants by sending the interest earned on the fund to State Education Assistance Authority. I encourage all citizens to visit our website at www. nctreasurer. com to learn more about these activities and many other initiatives. Thank you for your interest in the Department of the State Treasurer. Sincerely, Richard H. Moore Table of Contents I I Treasurer’s Letter ............................................................................................................................... .............................................. I Table of Contents ............................................................................................................................... .............................................. II Retirement Systems Division ............................................................................................................................... .. 1 Structure ............................................................................................................................... ....................................................... 2 Operational Highlights..................................................................................................................... ...................................... 3 The Basic Functions ............................................................................................................................... ............................... 3 Retirements Processing Section .............................................................................................................................. 4 Benefits Processing Section ............................................................................................................................... ....... 5 Accounting/ Data Control Section .......................................................................................................................... 5 Member Services Section ............................................................................................................................... ............ 6 Records Section ............................................................................................................................... ............................... 6 Significant Accomplishments ............................................................................................................................... ............ 7 Legislation ............................................................................................................................... ........................................... 7 Communications and Customer Service ............................................................................................................. 8 Operational ............................................................................................................................... ......................................... 8 The Retirement Systems and Trust Funds ................................................................................................................... 10 Actuarial Valuation ............................................................................................................................... ......................... 10 Actuarial Assumptions ............................................................................................................................... .................. 10 Funding of the Systems ............................................................................................................................... ............... 10 Funding Status of the Systems ............................................................................................................................... 1 1 Teachers’ and State Employees’ Retirement System of North Carolina .............................................. 1 2 Local Governmental Employees’ Retirement System of North Carolina ............................................. 1 3 Consolidated Judicial Retirement System of North Carolina .................................................................... 1 4 Teachers’ and State Employees’ Benefit Trust .................................................................................................. 1 5 Firemen’s and Rescue Squad Workers’ Pension Fund .................................................................................. 1 7 Retirees’ Health Premium Funds ............................................................................................................................. 1 8 Legislative Retirement Fund ............................................................................................................................... ...... 1 8 Legislative Retirement System ............................................................................................................................... . 1 9 Disability Income Plan ............................................................................................................................... ................... 1 9 Public Employees’ Social Security Agency ........................................................................................................ 20 National Guard Pension Plan ............................................................................................................................... ..... 20 Registers of Deeds’ Supplemental Pension Fund ........................................................................................... 20 Supplemental Retirement Income Plan of North Carolina .......................................................................... 2 1 North Carolina Public Employee Deferred Compensation Plan ............................................................... 2 1 Investment Management Division ..................................................................................................................... 22 Structure ............................................................................................................................... ....................................................... 23 Investment Objectives ............................................................................................................................... ........................... 24 Cash Management Program ............................................................................................................................... ...... 24 Trust Funds Investment Program ............................................................................................................................ 24 Investment Management Division ( continued) Operating Policy ............................................................................................................................... ....................................... 24 Overall Fund Strategy....................................................................................................................... ............................ 25 Review of the Past Year........................................................................................................................... ..................... 25 Looking Forward to the Year Ahead....................................................................................................................... 25 Cash Management Program Review .............................................................................................................................. 27 Short- Term Investment Fund ............................................................................................................................... ..... 27 Trust Funds Investment Program Review .................................................................................................................... 30 Total Trust Fund........................................................................................................................... .................................... 30 Structure...................................................................................................................... ........................................................ 32 Corporate Governance ............................................................................................................................... ................. 33 Sudan.......................................................................................................................... ........................................................... 33 Payday Lending........................................................................................................................ ........................................ 33 Trust Fund Fiscal Year Activity....................................................................................................................... .......... 33 Fixed Income ............................................................................................................................... .............................................. 34 Structure...................................................................................................................... ........................................................ 34 Fixed Income Fiscal Year Activity....................................................................................................................... .... 35 Fixed Income Market Fiscal Year Commentary................................................................................................. 36 Equity Investment Portfolio ............................................................................................................................... ................ 37 Structure...................................................................................................................... ........................................................ 37 Equity Fiscal Year Activity....................................................................................................................... ................... 38 Equity Market Fiscal Year Commentary................................................................................................................ 42 Real Estate ............................................................................................................................... ................................................... 43 Structure...................................................................................................................... ........................................................ 43 Real Estate Fiscal Year Activity....................................................................................................................... ......... 45 Real Estate Market Fiscal Year Commentary...................................................................................................... 45 Alternatives ............................................................................................................................... ................................................. 47 Structure...................................................................................................................... ........................................................ 47 Private Equity Fiscal Year Activity....................................................................................................................... ... 50 Alternative Market Fiscal Year Commentary...................................................................................................... 50 Ancillary Investment Programs Review ........................................................................................................................ 53 Escheat Investment Program ............................................................................................................................... .... 53 UNC and Public Hospitals...................................................................................................................... ..................... 54 OPEB Fund........................................................................................................................... .............................................. 54 State and Local Government Finance Division................................................................................... 55 Operational Highlights ............................................................................................................................... ........................... 57 The State of Tax- Exempt Financing ............................................................................................................................... 58 The Basic Functions ............................................................................................................................... ............................... 58 Debt Management ............................................................................................................................... .......................... 58 Fiscal Management ............................................................................................................................... ........................ 60 Table of Contents I I I State and Local Government Finance Division ( continued) Significant Accomplishments ............................................................................................................................... ............ 62 Debt Management ............................................................................................................................... .......................... 62 Fiscal Management ............................................................................................................................... ........................ 65 Projects in Progress ............................................................................................................................... ....................... 68 Financial Operations Division ............................................................................................................................... . 72 Operations Highlights ............................................................................................................................... ............................ 73 Banking Operations ............................................................................................................................... ................................ 74 Receiving State Moneys......................................................................................................................... ...................... 74 Disbursing State Moneys......................................................................................................................... .................... 74 Specialized Banking Functions...................................................................................................................... ........... 74 Banking Reconciliation Unit ............................................................................................................................... ................ 74 Statewide Operations ............................................................................................................................... ............................ 75 Investment Accounting..................................................................................................................... ............................ 75 Retirement and Escheat Fund Accounting......................................................................................................... 75 Departmental Operations..................................................................................................................... ....................... 75 Unclaimed Property and Escheats Division .......................................................................................... 76 Statistical Tables ............................................................................................................................... .................................... 77 Table of Contents I V The State Treasurer’s Annual Report Retirement Systems Division 1 Structure The Retirement Systems Division of the Department of State Treasurer administers the statutory retirement and benefit plans that cover public employees in the State, as authorized by the General Assembly of North Carolina. The administration of the several retirement systems requires a high level of fiduciary responsibility for the employees’ trust funds with prudent, honest and efficient use of employees’ and taxpayers’ contributions. The purpose of the retirement systems and benefit plans is to recruit and retain skilled employees for a career in public service by providing valuable post- employment benefits, including replacement income at retirement, during disability or for an employee’s survivors. The organizational structure herein shows the functional arrangement of the tasks performed in this Division. Retirement Systems Division BOARD DIRECTOR OF TRUSTEES ACTUARY POLICY DIRECTOR MEMBER SERVICES SECTION BENEFITS PROCESSING SECTION RECORDS SECTION RETIREMENT PROCESSING SECTION DEPUTY DIRECTOR OF OPERATIONS DEPUTY DIRECTOR OF POLICY & COMMUNICATIONS 2 ACCOUNTING SECTION Retirement Systems Division Operational Highlights n Presented recommendations and draft legislation during the 2008 session of the General Assembly that resulted in the enactment of laws to: – Provide cost- of- living adjustments equal to 2.2 percent to retirees of the Teachers’ and State Employees’ Retirement System ( TSERS), Consolidated Judicial Retirement System ( CJRS) and Legislative Retirement System ( LRS) and – Increase the monthly benefit payment to beneficiaries of the Firemen’s and Rescue Squad Workers’ Pension Fund from $ 1 67.00 to $ 1 70.00 per month. n Redesigned the Annual Benefits Statement to provide a comprehensive look at members’ retirement information, including Social Security benefits, as well as supplemental savings in the NC 401( k) and Deferred Compensation plans. n Launched the second phase of ORBIT ( Online Retirement Benefits through Integrated Technology), enabling active members to have online access to their personal retirement account information 24 hours a day, seven days a week. n Provided cost- of- living adjustments equal to 2.15 percent to retirees of the Local Governmental Employees’ Retirement System ( LGERS). n Processed benefits for 1 3 , 451 new retirees. n Processed refunds for 1 5 ,773 former public employees. n Established approximately 58,228 new active member accounts on ORBIT. Basic Functions The four major retirement systems administered by this Division are the: n Teachers’ and State Employees’ Retirement System n Local Governmental Employees’ Retirement System n Consolidated Judicial Retirement System n Legislative Retirement System The systems are governed by boards of trustees. The State Treasurer is ex- officio chairman of each board. The board of the Teachers’ and State Employees’ Retirement System is composed of 14 members, including seven actively working employees or retirees, as well as seven public and appointed members who also serve on the Local Governmental Employees’ Retirement System Board. The Local Governmental Employees’ Retirement System Board, while legally separate, is composed of the same seven ex- officio or public Teachers’ and State Employees’ Retirement System members plus seven members representing local governments. During the 2007- 2008 fiscal year, the Board of Trustees of the Teachers’ and State Employees’ Retirement System was the governing body of the Consolidated Judicial and Legislative Retirement Systems and all of the other programs listed herein, except for the Firemen’s and Rescue Squad Workers’ Pension Fund and the NC Public Employee Deferred Compensation Fund. The Firemen’s and Rescue Squad Workers’ Pension Fund is governed by a five- member board of trustees, including actively working employees, volunteers and a member of the public. During the 2008 session of the General Assembly, the Supplemental Retirement Board of Trustees was created in order to consolidate the administration of the NC 401( k) Plan and the 3 NC Public Employee Deferred Compensation Retirement Systems Division ( 457) Plan. This board, composed of nine members, including financial professionals and working and retired state employees, will administer both the NC 401( k) and Deferred Compensation ( 457) plans. The State Treasurer will be ex- officio chairman of this board. In addition to the four major retirement systems, the Division is also responsible for the administration of the following programs: n Firemen’s and Rescue Squad Workers’ Pension Fund n Public Employees’ Social Security Agency n Disability Income Plan n Legislative Retirement Fund n National Guard Pension Plan n Teachers’ and State Employees’ Benefit Trust n Supplemental Retirement Income Plan n Public Employee Deferred Compensation Plan n Registers of Deeds’ Supplemental Pension Fund n Contributory Death Benefit for Retired Members All retirement systems and other programs administered by this Division are operated on a calendar year basis from January 1 to December 3 1 , rather than the State’s fiscal year, except for the Firemen’s and Rescue Squad Workers’ Pension Fund. For this reason, much of the financial data shown for the Division is for the captioned year ending December 3 1 . Administrative figures, however, are generally collected on a fiscal year basis and are shown here as such. The administrative expenses of the Division are paid from the retirement trust funds. The Retirement Systems Director and his immediate staff are responsible for the overall operation of the Division and carry out the policies and directives of the State Treasurer and the governing boards. They provide assistance to legislators and committees of the General Assembly, including: n Drafting proposed legislation and acquiring of actuarial notes for introduced bills. n Managing action and administrative appeals by individual members of the retirement systems. n Maintaining a working relationship with associations and organizations of employees and employers. n Providing information to State agencies, institutions and local governments. The staff provides assistance to local governments for Social Security coverage and acts as the liaison between the State and the Social Security Administration. The staff also performs planning and research functions and directs special projects. Retirements Processing Section The mission of the Retirements Processing Section is to process applications for benefits in a prompt, accurate and efficient manner. This Section is responsible for the determination of eligibility for monthly retirement allowances and processing payment of benefits for all retirement systems governed by the boards of trustees and administered by this Department. For the period July 2007 through June 2008, 1 3 ,451 retirements were processed for payment. The calculation of service purchase costs under the provisions of the various retirement systems administered by the Division is performed by this Section. The Section performed a total of 5,733 cost and other calculations. During the last fiscal year, 5,637 benefit estimates were generated by the Retirements Processing Section. There was a reduction in the number of requests for benefit estimates compared to last year due to the increasing number of members who generated their own estimates through ORBIT. 4 Retirement Systems Division Benefits Processing Section This mission of the Benefits Processing Section is to deliver prompt contribution refunds, disability and death benefits to employees, retirees and their beneficiaries in an effective and efficient manner. The administration and determination of disability benefits through the Retirement System’s Medical Review Board under the provisions of the Disability Income Plan for teachers and State employees, as well as the determination of eligibility for disability benefits from the other retirement systems are incumbent upon this section. The Medical Review Board reviewed approximately 4,457 disability claims during the 2007- 2008 fiscal year. Responsibilities of this Section include the calculation and payment of monthly disability benefits as well as the calculation and payment of reimbursements for short- term disability benefits paid by the various employers under the provisions of the Plan. From July 2007 through June 2008, 62 short- term disability reimbursements were issued to employers, totaling $ 475,854.52. The various death benefit programs related to the retirement systems and the Separate Insurance Benefits Fund are managed by this Section. Responsibilities include the calculation and payment of death benefits, return of members’ contributions, survivor’s alternate benefits and other lump sum payments. Approximately 7,302 death reports were received and processed during fiscal year 2007– 2008. This Section also is responsible for the calculation and the payment of returns of accumulated contributions, known as refunds, to terminated employees. A total of 15,773 refunds were processed for the period July 2007 through June 2008. Accounting Section The mission of the Accounting/ Data Control Section is to provide accurate financial data and on- time benefit payment services in a customer driven environment. This Section is responsible for maintaining accounting records for the retirement systems and receiving and processing payroll contribution reports from more than 1 ,1 2 0 participating State and local units of government. Contribution information from the payroll reports is electronically posted to the individual accounts for more than 455,000 members. This Section also is responsible for the administration of the Contributory Death Benefit ( CDB), including the notification of eligibility under the Plan, enrollment of members electing coverage and collection of the required contributions. During fiscal year 2007– 2008, the Retirement Systems Division held an open enrollment period giving retired members another window of opportunity to sign up for the optional $ 10,000 benefit. A total of 22,228 CDB enrollments were processed from July 2007 to June 2008. Brief descriptions of the other functions performed by this Section are as follows: n Retirees’ Health Insurance – Duties pertaining to this program included receiving and processing 60,877 health insurance enrollment applications. n Direct Deposit Accounts – Activities involved in this area related to the receipt and processing of Electronic Funds Transfer ( EFT) account applications and changes to direct deposit accounts. During the fiscal year 2007– 2008, approximately 202,036 retirees’ benefits were processed through EFT. 5 Retirement Systems Division Member Services Section The mission of the Member Services Section is to provide public service employees and employers accurate and timely information and education in a manner intended to advance partnerships and relationships. This Section handles written correspondence and telephone inquiries with members and employers participating in the Retirement Systems and other benefit programs. The staff responds to a large number of questions about benefits. Accordingly, during 2007– 2008 the Section received more than 28,000 letters and e- mails, approximately 268,400 telephone calls through the call center and an additional 23,700 calls handled by the Interactive Voice Response Unit ( IVR). Annual pre- retirement planning seminars are conducted by the staff of this Section, as well as retirement and benefit conferences at the request of employers and employee associations. During the period from July 2007 through June 2008, almost 1 3 ,000 members attended 1 9 0 employee retirement information sessions. In 2007, employer education focused on four ORBIT introduction sessions in Hickory, Greensboro, Raleigh and Greenville. This extended into an additional 48 summer training sessions and 10 webinars. Total attendance for these sessions is estimated at over 2,200 human resources and benefits representatives from approximately 90 percent of the 1,200 reporting agencies. All visitors to the Division requiring individual counseling about their benefits are referred to the Member Services Section. Members nearing retirement may call to schedule an appointment with a retirement counselor. During 2007– 2008, there were 4,200 visitors with 1 , 3 00 members seen by benefit counselors. Another important function of this Section is coordinating the participation of local government employers electing to become members of the Local Governmental Employees’ Retirement System. This involves meeting with local governing bodies, collecting data for transmission to the Systems’ consulting actuary, enrolling eligible employees and explaining monthly reporting procedures. Ancillary to this function is assistance to local governments in the adoption of tax shelter and death benefit coverage agreements. During 2007– 2008, six local government employers became participants, enrolling their employees in the Local Governmental Employees’ Retirement System. Records Section The mission of the Records Section is to ensure timely and accurate processing, internal distribution, storage and protection of personal member information for the purpose of delivering benefits. The Records Section is primarily responsible for the creation, maintenance and storage of files for individuals who are currently, or have been at one time, members of any of the State- administered retirement systems. The Records Section increased the number of images committed to the system due to the annuity conversion process undertaken during the fiscal year. As a result, this Section now maintains 17.6 million records in an electronic document imaging system. All active and retired member jacketed microfiche records were converted to the imaging system, while all new records, plus updates to existing files, are now automatically processed as digital images. 6 Retirement Systems Division 7 Significant Accomplishments Legislation Prior to the convening of the 2008 session of the General Assembly, the Retirement Systems Director and staff identified all proposals for benefit enhancements and changes recommended by the various associations of educators, employees and retirees. Also identified were measures to enhance administrative ability. Cost estimates for the recommendations were acquired from the Division’s consulting actuary. The staff then assisted the State Treasurer and the Retirement Systems’ Boards of Trustees in forming their legislative recommendations. During the 2008 session, the Director and staff provided technical assistance and bill drafting services for the standing Senate and House Committees on Pensions and Retirement and communicated the Boards of Trustees’ recommendations. The staff also acquired, as provided by State law, 33 actuarial notes disclosing the fiscal impact of every bill that affected a State- administered retirement systems or pension plan. In its 2008 legislative recommendations, Treasurer Moore and the Board of Trustees advocated for a 4.1 percent cost- of- living adjustment for retirees of the Teachers’ and State Employees’ Retirement System, the Consolidated Judicial Retirement System and the Legislative Retirement System. The General Assembly modified the recommendation for cost- of- living benefits and also addressed other administrative enhancements recommended by the board, including: 1) providing, effective July 1, 2008, in the Teachers’ and State Employees’ Retirement System, a 2.2 percent cost- of- living adjustment ( COLA) for beneficiaries who commenced retirement on and before July 1 , 2007, and for beneficiaries who began retirement with effective dates of August 1, 2007 to June 1, 2008, a prorated portion of the 2.2 percent COLA based on the number of months a retirement allowance was paid; 2) providing, effective July 1, 2008, in the Consolidated Judicial Retirement System, a 2.2 percent COLA for beneficiaries who commenced retirement on and before July 1, 2007, and for beneficiaries who began retirement with effective dates of August 1, 2007 to June 1, 2008, a prorated portion of the 2.2 percent postretirement increase in their allowances based on the number of months a retirement allowance was paid; 3) providing effective July 1, 2008, in the Legislative Retirement System, a 2.2 percent COLA for beneficiaries who commenced retirement on or before January 1, 2008, and for beneficiaries who began retirement with effective dates of February 1, 2008 to June 1, 2008, a prorated portion of the 2.2 percent was paid; 4) increasing, effective July 1, 2008, the monthly benefit payment to beneficiaries of the Firemen’s and Rescue Squad Workers’ Pension fund from $ 167.00 to $ 170.00 per month; 5) creating the Supplemental Retirement Board of Trustees to consolidate the administration of the NC 40 1 ( k) Plan and the NC Deferred Compensation ( 457) Plan, which will administer both the NC 40 1 ( k) and Deferred Compensation plans; and, 6) adopting provisions allowing the Department to disclose the names and addresses of retired State employees and school personnel, local governmental employees and community college employees to certain North Carolina- based not- for- profit organizations. The Board of Trustees governing the Local Governmental Employees’ Retirement System enacted policies to: 1) provide, effective July 1, 2008, in the Local Governmental Employees’ Retirement System, a 2 .1 5 percent COLA adjustment Retirement Systems Division 8 for beneficiaries who commenced retirement on and before July 1, 2008, and 2) provide beneficiaries who began retirement with effective dates of August 1, 2007 to June 1, 2008, a prorated portion of the 2 .1 5 percent COLA based on the number of months a retirement allowance was paid. Communications and Customer Service The Division is committed to providing timely, effective communication to all members and employers on a wide range of topics. A major project for the year was the redesign of the Annual Benefits Statement to provide active members with a comprehensive look at their retirement future. The 2007 Annual Benefits Statement included a report on members’ retirement accounts and Social Security benefits, as well as savings in the NC 401( k) and Deferred Compensation plans. The updated statement also included a projection of the member’s unreduced retirement benefits and a gap analysis showing how much the member would need in retirement. With the launch of the ORBIT site for active employees, the Division was able to electronically capture and maintain up- to- date mailing addresses of active members. This enabled the Division to mail the 2007 Annual Benefits Statement directly to members’ homes for the first time in the history of the Department. The Division conducted a series of webinars to educate employers on how to read the newly-designed statement and prepare them for their employees’ questions. The webinars were well received with about 400 employers participating in the hour- long interactive information sessions. Employer manuals and member handbooks describing plan provisions of the Teachers’ and State Employees’ Retirement System, Local Governmental Employees’ Retirement System, Consolidated Judicial Retirement System, Firemen’s and Rescue Squad Workers’ Pension Fund and Legislative Retirement System were revised in January 2008 and updated on the Division’s Web page. The Division also re- launched the employer newsletter, Retirement Monitor, a monthly newsletter for public sector human resources and payroll specialists. More than 5,000 state and local human resources and payroll staff are now reached monthly with updates and best practices to help them provide superior customer service to their employees. In addition, Legislative Digest, a synopsis of 2008 legislative changes, was provided to all employing units for the State and Local systems and the Division’s association partners and was made available online. Retirees and active employees also received newsletters communicating the retirement systems highlights and other retirement- related matters. The Retirement Report, a bi- annual newsletter to retirees that delivers news regarding changes to retirement laws and policies as well as information about the financial health of the retirement systems, was distributed during 2007- 2008. On the Horizon, an annual publication to active members was also distributed. Operational In October 2007, the Division launched the second phase of ORBIT. The employers’ reports and active members’ information now reside in the Web- based system. As a result, active members have online access to their personal retirement account information 24 hours a day, seven days a week. Active members have the ability to view their years of service credit, view designated beneficiaries and calculate benefit estimates. Retirement Systems Division ORBIT also serves as a central repository for all Retirement Systems Division information and serves as an operating platform for retirement processing for the 820,000 members – active employees, retirees and beneficiaries. Transitioning to ORBIT enabled the Division to shut down the legacy mainframe systems that were relied on for more than 30 years. ORBIT provides flexibility to keep pace with the growth of the membership population by enabling the Division to collect more information from retirees and active members, improve accuracy of information stored and provided and enhance response time to inquiries. The North Carolina Retirement Systems also held open enrollment for the Contributory Death Benefit ( CDB) from February 1 to May 3 1 , 2008. Typically, retired members of the Teachers’ and State Employees’ Retirement System, the Local Governmental Employees’ Retirement System, the Consolidated Judicial Retirement System and the Legislative Retirement System have 60 days from the date of retirement to elect coverage under the Contributory Death Benefit. In 2007, the General Assembly passed legislation that made provisions for open enrollment for the CDB, a one- time $ 1 0,000 death benefit. This open enrollment gave retirees another window of opportunity to sign up for the optional benefit. A total of 22,228 CDB enrollments were processed during the 2007- 2008 fiscal year, an increase of 600 percent from the previous year’s enrollments. In the Local Governmental Employees’ Retirement System, six local governments elected to become participating employers with the System. The participation of these employers involved the staff of the Member Services Section meeting with their governing bodies and employees, acquiring pre- evaluations from the consulting actuary to determine an employer’s contribution rate and providing all legal documents and agreements for their execution. The Division continues to receive numerous verbal and written requests for information, from both attorneys and the general public, as to how the retirement law impacts individual members and their spouses with respect to the equitable distribution of their retirement income. Attorneys are required to submit proposed Domestic Relations Orders to the Retirement Systems for review by the Attorney General’s office before any payment of retirement income can be made to a member’s ex- spouse in a divorce situation. The office continues to process these requests on a timely basis, thereby providing financial certainty to all parties involved. 9 Retirement Systems Division Actuarial Valuation The actuarial valuation is prepared by an actuary to assess the funding progress of a retirement system and to determine the contribution rates necessary to sustain the system. An actuarial valuation is an inventory of the assets and liabilities of a retirement system at a specific point in time. Information collected covers all of the active ( both in- service and terminated) members and all of the retired members and other beneficiaries who are receiving benefit payments. In this way, everyone who has been promised a benefit from the system is included in the actuarial calculations to determine the present value of the system’s liabilities. These liabilities are then compared to the system’s assets, and calculations are made to determine what contribution rate is needed to fund the uncovered liabilities in the time period originally established. Annual valuations are made to permit gradual changes in the contribution level and/ or funding period and keep the funding on a proper course. The annual valuation is also used by the actuary to compare actual separation, compensation and investment experience with the actuarial assumptions used in the valuation of the liabilities of the system. The actuarial valuation balance sheets for each retirement system are included with the tables that follow. Actuarial Assumptions The economic assumptions used for the actuarial valuation of all retirement systems are an interest rate of 7.25 percent per year and average rates of salary increase of about 6 percent per year, varying at different ages. The assumed rates for mortality, withdrawals, disabilities and service retirements are based on actual past experience. The asset valuation method is based on a modified market related value. The retirement systems described in this report, except the Legislative Retirement System and Consolidated Judicial Retirement System, are being funded on a full actuarial reserve basis and use the entry age normal cost method as the actuarial cost approach. Under the entry age normal cost method, the normal contribution percentage rate is calculated on the basis of the adopted actuarial assumptions as the level percentage of the compensation of the average new member, which, if contributed throughout the entire period of active service, would be sufficient, together with his/ her contributions, to support all the benefits payable on his/ her account. The accrued liability is the difference between total liabilities and the present value of future normal cost contributions and the members’ future contributions. All experienced gains and losses are reflected in the amount of the unfunded accrued liability and thereby affect the period of liquidation, except in the Local Governmental Employees’ Retirement System, where they are reflected in the normal contribution rate. The Legislative Retirement System and Consolidated Judicial Retirement System are also being funded on a full actuarial reserve basis but use the projected unit credit cost method with unfunded accrued liability as the actuarial cost approach. Funding of the Systems All retirement systems are joint contributory, defined benefit plans with contributions made by both employees and employers. Each active member contributes 6 percent of his/ her compensation for creditable service by monthly payroll deduction. The only exception to this member contribution rate is the Legislative Retirement System to which each active member contributes 7 percent of his/ her compensation. Employers make monthly contributions based on a percentage rate of the members’ compensation for the month. Employer contribution rates are actuarially calculated. The Retirement Systems and Trust Funds 1 0 Retirement Systems Division 1 1 Funding Status of Systems The consistent use of conservative actuarial assumptions and an approved actuarial cost method over the years since the establishment of the retirement systems and the recognition of all promised benefits in the actuarial liabilities have resulted in retirement systems which can be labeled as “ actuarially sound.” In fact, North Carolina’s pension fund was named the second strongest in the nation for the third year in a row by Standard & Poor’s in February 2008. A simple measure for determining the funded status of a system is to relate the total present assets to total accrued liabilities to determine a funded ratio. The total accrued liabilities are found by adding the assets and the unfunded accrued liabilities. For purposes of comparison, the funded ratios for the major retirement systems are illustrated in Chart 1. When the ratio equals 100 percent, a system is considered to be “ fully funded” on a current basis. TEACHERS’ AND STATE LOCAL GOVERNMENTAL CONSOLIDATED JUDICIAL EMPLOYEES’ RETIREMENT SYSTEM EMPLOYEES’ RETIREMENT SYSTEM RETIREMENT SYSTEM 2000 – 1 1 2.8% 2000 – 99.3% 2000 – 1 0 8.4% 200 1 – 1 1 1 . 6% 200 1 – 99.3% 200 1 – 1 0 8.9% 2002 – 108.4% 2002 – 99.4% 2002 – 1 07.4% 2003 – 108.1% 2003 – 99.3% 2003 – 1 07.6% 2004 – 108.1% 2004 – 99.3% 2004 – 1 0 8.6% 2005 – 1 06.5% 2005 – 99.4% 2005 – 1 07.6% 2006 – 106.1% 2006 – 99.5% 2006 – 1 07.3% 2007 – 104.7% 2007 – 99.5% 2007 – 1 0 2.9% Chart 1: Funded Ratio of the Retirement Systems Retirement Systems Division 1 2 Teachers’ and State Employees’ Retirement System of North Carolina ( TSERS) N. C. G. S. 1 3 5- 1 Through 1 3 5- 1 8 .5 The Teachers’ and State Employees’ Retirement System ( TSERS) has the most assets and largest membership of the retirement systems administered by the Division. Created by the General Assembly effective July 1, 1941 , TSERS provides benefits to all full- time teachers and State employees in all public school systems, universities, departments, institutions and agencies of the State. This System began operations with a membership of 42,878 teachers and State employees, and with appropriations from the State of $ 1 , 838,000. The membership has grown over the years in proportion to the growth in size and complexity of the public schools and State government. The active membership at December 3 1 , 2007, was 338,490, and, in addition, there were 69,420 inactive members and 1 4 5,855 retired members and beneficiaries of deceased retired members. Invested assets at market value amounted to about $ 58.5 billion. The distribution of investments of the assets of TSERS as of December 3 1 , 2007, was: Long- Term Investment Fund: $ 20,294,814,474 Short- Term Investment Fund: $ 1 1 8,389,5 1 7 Real Estate Investment Portfolio: $ 3,307,962,8 1 2 Equity Investment Portfolio: $ 32,584,924,977 Alternative Investment Portfolio: $ 2,1 66,300,703 TOTAL: $ 58,472,392,483 Operations of TSERS during calendar year 2007 resulted in total receipts of $ 5,790,42 1 , 309 and total expenditures of $ 2,900,055,094. Chart 2 presents the distribution of revenues by source and expenditures by purpose. The latest Actuary’s Valuation Balance Sheet for TSERS, as of December 31, 2007, is shown in Table T10. Based on the latest actuary’s report, the General Assembly set the employer contribution rate at 3.05 percent of covered payroll, effective July 1, 2007 and at 3.36 percent of covered payroll, effective July 1, 2008. On this basis, the total of employee and employer rates of contribution is adequate to fund all future benefits presently authorized, based on current service, and to fund, over a period of nine years from January 1, 2008, the remaining accrued liability for past service. SOURCES OF FUNDS Employee Contributions: $ 797,724,1 9 0 ( 1 3 .78%) Employer Contributions: $ 388,477,830 ( 6.7 1%) Other Income: $ 3,622,875 (. 06%) Investment Income: $ 4,600,596,414 ( 79.45%) APPLICATIONS OF FUNDS Retiree Benefits: $ 2,808,1 5 3,1 67 ( 48.50%) Refunds: $ 76,907,353 ( 1 . 33%) Administrative Expenses: $ 1 4 ,963,775 (. 26%) Other Expenses: $ 30,799 (–) Addition to Reserves for Future Benefits: $ 2,890,366,2 1 5 ( 49.9 1%) Chart 2: Teachers’ and State Employees’ Retirement System of North Carolina Year Ended December 31, 2007 Retirement Systems Division 1 3 Local Governmental Employees’ Retirement System of North Carolina ( LGERS) N. C. G. S. 1 2 8- 2 1 Through 1 2 8- 38 The Local Governmental Employees’ Retirement System ( LGERS) is maintained for the employees of cities, towns, counties, boards, commissions and other entities of local government in North Carolina. Because participation by local governments is voluntary, the operation of LGERS is dependent upon the acceptance and continuing financial support of the governing bodies and employees of local governments. Approval and acceptance are evidenced by the fact that, as of December 31, 2007, a total of 874 cities, towns, counties and local commissions were participating in LGERS. This System began operations in 1945 with 18 participating local governments, 2,102 members and assets of $ 1 7 8,053. The active membership, as of December 31, 2007, was 127,959. In addition, there were 24,907 inactive members and 42,408 retired members and beneficiaries of deceased members. Invested assets at market value amounted to about $ 1 7.8 billion. The distribution of investments of the assets of LGERS as of December 31, 2007 was: Long- Term Investment Fund: $ 6,1 8 9,793,402 Short- Term Investment Fund: $ 36,1 5 0,206 Real Estate Investment Portfolio: $ 1,008,908,28 1 Equity Investment Portfolio: $ 9,938,201 , 401 Alternative Investment Portfolio: $ 660,708,371 TOTAL: $ 17,833,761,661 Operations of LGERS during the calendar year 2007 resulted in total receipts of $ 1,939,607,1 9 6 and total expenditures of $ 723,233,2 1 8 . Chart 3 presents the distribution of revenues by source and expenditures by purpose. The latest Actuary’s Valuation Balance Sheet for LGERS, as of December 31, 2007, is shown in Table T11. Based on the actuary’s latest report, the Board of Trustees set the employer normal contribution rate at 4.80 percent of covered payroll for general employees and at 5.27 percent of covered payroll for law enforcement officers, effective July 1, 2008. The accrued liability rate, if any, varies with each employing unit depending on the amount of prior service that was awarded to the members. In accordance with the provisions of the legislation that caused the merger of the Law Enforcement Officers’ Retirement System and the Local Governmental Employees’ Retirement System on January 1, 1986, the normal contribution rates are separate for each of the two groups of employees while the accrued liability rate is the same. SOURCES OF FUNDS Employee Contributions: $ 301 ,094,054 ( 1 5 .52%) Employer Contributions: $ 252, 1 6 5,044 ( 1 3 .00%) Other Income: $ 99,880 (. 0 1%) Investment Income: $ 1 , 3 86,248,2 1 8 ( 7 1 . 47%) APPLICATIONS OF FUNDS Retiree Benefits: $ 671,389,752 ( 34.62%) Refunds: $ 46,630,880 ( 2.40%) Administrative Expenses: $ 5 , 2 0 9 ,1 1 7 ( . 27%) Other Expenses: $ 3,468 (–) Addition to Reserves for Future Benefits: $ 1 , 2 1 6 ,373,979 ( 62.7 1%) Chart 3: Local Governmental Employees’ Retirement System of North Carolina Year Ended December 31, 2007 Retirement Systems Division 1 4 Consolidated Judicial Retirement System of North Carolina ( Judicial System) N. C. G. S. 135- 50 Through 135- 72 The Consolidated Judicial Retirement System was created by the 1983 session ( Regular Session, 1 9 84) of the General Assembly, effective January 1 , 1 985. This System was formed by combining the previously existing Uniform Judicial, Uniform Solicitorial and Uniform Clerks of Superior Court Retirement Systems. The Courts Commission was responsible for the design of the benefit structure of the previous systems, which was carried forward to the new consolidated system. The membership of the Judicial System is comprised of the elected judges and justices, district attorneys, clerks of superior court of the General Court of Justice and public defenders. As of December 31, 2007, there were 548 active members, 54 inactive members and 482 retired members and beneficiaries of deceased members. The invested assets at market value were about $ 457 million. The distribution of the investments of the Judicial System as of December 31, 2007, was: Long- Term Investment Fund: $ 1 5 8,023,674 Short- Term Investment Fund: $ 2,660,486 Real Estate Investment Portfolio: $ 25,757,1 4 3 Equity Investment Portfolio: $ 253,7 1 9 ,469 Alternative Investment Portfolio: $ 1 6 ,867,698 TOTAL: $ 457,028,470 Operations of the Judicial System during the calendar year 2007 resulted in total receipts of $ 49,641 , 6 85 and total expenditures of $ 25,640,466. Chart 4 presents the distribution of revenues by source and expenditures by purpose. The latest Actuary’s Valuation Balance Sheet for the Judicial System, as of December 31, 2007, is shown in Table T12. Based on the actuary’s latest report, the General Assembly set the employer contribution rate at 13.21 percent of covered members’ payroll, effective July 1, 2008. On this basis, the total number of member and employer rates of contribution is more than adequate to fund all future benefits present authorized based on current service. SOURCES OF FUNDS Employee Contributions $ 5,568,61 9 ( 1 1 .22%) Employer Contributions $ 8,224,364 ( 1 6.57%) Other Income $ 4,30 1 (. 01%) Investment Income $ 35,844,402 ( 72.20%) APPLICATIONS OF FUNDS Retiree Benefits $ 25,474,8 1 5 ( 5 1 . 3 2%) Refunds $ 9,79 1 (. 02%) Administrative Expenses $ 39,885 (. 08%) Other Expenses $ 1 1 5,974 (. 23%) Addition to Reserves for Future Benefits $ 24,00 1 , 220 ( 48.35%) Chart 4: Consolidated Judicial Retirement System of North Carolina Year Ended December 31, 2007 Retirement Systems Division 1 5 Teachers’ and State Employees’ Benefit Trust ( Benefit Trust) N. C. G. S. 135- 5( I); 143- 166.20; and 143- 166.60 The Benefit Trust was established January 1, 1980, by the Board of Trustees of the Teachers’ and State Employees’ Retirement System after enabling legislation was enacted in the 1979 session of the General Assembly. The Board of Trustees of the Local Governmental Employees’ Retirement System elected to become a participating affiliate in the Trust on the same date. The purpose of the Benefit Trust is to provide group death benefits for members of these two retirement systems. Formerly, identical type death benefits were provided directly by these retirement systems. All contributions to fund the death benefits plans are held separate and apart from any pension or retirement funds. The funding method adopted for the Benefit Trust is one year term cost. In 2007, the employer contribution rate to fund this benefit for members of the Teachers’ and State Employees’ Retirement System was 0.16 percent of covered payroll. The employer contribution rate for members of the Local Governmental Employees’ Retirement System is actuarially determined and varies among employers. The Benefit Trust further includes the Separate Insurance Benefits Plan for State and Local Governmental Law Enforcement Officers. The Plan provides additional death benefits to active and retired law enforcement officers and additional accident and sickness insurance coverage for law enforcement officers. These benefits were funded by a $ 1.00 cost- of- court assessment in each criminal case conviction in the State. This funding source ceased June 30, 2003. Additionally, the Benefit Trust includes the Retiree Death Benefit Plan. This plan is funded by participant contributions. Effective July 1, 2007, the benefit is $ 10,000 after 24 months of contributions. If a participant’s death occurs before 24 months of contributions, the benefit is limited to a refund of contributions plus interest. Chart 5 presents the distribution of revenues by source and expenditures by purpose. The number of deaths and amounts of benefit payments, according to member group, during 2007 were: RETIREMENT SYSTEM NUMBER OF PAYMENT MEMBERSHIP PAYMENTS AMOUNT Teachers’ and State Employees’ 606 $ 2 1 , 426,941 Local Governmental Employees’ 1 57 $ 5,334,100 Death Benefit Payments Calendar Year 2007 Retirement Systems Division 1 6 SOURCES OF FUNDS Local Governmental Employees Retirement System Death Benefit $ 4,28 1 ,067 ( 7.85%) Legislative Death Benefit $ 45,000 (. 08%) Retirees’ Death Benefit $ 10,502,727 ( 1 9 .26%) Teachers’ and State Employees’ Retirement System Death Benefit $ 20,737,029 ( 38.05%) Investment Income $ 1 8 ,952,98 1 ( 34.76%) APPLICATIONS OF FUNDS Local Death Benefits Paid $ 5,334,100 ( 9.78%) Death Benefits and Insurance Paid SIF $ 940,555 ( 1 .73%) Administrative Expenses $ 359,977 (. 66%) Retiree Death Benefits Paid $ 10,860,609 ( 1 9 .92%) State Death Benefits Paid $ 2 1 , 426,941 ( 39.30%) Legislative Death Benefit $ 45,000 (. 08%) Addition to Reserves for Future Benefits $ 1 5 ,55 1 , 622 ( 28.53%) Chart 5: North Carolina Teachers’ and State Employees’ Benefit Trust Year Ended December 31, 2007 Retirement Systems Division 1 7 Firemen’s and Rescue Squad Workers’ Pension Fund ( Pension Fund) N. C. G. S. 58- 86- 1 Through 58- 86- 90 The Firemen���s and Rescue Squad Workers’ Pension Fund ( Pension Fund) was created by the General Assembly in 1959 to provide benefits for certified firemen. The statutes were amended to include certified rescue squad workers beginning January 1, 1982. Both volunteer and paid personnel are included in the membership. Funded by an initial appropriation of $ 235,000, retroactive benefit payments amounting to $ 210,700 were made to 362 retirees during August 1962 to cover all benefits due and payable since July 1, 1961. As of June 30, 2008, the active membership of the fund was 36,160, while the number of retired members was 10,509. Invested assets at market value amounted to about $ 319.20 million. The distribution of the investment of the assets as of June 30, 2008 was: Long- Term Investment Fund: $ 1 1 8 ,596,550 Short- Term Investment Fund: $ 2,404,282 Real Estate Investment Portfolio: $ 20,690,758 Equity Investment Portfolio: $ 1 6 2,279,53 1 Alternative Investment Portfolio: _$ 1 5 ,1 8 5,796 TOTAL: $ 319,156,917 Operations of the Pension Fund during the 2007 fiscal year resulted in total receipts of $ 4,826,244 and total expenditures of $ 22,401,635. Chart 6 presents the distribution of revenues by source and expenditures by purpose. The latest Actuary’s Valuation Balance Sheet, as of June 30, 2008, is shown in Table T13. Based on the latest actuary’s report, the General Assembly appropriated $ 9,458,957 for the 2007- 2008 fiscal year. The yearly appropriation will fund all future benefits, based on current service, and will fund, over a period of nine years from June 30, 2008, the remaining accrued liabilities for past service. SOURCES OF FUNDS Appropriation $ 8,733,957 ( 30.36%) Member Contributions $ 2,459,738 ( 8.55%) Reduction in Reserves for Future Benefits $ 1 7,575,390 ( 61 .09%) APPLICATIONS OF FUNDS Pension Benefits $ 20,869,033 ( 72.54%) Refunds $ 347,88 1 ( 1 . 2 1%) Administrative Expenses $ 1 ,1 8 4,720 ( 4 .1 2 %) Investment Loss $ 6,367,45 1 ( 22 .1 3 %) Chart 6: Firemen’s and Rescue Squad Workers’ Pension Fund Year Ended June 30, 2008 Retirement Systems Division 1 8 Retirees’ Health Premiums Funds This fund is used as a conduit of transferring money from employers to pay individual coverage costs of retirees’ health insurance. This coverage is under the State’s health plan. Retirees from the Teachers’ and State Employees’, Consolidated Judicial and Legislative Retirement Systems are eligible for coverage. Legislation allows selected employers in the Local Governmental Employees’ Retirement System to participate in the Retiree Health Premiums Fund. The method of collecting the employers’ payments is a surcharge on active members’ payroll payable with the employer contribution rate to the affected retirement system. Financial Information for 2007 Beginning Fund Balance: $ 222,419,894 Additions: – Employer Contributions: $ 560,255,388 – Investment Income: $ 10,866,98 1 Deductions: – Health Premiums Paid: $ 496,1 76,1 8 1 – Administrative Expense: $ 1 8 9,008 Ending Fund Balance: $ 297,1 7 7,074 Legislative Retirement Fund ( Fund) N. C. G. S. 120- 4.1 Through 1 2 0- 4.2 The Fund was created by the 1969 session of the General Assembly as a retirement plan for members and elected officers of the North Carolina General Assembly. The Fund was abolished, prospectively, by the 1973 session ( second session 1974). The abolishing act preserved the vested and inchoate rights of the members in the Fund so that all members and former members of the General Assembly, who had qualified by virtue of service as of 1 974, are still in receipt of monthly allowances or may apply for and receive monthly allowances at age 65. In the year ended December 31, 2007, there were 1 9 former members and officers of the General Assembly in receipt of allowances with a cost of $ 27,900. The cost is funded by a contribution of 5 percent of compensation paid by members at retirement and an annual General Fund appropriation made to the General Assembly. The Fund is not operated as a retirement fund, but as an expendable trust fund. Retirement Systems Division 1 9 Legislative Retirement System N. C. G. S. 1 2 0- 4.8 Through 120- 4.29 The Legislative Retirement System was created by the 1 9 83 session of the General Assembly as a retirement plan for members of the General Assembly. The membership also includes: 1) members who were vested or had maintained contributions in the Legislative Retirement Fund; 2) those retirees receiving a benefit from the Legislative Fund who elect to transfer to the Legislative Retirement System. As of December 3 1 , 2007 the System had 1 70 active members, 86 inactive members and 265 retired members. Assets on that date totaled $ 33,226,776. Operations of the System during calendar year 2007 resulted in total receipts of $ 2,894,590 and disbursements of $ 1 , 866,762. Based on the latest actuarial report, the employer contribution rate was set by the General Assembly at 0.00 percent of covered payroll effective July 1, 2008. On this basis, the total of employee and employer rates of contribution is adequate to fund all future benefits presently authorized. Disability Income Plan N. C. G. S. 1 3 5- 100 Through 1 3 5 - 1 1 3 The Disability Income Plan of North Carolina was created in 1987 by the North Carolina General Assembly with an effective date of January 1, 1988. This plan replaced the former provisions for disability retirement under the Teachers’ and State Employees’ Retirement System and replaced the benefits provided under the former Disability Salary Continuation Plan. The purpose of this plan is to provide equitable replacement income for eligible teachers and State employees who become temporarily or permanently disabled for the performance of their duty prior to retirement. Based on the latest actuarial report, the General Assembly set the employer contribution rate to fund this benefit at 0.52 percent of the covered payroll of the members of the Teachers’ and State Employees’ Retirement System and the Optional Retirement Program, effective July 1, 2007. The following are certain statistics relating to the number of disabled members, number of new claims, employer contributions, investment earnings and amount of benefit payments during the calendar years 2006 and 2007. 2006 2007 Number of Disabled Members 5,902 6,072 New Claims During the Year 923 897 Employer Contributions $ 68,824,262 $ 73,342,244 Investment Income $ 1 0,822,041 $ 20,944,888 Amount of Benefit Payments $ 58,004,719 $ 66,462,928 Disability Income Plan Statistics Calendar Years 2006 and 2007 Retirement Systems Division 20 Public Employees’ Social Security Agency ( Social Security Agency) N. C. G. S. 1 3 5- 19 Through 1 3 5- 26 The Social Security Agency administers the State’s responsibility under the Social Security Agreement between the State of North Carolina and the United States Secretary of Health and Human Services. This Agreement was entered into on July 16, 1951, and executed pursuant to authority in Section 218 of the Federal Social Security Act and Article 2, Chapter 135, of the General Statutes of North Carolina. The provisions of the Agreement require the Social Security Agency to provide the mechanics of coverage for the State and its qualified political subdivisions and act as a liaison between the State and the Social Security Administration. National Guard Pension Plan ( Guard Plan) N. C. G. S. 127A- 40 The National Guard Pension Plan ( Guard Plan) was transferred to the Department of State Treasurer for payment of monthly benefits by the 1979 session of the General Assembly, effective July 1, 1979. This Division pays allowances based on the certification of eligibility of former National Guardsmen by the Secretary of the Department of Crime Control and Public Safety. The payments of benefits are funded by State General Fund appropriations by the General Assembly. As of December 31, 2007, there were 3,130 beneficiaries in receipt of monthly allowances from the Guard Plan at a cost that calendar year of $ 4,981,747. The 1983 session of the General Assembly enacted legislation, effective July 1, 1 9 83, creating a trust fund for financing National Guard Plan payments and requiring that the Plan be maintained on a generally accepted actuarial basis. Based on an actuarial study after passage of this legislation, the June 1 9 84 session appropriated $ 1 ,7 1 7,977 to begin actuarial reserve funding. The funding appropriated for 2007– 2008 was $ 7,007,443. Registers of Deeds’ Supplemental Pension Fund N. C. G. S. 1 61 - 50 Through 1 61 - 50.5 The Registers of Deeds’ Supplemental Pension Fund was created by the 1987 session of the General Assembly for the purpose of providing a supplement to the Local Governmental Employees’ Retirement System benefits for Registers of Deeds. The stated purpose of the Act was to attract the most highly qualified talent available within the State to that county office. In October 1987, each county board of commissioners began remitting monthly to the Department of State Treasurer an amount equal to 4.5 percent of the receipts collected pursuant to Article 1 of Chapter 161 of the General Statutes for deposit to the credit of the Register of Deeds’ Supplemental Pension Fund. Effective July 1, 2007 this funding was reduced to 1.5 percent. As of December 31, 2007, the Fund had total assets in the amount of $ 34,416,916. Benefits from the Fund became payable beginning July 1, 1 9 88. For the year ending December 3 1 , 2007, the Fund paid total benefits in the amount of $ 1 ,061 , 975. Retirement Systems Division 2 1 Supplemental Retirement Income Plan of North Carolina ( 401( k) Plan) N. C. G. S. 135- 90 Through 135- 95; 143- 166.30; and 143- 166.50 The 1983 session ( Regular Session, 1984) enacted enabling- type legislation creating the State’s Internal Revenue Code Section 401( k) Plan effective as of January 1, 1985. The Plan is a voluntary savings/ investment program designed to supplement members’ replacement income in retirement. The Plan is governed jointly by the State Treasurer and a Board of Trustees composed of members of the Boards of Trustees of the Teachers’ and State Employees’ and Local Governmental Employees’ Retirement Systems. Prudential Retirement, the Plan’s third- party administrator, is responsible, under the Plan document adopted by the Board and the terms of the contract with the Board, for all aspects of operating the Plan. This responsibility includes communications, record- keeping and monitoring investment products. The Plan’s number of participating members rose from 204,735 members as of June 30, 2007, to 2 1 3 ,400 members as of June 30, 2008, for an increase of 4.2 percent. Contributions by employers during this fiscal year totaled $ 1 5 9,537,288 while salary deferred contributions by members were $ 241 , 291,987. The total assets at market value of the Plan decreased by 1.72 percent to $ 4,148,01 1 , 855. Under the current contract, members may select from a stable value fund and eight mutual funds. As of June 30, 2008, 28.2 percent of the assets were invested in the Stable Value Fund and 71.8 percent were invested in the mutual funds. In addition, $ 35,655,682 was invested in the mutual funds that were previously offered in the Plan and the outstanding loan balances totaled $ 1 8 3,464,954. The North Carolina Public Employee Deferred Compensation Plan N. C. G. S. 143B- 426.24 The North Carolina Public Employee Deferred Compensation ( 457) Plan was established by its Board of Trustees on Executive Order from the Governor in 1974. The Plan is a voluntary tax-deferred savings/ investment program designed to supplement members’ replacement income in retirement. The Plan is governed by its Board of Trustees; the State Treasurer is the chairperson of the Board. Great- West Retirement Services is the Plan’s third- party administrator and is responsible under the Plan document adopted by the Board and the terms of the contract with the Board for most aspects of operating the Plan, including communications and record- keeping. As of June 30, 2008, the Plan’s number of participating members was 29,968. Contributions during this fiscal year totaled $ 41 ,1 05,802, and the total assets at market value of the Plan were $ 705,784,807. Under the current contract, members may select from 1 9 investment options. As of June 30, 2008, 7.5 percent of the assets were invested in one of the five fund- of- funds options, 42.1 percent were invested in the fixed and bond funds and 50.4 percent were invested in the mutual funds. The outstanding loan balances as of June 30, 2008, totaled $ 6,1 3 6,695. 22 The State Treasurer’s Annual Report Investment Management Division Investment Management Division Investment Management Division Structure The Investment Management Division serves as the investment arm for the Department of State Treasurer. The Division manages: 1) The combined assets of the North Carolina Retirement Systems, referred to as the Trust Fund Investment Program (“ the Trust Fund”). 2) The assets of the Cash Management Program. 3) The ancillary investment programs as authorized by the General Assembly. The State Treasurer administers both the Cash Management and Trust Funds Investment programs. The Treasurer is directed by statute to “ establish, maintain, administer, manage and operate” investment programs for all funds on deposit, pursuant to the applicable statutes. In doing so, the Treasurer “ shall have full power as a fiduciary” and shall manage the investment programs so assets “ may be readily converted into cash as needed.” At the fiscal year closing June 30, 2008, total assets of the Trust Fund Investment Program, Cash Management Program and ancillary investment programs were $ 85.9 billion. Assets of the Trust Fund Investment Program accounted for 84.2 percent of this amount, assets of the Cash Management Program accounted for 13.8 percent and ancillary programs comprised 2.0 percent. This total represents the aggregate assets of seven retirement systems, various other trust funds and the State’s General and Highway Funds. In establishing the comprehensive management program, the State Treasurer, utilizing a professional investment staff, has developed an investment strategy for each portfolio that recognizes the guidelines of the governing General Statutes and provides appropriate diversification. STATE TREASURER SOLE FIDUCIARY DEPUTY TREASURER CHIEF INVESTMENT OFFICER TRUST FUND INTERNAL ASSETS INVESTMENT OPERATIONS TRUST FUND EXTERNAL ASSETS 23 Investment Management Division Investment Objectives Cash Management Program The Cash Management Program’s objective is to maximize income consistent with the principals in preservation of capital and liquidity. Prudence in discharging this fiduciary obligation requires that all investments be reviewed continuously to ensure recognition of opportunities in the secondary markets that may improve the quality and/ or income stream. Trust Funds Investment Program The Trust Funds Investment Program’s objective is to generate returns that match or exceed those of the appropriate benchmarks on a trailing three- year basis, thereby assisting in maintaining actuarially sound funding levels for the retirement system assets ( the dominant participants) while maintaining the necessary diversification. Operating Policy In all transactions executed for any investment program managed by the State Treasurer, the objective is to transact such business in the best interest of the beneficial owners of the trusts’ assets. Within the Trust Fund, assets are divided into different classes of investments: Short- Term Investment Fund Long- Term Investment Fund Equity Investment Portfolio Real Estate Investment Portfolio Alternative Investment Portfolio Highly Liquid Money Market Instruments Longer Term Investments Equity Securities Real Estate Private Equity; Hedge Funds Internally Internally Externally Externally Externally Treasuries, Agencies, Short- Term Corporate Issues Investment Grade Corporate Securities, Treasuries, Agencies, GNMAs Fiduciary Relationships with experienced investment advisors Limited Partnerships managed by experienced real estate advisors Limited Partnerships managed by experienced private equity advisors, Hedge Fund of Funds Portfolio Investment Examples Managed Mandate 24 Investment Management Division Overall Fund Strategy The tradition of conservative fiscal management has served North Carolina’s public workers and taxpayers well through the years. The Trust Fund continues that tradition today with a heavy allocation in fixed income assets ( bonds) combined with minimal exposure to high- risk assets and an increasingly diversified portfolio. The result of this strategy is a fund that is a top performer in turbulent economic times and steady in bull markets. Recent reports and rankings demonstrate the wisdom of North Carolina’s long- term strategy. In Standard & Poor’s annual rankings of state retirement fund funding ratios, North Carolina ranked second for the third year in a row. It should also be noted that we have been able to avoid the problematic strategies utilized by other pension funds. More recently, Wilshire, the most widely accepted benchmark for the performance of institutional assets, reported that North Carolina was in the top quarter of performers for the fiscal year ending June 30, 2008. In a year when the average public fund lost 4.5 percent and the S& P 500 lost more than 13 percent, North Carolina’s Trust Fund lost only 2 percent. The strong performance in such a tough year demonstrates the success of the Investment Management Division’s effort to maintain a well- balanced portfolio that minimizes risk. Review of the Past Year The fiscal year ended June 30, 2008 saw significant turmoil and losses in markets across the globe. The mortgage crisis and tightening credit, declines in the stock market, a weakening dollar and increasing inflation made it a tough year for investors across the spectrum. However, the Trust Fund’s conservative investment strategy mitigated losses in the equity portfolio and provided solid returns from fixed income, alternatives and real estate. This allowed us to outpace the majority of our peer funds who are positioned to outperform in up market cycles. Many fixed income investors were hit particularly hard by collapses in certain mortgage- backed securities and other credit instruments. The Trust Fund avoided these pitfalls and took no direct losses from mortgage- backed securities, such as Collateralized Debt Obligations ( CDOs) and Structured Investment Vehicles ( SIVs). The Trust Fund’s staff declined offers to invest in these securities in earlier years, which proved to be a wise decision. The year did see the Trust Fund make a number of significant new investments and continue its effort to balance the portfolio with a greater emphasis on diversifying into alternative asset classes, increasing exposure to international and emerging markets, and reallocating passive investments to active strategies. Looking Forward to the Year Ahead Though the Trust Fund performed relatively well during the significantly volatile and arduous fiscal year in the financial markets, the Investment Division is committed to enhancing the portfolio to perform well in all types of market environments. Throughout the 2009 fiscal year, the Investment Division will continue to focus on reducing overall portfolio risk, while creating a stronger position to outperform in an up market environment. With the Federal Reserve Board holding the federal funds rate steady at a relatively low level as of the 2008 fiscal year end, the fixed income management team will focus on protecting its longer duration portfolio against a possible rising interest rate environment. The Investment Division will utilize more credit research resources to identify and capitalize on market inefficiencies during this possible difficult period for bond prices. In the equity market, growth- oriented securities outperformed value- focused securities considerably. The Trust Fund benefited from the growth stocks’ performance, but the Investment Division will evaluate the Fund’s bias to the growth equity style as the market potentially adjusts prices. The Investment 25 Investment Management Division Division will also concentrate on increasing its global equity management allocation within the Equity Investment Portfolio. By utilizing a global approach, external investment managers can increase their opportunity set when searching for strong investments. As companies increasingly participate on a global stage, this strategy allows managers to evaluate whether companies within industries and sectors would truly be strong investment opportunities on a global basis. In addition, given this flexibility in a portfolio, global equity managers can effectively reduce risk through diversification and position themselves for potentially greater returns. In the private equity market, the Investment Division was successful in securing high quality fund relationships throughout the fiscal year 2008. The private equity team will continue its concentration on opportunistic funds and co- investment opportunities with existing relationships. During the next fiscal year, the Investment Division will update the 2005 asset optimization study to reflect market revaluation and the Trust Fund’s liabilities. As the Investment Division seeks to increase allocations to strategies that, by themselves, might hold greater volatility, the Division remains steadfast in the fundamental concepts that these strategies’ low correlation with others provides the diversification to effectively reduce overall portfolio risk, while concurrently increasing the potential for better portfolio performance. 26 Investment Management Division Cash Management Program Review Short- Term Investment Fund The Short- Term Investment Fund ( STIF) is an internally managed portfolio of highly liquid fixed income securities. These securities are primarily money market instruments and short- to intermediate- term treasuries and agencies. All bank accounts of the State Treasurer are included in this portfolio, which serves as the main operating account for state agencies. Because the Treasurer’s cash balances are ultimately subject to disbursement upon presentation of valid warrants, the primary considerations in making investments are safety and liquidity; the secondary consideration is income. For the fiscal year 2008, the STIF generated a cash return of 5.2 percent. The objective of this portfolio is to provide maximum income within the parameters of the IRS regulations on bond arbitrage. 6.00% 4.00% 2.00% 0.00% 4.32% 3.22% 2.88% 3.56% 4.68% 5.19% STIF Fiscal Year Performance Fiscal Year Ending 2003 2004 2005 2006 2007 2008 27 Investment Management Division STIF Asset Allocation as of 6/ 30/ 08 U. S. Agencies, 73.0% U. S. Treasuries, 24.0% Corporates, 0.5% Certificates of Deposit, 2.5% STIF Asset Allocation as of 6/ 30/ 07 U. S. Agencies, 58.2% U. S. Treasuries, 40.0% Corporates, 0.4% Certificates of Deposit, 1.4% 28 Investment Management Division Bank of America Barclays Credit Suisse Deutsche Bank First Tennessee Bank Goldman Sachs HSBC Securities JPMorgan Chase Key Bank Lehman Brothers Loop Capital Merrill Lynch Mizuho Securities Morgan Keegan Morgan Stanley RBC Capital Markets RBS Greenwich SBK Brooks UBS Warburg Wachovia Capital Markets Williams Capital Group STIF Summary of Brokers Utilized During Fiscal Year 2008 29 ISSUER COUPON MATURITY DATE VALUE ($) FHLB Discount Notes 07/ 01/ 2008 3,004,326,357 U. S. Treasury Note 4.875% 08/ 31/ 2008 2,579,344,047 FHLMC 4.700% 07/ 1 1 / 20 1 3 2,086,7 1 4 ,3 1 3 FHLMC 4.500% 08/ 1 1 / 2014 2,056,41 8 ,730 FHLMC 4.7 1 0% 07/ 1 8 / 2014 1 , 822,463,990 FHLMC 4.730% 07/ 1 1 / 20 1 3 1 , 430,552,904 FHLMC 4.320% 04/ 29/ 201 3 1 , 366,003,957 FHLB 5.050% 1 1 / 1 9 / 201 2 1 , 1 39,574,057 FHLB 5.050% 1 1 / 1 3 / 201 2 874,770,750 FHLB 5.000% 1 1 / 1 4 / 201 2 65,499,335 STIF Top 10 Positions as of June 30, 2008 Investment Management Division Total Trust Fund As of June 30, 2008, the Trust Fund maintained a market value of $ 72.3 billion. For the fiscal year 2008, the Trust Fund returned - 2.1 percent, net of fees, outperforming its custom benchmark return of - 2.9 percent. Over longer time periods, the Trust Fund continued its strong relative performance as it outperformed the benchmark over all of the respective time periods. Trust Funds Investment Program Review 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% - 2.00% - 4.00% Total Trust Fund Annualized Performance Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year Total Trust Fund Custom Benchmark* * 50% Custom Equity Benchmark, 39.5% Custom Fixed Income Benchmark, 6% Custom Real Estate Benchmark and 4.5% Custom Alternatives Benchmark. 6.44% 8.2 1% 5.89% 6.08% 7.73% 5.68% - 2.07% - 2.86% 30 Investment Management Division 1- YEAR 3- YEAR 5- YEAR 10- YEAR TOTAL TRUST FUND - 2.1% 6.4% 8.2% 6.1% Total Pension Custom Benchmark1 - 2.9% 5.9% 7.7% 5.7% LONG TERM INVESTMENT FUND 8.4% 4.0% 4.1% 6.3% Custom Fixed Income Benchmark2 7.5% 3.5% 4.0% 6.0% EQUITY INVESTMENT PORTFOLIO - 1 0.5% 6.5% 10.4% 5.2% Custom Equity Benchmark3 - 1 2 .0% 6.2% 9.8% 4.0% REAL ESTATE INVESTMENT PORTFOLIO 8.7% 1 6 .2% 1 3 .7% 10.7% Custom Real Estate Benchmark4 9.5% 15.4% 14.3% 12.4% ALTERNATIVE INVESTMENT PORTFOLIO 7.6% 1 1 . 8% 8.8% 6.9% Custom Alternatives Benchmark5 - 1 .0% 7.5% 8.8% 5.3% 1) 50% Custom Equity Benchmark, 39.5% Custom Fixed Income Benchmark, 6% Custom Real Estate Benchmark and 4.5% Custom Alternatives Benchmark. 2) ML 40% Govt 5+ Yr, ML 35% Corp ( Investment Grade – BBB Max 25%) 5+ Yr and ML 25% Mortgage Master. 3) 68% Russell 3000 Index and 32% MSCI EAFE Index. 4) 90% NCREIF Open End Funds Index and 10% FTSE EPRA/ NAREIT Global Securities Index. 5) 70% Custom Private Equity Benchmark and 30% Custom Hedge Fund Benchmark. Custom Private Equity Benchmark is the Russell 3000 Index lagged 3 months + 250 bps. Custom Hedge Fund Benchmark is the U. S. T- Bill + ML 400 bps. Annualized Trust Fund Performance as of June 30, 2008 3 1 Investment Management Division Structure The Investment Management Division is constantly monitoring the overall Trust Fund in an effort to control risk. The following chart highlights revisions to strategic asset allocation targets. The Investment Management Division sustains consistent rebalancing to ensure the overall portfolio weights stay in line with the target weights. A disciplined approach to rebalancing ultimately controls the level of risk that an investment portfolio experiences. JUNE 2006 JUNE 2007 JUNE 2008 Fixed Income 39.5% 39.5% 39.5% Total Equity 54.5% 52.0% 50.0% U. S. 41 . 5% 36.0% 34.0% Non- U. S. 1 3 .0% 1 6 .0% 1 6 .0% Real Estate 3.5% 5.0% 6.0% Alternatives 2.5% 3.5% 4.5% Current and Historical Strategic Targets MARKET PORTFOLIO TARGET TARGET VALUE WEIGHT WEIGHT RANGE Fixed Income $ 28,534,5 1 8 ,609 39.5% 39.5% 35.0% – 44.0% Total Equity $ 36,1 2 1 , 1 3 1 , 936 50.0% 50.0% 45.0% – 55.0% Real Estate $ 4 ,1 8 2,444,878 5.8% 6.0% 5.0% – 7.0% Alternatives $ 3,466,433,043 4.8% 4.5% 3.5% – 5.0% TOTAL FUND $ 72,304,528,466 100.0% 100.0% --- Trust Fund Asset Allocation as of June 30, 2008 32 Investment Management Division Corporate Governance The Investment Management Division maintains a robust corporate governance program. The corporate governance movement followed on the heels of highly publicized scandals at companies like Enron, WorldCom and Tyco, when investors saw the clear results of poor governance standards. The pension plan works through proxy voting, shareholder resolutions, dialogue with corporate leaders and regulatory agencies and collaboration with other institutional investors to create positive change within portfolio companies. Some of the primary issues addressed by the pension plan include: n Ensuring greater transparency in executive compensation packages and stronger rights for shareholders to provide advisory votes on pay plans n Tying executive pay to performance n Creating stronger Board independence n Ensuring investor rights to nominate director candidates n Protecting the legitimacy of director elections by working to eliminate uninstructed broker votes from director election tallies n Ensuring companies develop sustainable environmental business practices Sudan The Trust Fund has developed a policy related to investments in companies that may be doing business with the government of Sudan. The policy incorporates engagement with companies to encourage positive change, with the possibility that non- responsive companies may be excluded from the Trust Fund portfolio. On November 1 , 2006, the Trust Fund announced that it had divested from, or prohibited future investment in, nine companies that were shown to be providing military or monetary support to the Sudanese government, but who had taken little or no interest in the humanitarian crisis. On August 30, 2007, the “ Act Providing for how the State Treasurer Shall Address Certain State Investments Relating to Sudan” ( House Bill 291) was signed into law, and the Department is following this legislation. Payday Lending The Trust Fund implemented a policy to exclude holdings of companies engaged in payday lending. Payday lenders typically offer short- term loans at high interest rates and may not legally operate in the State of North Carolina. As such, any company that in the primary course of business engages in such practices is excluded from the North Carolina investable universe. Trust Fund Fiscal Year Activity The Division conducts its activities in accordance with the Statement of Investment Policy approved by the Treasurer in consultation with the Investment Advisory Committee. This policy covers fiduciary standards of care, asset allocation ranges, rebalancing requirements and other issues. During Fiscal Year 2008, strategies were revised to increase long- term exposure to real estate and alternatives. The allocation to U. S. equity was lowered to provide funds for the additional allocation to real estate and alternatives. This strategic realignment effectively increased the Non- U. S. equity allocation within the overall Equity Investment Portfolio. The Division models a policy portfolio that should, over time, produce a return that exceeds the actuarial requirements with prudent risk guidelines. Specifically, the Trust Fund’s fixed income holdings posted an 8.4 percent return for the year, while the equity portfolio, or stocks, lost - 10.5 percent. The alternatives and real estate portfolios returned 7.6 percent and 8.7 percent, respectively. The relatively young real estate and alternatives investment programs will provide increasingly strong returns over the next several years, as these types of investments typically take several years to realize maximum results. These investments also diversify the overall portfolio, helping to produce steadier returns over the long term. 33 Investment Management Division Fixed Income 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% LTIF Annualized Performance Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year LTIF Custom Fixed Income Benchmark 3.95% 4.15% 6.27% 3.50% 3.95% 6.05% 8.35% 7.50% Structure The fixed income allocation of the Trust Fund is actively managed through the LTIF. The Investment Management Division utilizes the LTIF to help match the liabilities of the overall fund. Because of this approach, the duration of the portfolio tends to be fairly long. Duration is a measure of a bond’s price sensitivity to changes in interest rates. With rates dropping and spreads widening, the fixed income portfolio return of 8.4 percent was within expectations for the fiscal year. 34 The majority of the Trust Fund’s fixed income allocation is invested in the Long Term Investment Fund ( LTIF) and includes allocations to the STIF ($ 0.9 billion) and the Campbell Timber Fund III ($ 0.5 billion). As of June 30, 2008, the LTIF comprised a market value of $ 27.1 billion, representing 37.4 percent of the Trust Fund’s assets. For the fiscal year 2008, the LTIF returned 8.4 percent, net of fees, outperforming its custom benchmark return of 7.5 percent. Over longer time periods, the LTIF continues its strong relative performance and adds value to the Trust Fund as it outperforms the benchmark over all of the respective time periods. Investment Management Division Fixed Income Fiscal Year Activity During the fiscal year, the LTIF increased its overall position within the Trust Fund to 39.5 percent of the total assets. The LTIF added approximately $ 215.0 million in value to the Trust Fund by outperforming its benchmark. By adhering to its high quality structure throughout the fiscal year, the LTIF successfully avoided credit market difficulties associated with Special Investment Vehicles (“ SIVs”) and Subprime mortgages. In addition, the LTIF strategically added exposure to Treasury Inflation- Protected Securities (“ TIPS”) as fears of relatively higher inflation spread through the economy. LTIF Credit Quality* Allocation as of 6/ 30/ 08 BBB, 22.4% High Yield, 2% AAA, 4.5% AA, 2 9 .1 % * Credit Quality based on Moody’s Ratings A, 41 . 9 % LTIF Sector Allocation as of 6/ 30/ 08 Mortgages, 25.2% Cash, 0.7% Corporates, 36.4% Government, 37.7% 35 Investment Management Division CORPORATE ISSUER MARKET VALUE ($) % OF LTIF JPMorgan 367, 1 73,73 1 1 . 3% General Electric 344,1 1 9 ,50 1 1 . 2% Bank of America 323,680,408 1 . 1 % AT& T 307,9 1 9 ,879 1 . 1 % Citigroup 296,396,789 1 . 0% Wal- Mart Stores 258,1 3 2,036 0.9% Goldman Sachs Group 257,303,329 0.9% Verizon Comm 220,542,874 0.8% Morgan Stanley 1 85,357,41 8 0.6% Wachovia Bank 1 89,991,614 0.6% LTIF Top 10 Corporate Positions as of June 30, 2008 AG Edwards Bank of America Barclays Capital Bear Stearns Citigroup Countrywide Securities Credit Suisse Securities Deutsche Bank Securities First Tennessee Bank Goldman Sachs HSBC Securities JPMorgan Chase LaSalle Financial Lehman Brothers Loop Capital Markets KeyBanc Capital Markets Merrill Lynch Mizuho Securities Morgan Keegan Morgan Stanley RBC Capital Markets RBS Greenwich Capital Stifel Nicolaus Suntrust Capital Markets UBS Securities Wachovia Capital Markets Williams Capital Group LTIF Summary of Brokers Utilized During Fiscal Year 2008 Fixed Income Market Fiscal Year Commentary The beginning of the fiscal year saw the impact of the subprime mortgage meltdown take full effect as delinquencies and defaults began a sharp rise. Due to the subsequent credit crisis and escalating fears of a weakening economy, the fiscal year experienced a significant period of monetary easing by the Federal Reserve Board. Making some of the largest drops in monetary policy history, the Fed lowered the federal funds rate from 5.25 percent to 2.00 percent. High quality securities posted strong returns for the fiscal year due to a decrease in interest rates across the yield curve and a flight to quality. On the corporate side, spreads widened significantly throughout the year as the credit crisis intensified and the economy showed more signs of weakness. 36 Investment Management Division Equity Investment Portfolio As of June 30, 2008, the Equity Investment Portfolio ( EIP) maintained a market value of $ 36.1 billion, representing 50.0 percent of the Trust Fund’s assets. For the fiscal year 2008, the EIP returned - 10.5 percent, net of fees, outperforming its custom benchmark return of - 12.0 percent. Over longer time periods, the EIP continues its strong relative performance and adding value to the Trust Fund. Structure All investments of the Equity Investment Portfolio are managed externally according to one of three different strategies: passive, enhanced or active. Passive investments track existing indexes in relatively efficient markets. Enhanced indexes allow managers some flexibility to make decisions that deviate from the index, but maintain more control of market risk than active management. Actively managed funds give the manager discretion to make investment decisions within the parameters of the portfolio’s mandate. The EIP maintains prudent diversification within the broad equity market and is categorized into U. S. Large- Cap, U. S. Mid- Cap, U. S. Small- Cap and Non- U. S. investments. U. S. investments make up the large majority of equity investments, though the international investments have grown in recent years. Equity Style Allocation Growth, 48% Sector, 2% Value, 25% Core, 25% Equity Size Allocation U. S. Small- Cap, 7% U. S. Mid- Cap, 1 0 % Non- U. S., 33% U. S. Large- Cap, 50% Equity Strategy Allocation Passive, 32% Enhanced, 12% Active, 56% 37 Investment Management Division 1 5 .00% 10.00% 5.00% 0.00% - 5.00% - 1 0.00% - 1 5 .00% Equity Investment Portfolio Annualized Performance Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year Equity Investment Portfolio Custom Equity Benchmark 6.52% 10.38% 6.24% 5.2 1% 9.76% 4.03% - 10.45 %- 12.01% Equity Fiscal Year Activity Based on the implementation of an independent asset optimization analysis, strategic targets for the EIP were lowered to allow an increase in the Trust Fund’s diversification through the investment into other asset classes. However, over the past few years within the EIP, the Non- U. S. equity allocation was strategically increased; this has added significant value to the overall Equity Investment Portfolio. During the fiscal year, the EIP increased its Large- Cap Value position through an allocation to the investment advisor, Hotchkis & Wiley. The EIP strategically reallocated active exposure with U. S. Small- Cap by adding the investment advisor, Turner Investment Partners. During the year, the EIP also augmented its U. S. Mid- Cap position by selecting advisors, TimesSquare Capital and Angelo Gordon. The EIP continues to steadily build its exposure to the emerging markets as it hired Baillie Gifford during the fiscal year. Following is a list of the EIP’s investment managers as of June 30, 2008, as well as the EIP’s top 1 0 holdings. Decrease in Trust Fund’s Equity Allocation 100.0% 80.0% 60.0% 40.0% 20.0% 0.00% FYE 2001 2002 2003 2004 2005 2006 2007 2008 Equity Fixed Income Real Estate/ Alternatives 38 Investment Management Division 10.00% 5.00% 0.00% - 5.00% - 1 0.00% - 1 5 .00% 20.00% 1 0.00% 0.00% - 1 0.00% - 20.00% U. S. Equity Annualized Performance Non- U. S. Equity Annualized Performance Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year Total U. S. Equity Russell 1 0 00 Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year Total Non- U. S. Equity MSCI EAFE 4.62% 15.40% 8.83% 18.09% 4.42% 8.47% 4.73% 12.84% 8.37% 16.67% 3.5 1% 5.83% - 11.93% - 7.72% - 12.69% - 10.61% Increase in Non- U. S. Equity Allocation 100.0% 80.0% 60.0% 40.0% 20.0% 0.00% FYE 2001 2002 2003 2004 2005 2006 2007 2008 U. S. Non- U. S. 39 Investment Management Division U. S. EQUITY INVESTMENT ADVISORS STYLE MARKET VALUE First Citizens Large Cap Large- Cap Passive 3,004,326,357 Evergreen S& P 500 Large- Cap Passive 2,579,344,047 BOA Large Cap Large- Cap Passive 2,086,7 14,313 BGI Russell 3000 Alpha Tilts Large- Cap Active 2,056,418,730 Alliance Relative Value Large- Cap Active 1,822,463,990 Evergreen Mid Cap Mid- Cap Passive 1,430,552,904 Wellington Growth Large- Cap Active 1,366,003,957 Wellington Tech Eq Large- Cap Active 1,139,574,057 Wellington Mid Cap Intersection Mid- Cap Active 874,770,750 Evergreen Russell 200 Enhanced Large- Cap Active 841,845,236 Sands Large Cap Large- Cap Active 828,642,939 Turner Investments Large- Cap Active 8 1 5 ,962,57 1 BOA Mid Cap Mid- Cap Passive 614,885,038 SSGA S& P 600 Small- Cap Passive 564,2 1 8 ,997 Piedmont Strategic Core Large- Cap Active 435,520,987 Wellington S& P 600 Small- Cap Passive 4 1 5 ,937,826 Wellington Biotech Small- Cap Active 392,745,20 1 Hotchkis Mid Cap Value Mid- Cap Active 339,986,340 Earnest Partners Small Cap Value Small- Cap Active 298,700,393 Sterling Small Cap Value Small- Cap Active 261,561 , 578 Hotchkis Large Cap Value Large- Cap Active 253,809,1 97 Angelo Gordon SMID Growth Smid- Cap Active 225,839,0 1 1 Times Square Mid Cap Growth Mid- Cap Active 2 1 1 ,966,978 Numeric Small Cap Value Small- Cap Active 1 3 4,748,258 Turner Quant Micro Cap Small- Cap Active 99,433,604 Numeric Small Cap Growth Small- Cap Active 79,903,1 9 6 TimesSquare Mid Cap Focused Mid- Cap Active 65,499,335 U. S. Equity Investment Advisors ( FY ending 2008) 40 Investment Management Division NON- U. S. EQUITY INVESTMENT ADVISORS STYLE MARKET VALUE GMO Int’l Non- U. S. Active 1 , 549,276,41 3 Alliance ACWI ex- US Non- U. S. Active 1,389,026,520 BGI Non- US Alpha Tilts Non- U. S. Active 1,271,686,490 Capital Guardian Int’l Non- U. S. Active 1,265,933,636 Wellington Int’l Non- U. S. Active 1 ,1 9 3,977,805 Baillie Gifford EAFE Non- U. S. Active 995,237,278 BGI EAFE Index Fund Non- U. S. Passive 722,1 1 7,075 Mondrian EAFE Value Non- U. S. Active 701,769,53 1 Invesco Non- U. S. Active 690,450,741 Oeschle EAFE Growth Non- U. S. Active 652,777,554 Alliance Emerging Markets Non- U. S. Active 608,190,193 Walter Scott Int’l Non- U. S. Active 453,879,305 Baillie Gifford Emerging Non- U. S. Active 299,782,234 AGA Global Strategy Partners Global Active 236,327,086 Longview Global Equity Global Active 219,284,343 Non- U. S. Equity Investment Advisors ( FY ending 2008) COMPANY % of EIP Exxon Mobil 1 . 4% Microsoft 0.8% General Electric 0.7% Apple 0.7% Google 0.6% AT& T 0.6% Proctor & Gamble 0.6% Chevron 0.6% Cisco Systems 0.6% Johnson & Johnson 0.6% EIP Top 10 Holdings ( FY ending 2008) 41 Investment Management Division Equity Market Fiscal Year Commentary The equity markets contributed large negative returns for 2008��� s fiscal year as the Russell 3000 Index posted a - 12.7 percent return. The credit crisis stretched its detrimental impact to equity securities as investors made a flight to quality due to rising uncertainty in the markets and economy and hedge funds liquidating holdings to reach margin calls. The equity market experienced significant volatility as returns sank throughout the fiscal year. The factors affecting this rocky decline included rising unemployment, a weakening U. S. dollar, rising commodity prices, slowing consumer confidence, large corporate write- downs, tightening credit and a collapsing housing market. During this period, the EIP may attribute a portion of its outperformance over its benchmark to its overweight in growth- oriented securities. During the fiscal year, growth securities outperformed value securities as the Russell 3000 Growth Index returned - 7.1 percent and the Russell 3000 Value Index posted a - 9.6 percent return. Despite a weakening U. S. dollar, the international equity market posted sharp negative performance for the fiscal year 2008. Though the international markets somewhat resisted the initial onset of the crisis occurring in the U. S., it soon caught up and took a devastating toll. Though it seems the emerging markets weathered the global storm with a fiscal year return of 4.6 percent, recent performance has deteriorated most of the significantly high returns gained through the second half of 2007. 42 Investment Management Division Real Estate As of June 30, 2008, the Real Estate Investment Portfolio ( REIP) maintained a market value of $ 4.2 billion, representing 5.8 percent of the Trust Fund’s assets. For the fiscal year 2008, the REIP returned 8.7 percent, net of fees, underperforming its custom benchmark return of 9.5 percent. Structure The Trust Fund began investing in Real Estate on a limited basis in the early 1990’ s with investments in passive open- end core real estate funds. In the early 2000’ s, it was determined a more active real estate strategy could add considerable value over time. The REIP has grown from 1.9 percent of the Trust Fund in 2001 to 5.8 percent of the Trust Fund at the end of 2008’ s fiscal year. As of June 30, 2008, the REIP maintains $ 2.3 billion in outstanding commitments. The REIP is an actively managed portfolio of open and closed- end funds sponsored by leading management firms. The REIP also includes a limited number of separate accounts representing specific strategies such as timber and real estate investment trusts ( REITs). The Real Estate Investment Portfolio maintains strategic allocations to diverse strategies within real estate investment vehicles including core, value- added and opportunistic funds. In addition, the analysis of new investments focuses on location and property types and employs a moderate level of risk. The REIP continues its objective by expanding into a variety of property types including debt, industrial, land, lodging, multi- type, office, residential – multi- family, residential – single- family, retail and timber. The chart on the top of page 44 illustrates the REIP’s diversification into these types of property. 20.00% 1 6 .00% 1 2 .00% 8.00% 4.00% 0.00% Real Estate Investment Portfolio Annualized Performance Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year REIP Custom Real Estate Benchmark 16.19% 13.71% 10.67% 15.43% 14.29% 12.37% 8.74 % 9.51% 43 Investment Management Division Domestically, the REIP has a coastal focus with the greatest exposure to major cities on the West Coast, followed closely by Eastern and Southern markets with the remainder in the Midwest. International investment exposure is approximately 18.0 percent with the majority in Europe. A large majority of the European exposure is in France, Germany and the United Kingdom. Japan accounts for 45 percent of the Asian exposure, down from approximately 67 percent at the 2007 fiscal year end, as opportunities in Australia, China and Hong Kong develop. U. S. Geographic Allocation East, 27% Midwest, 10% West, 3 4 % South, 29% Global Geographic Allocation Asia, 7% Europe, 1 1 % Property Type Allocation Office, 32% Multi- Type, 10% Debt, 1% Other, 3% Res– Multi Family, 1 0 % Res– Single Family, 6% Retail, 1 0 % Timber, 4% Industrial, 8% Land, 2% Lodging, 14% 44 U. S., 82% Investment Management Division Real Estate Fiscal Year Activity During the fiscal year, the REIP increased from $ 3.5 billion to $ 4.2 billion. Based on the implementation of an independent asset optimization analysis, strategic targets for the REIP were increased to allow greater diversification within the Trust Fund. The REIP added eleven fund relationships during the fiscal year and will continue to focus on opportunities in land, agricultural funds, timber, core and value- added strategies, emerging markets, infrastructure, REITs and secondary funds. Real Estate Market Fiscal Year Commentary The real estate market continued its strong performance throughout the fiscal year and has currently weathered the credit crunch crisis. However, despite the small allocation of the residential mortgage market affected by subprime issues and that commercial and residential markets are separate, the commercial mortgage debt market is still impacted by spread increases and economic downturns. Total returns for the private real estate market moderated throughout the latter half of the fiscal year as the appreciation portion of returns has waned. In the hotel sector, uncertainty mounted as business and leisure travel slowed. Industrial warehouses faced a decline in product inventories due to a decrease in consumption, but the sector was offset as the increase in exports attributed to the declining U. S. dollar has pushed products through the warehouses and into ports. The office and retail sectors continued to outperform during the fiscal year as the apartment sector experienced signs of slowing appreciation. On the next page is a list of the REIP’s investment advisors and fund relationships as of June 30, 2008. 45 Investment Management Division REIP Investment Advisors and Fund Relationships as of June 30, 2008 REIP ADVISORS MARKET AND FUNDS VALUE MS Global RE Securities 294,980,477 Timberland Inv Res - Nahele 220,432,749 JPMorgan Strategic Property 1 9 6,807,41 6 RREEF Global OPP II 1 9 1 , 453,38 1 MSREF VI INTL 190,095,084 Starwood SOF VII 1 61,564,478 CBRE Strategic IV 1 56,958,582 Sentinel RE Fund 146,576,684 Prudential PRISA 1 39,935,377 DLJ RECP III 136,024,338 UBS RESA 1 3 1 ,7 7 1 ,1 3 2 Rockpoint RE II 1 1 8,932,1 3 9 Blackstone RE V 1 1 2 ,226,522 Starwood SOF VII Co- Inv 109,685,761 Shorenstein VII 105,006,991 UBS PMSA 104,901,654 DRA Growth & Income V 94,720,759 Blackstone RE VI 93,553,79 1 MSREV V INTL 93,041 ,079 Keystone Industrial Fund 86,335,038 Rockwood VII 83,297,22 1 Rockwood VI 78 ,1 9 6,689 Terra Firma Deutsche 74,273,608 JER REP IV 73,619,564 Warburg Pincus RE I 67,297,750 Shorenstein VIII 65,566,007 Value Enhmnt IV 61 ,059,766 Stag II 57,306,388 CIM URBAN REIT 55,644,473 Crow Holdings Realty IV 54 ,1 2 7,45 1 JER REP III 49,586,91 1 DRA Growth & Income IV 45,130,326 Sentinel Realty V 40,015,197 RLJ Fund II 39,918,699 Benson Elliot RE II 3 1 , 273,841 DB RE GLBL OPP IA 31,022,725 REIP ADVISORS MARKET AND FUNDS VALUE Rockpoint RE I 28,892,39 1 Shorenstein IX 26,451,707 Angelo Gordon Core Plus 26,324,076 Security Cap Focus Select 26,103,1 6 6 Penwood CSIP I 24,505,3 1 5 Angelo Gordon Core Plus II 23,902,01 8 DRA Fund V Co- Inv 22,2 1 3 ,508 FROGMORE RE 2 1 , 9 1 7, 3 3 1 Crossharbor Instl PT 2 1 ,777,000 Cherokee III 1 8 ,65 1 ,739 LEM RE Mezzanine II 16,329,436 Value Enhancement II 1 5 ,575,848 DRA Growth & Income VI 14,485,345 Crow Holdings Realty IV- A 13,508,209 CBRE Strategic V 12,130,000 RMK Emerging Timberland 11,827, 41 6 DLJ RECP IV 1 1 ,660,656 DLJ RECP II 10,999,922 DRA Growth & Income III 8,714,876 Westbrook RE IV 8,084,424 American Value Partners 5,591,458 Westbrook RE III 4,001 , 248 Westbrook RE II 3,070,544 Rockpoint RE III 2,070,590 Penwood PSIP II 1,372,269 DLJ RECP 426,659 CIGNA Open End Fund 295,296 Westbrook RE I 204,962 Hawkeye Scout I- A 1 5 2 ,1 4 1 Value Enchancmnt III - Cherokee IV - Crow Holdings Realty V - Keystone Industrial Fund II - NorthRock Core Fund - RLJ Urban Lodging I - RLJ RE Fund III - 46 Investment Management Division Alternatives As of June 30, 2008, the Alternative Investment Portfolio ( AIP) posted a market value of $ 3.5 billion, representing 4.8 percent of the Trust Fund’s assets. For the fiscal year 2008, the AIP returned 7.6 percent, net of fees, outperforming its custom benchmark return of - 1.0 percent. Over longer time periods, the AIP continues to add value to the Trust Fund by outperforming the custom alternatives benchmark on a one- , three-, five- and ten- year basis. 1 6 .00% 12.00% 8.00% 4.00% 0.00% - 4 .00% Alternative Investment Portfolio Annualized Performance Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year Alternative Investment Portfolio Custom Alternative Benchmark 1 1 .77% 8.83% 6.86% 7.46% 8.79% 7.60% 5.32% - 0.98% Structure The AIP has grown in recent years, starting with commitments of less than $ 50 million in 2001 and totaling approximately $ 3.5 billion at the end of the fiscal year. The AIP consists of actively managed Private Equity and Absolute Return Investments. Private Equity funds invest in interests of private corporations ( not listed on the stock exchanges). Absolute Return funds make investments by entering into commitments through specialized funds, such as hedge funds. AIP Structure Hedge Fund, 1 8 % Private Equity, 72% Hedge Fund Redemption, 1 0 % 47 Investment Management Division The hedge funds within the AIP can be categorized into various sub- strategies including event driven, relative value, hedged directional and tactical. Below is the allocation of the AIP’s hedge fund portfolio. While Absolute Return investments are capable of immediate positive returns, it should be noted that Private Equity investments are unlikely to provide positive returns in early years. Investment gains in Private Equity are typically realized in later years as assets of the fund mature and increase in value due to the efforts of the management company. The effect of this timing on fund returns is referred to as the “ J- Curve” effect. Specifically, the cost of management fees and write- downs of under- performing assets are borne by funds early, while the realization of gains comes with the eventual sale of assets after their value has increased. Private Equity investments may be categorized into various sub- strategies. The Trust Fund’s allocation to these sub- strategies is displayed below. Private Equity Sub- Strategy Allocation Venture Early, 1 2 % Distressed, 1 0 % Other, 1 0 % Co- Investment, 5% Large Buyout, 26% Venture Balanced, 5% Venture Late, 6% Small/ Mid Buyout, 22% Secondary, 4% Hedge Fund Sub- Strategy Allocation Event Driven, 32% Relative Value, 3 1 % Tactical, 8% Hedged Directional, 29% 48 Investment Management Division The heavier allocation to Private Equity investments greatly attributed to the outperformance of the total AIP. As illustrated below, the private equity portion of the AIP has posted strong performance relative to its custom benchmark. 20.00% 1 5 .00% 1 0.00% 5.00% 0.00% - 5 .00% Private Equity Annualized Performance Hedge Fund Annualized Performance Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year Total Private Equity Private Equity Custom Benchmark Fiscal 2008 Tr. 3 Year Tr. 5 Year Tr. 10 Year Total Hedge Fund Hedge Fund Custom Benchmark 17.22% 6.96% 11.25% 6.15% 14.59% 7.18% 6.42% 7.63% 12.92% - 0.93% - 3.56% 8.61% 8.27% 7.52% N. A. 7.63% 10.00% 8 .00% 6 .00% 4.00% 2 .00% 0.00% - 2.00% 49 Investment Management Division Private Equity Fiscal Year Activity During the fiscal year, the AIP increased from $ 2.2 billion to $ 3.5 billion. Based on the implementation of an independent asset optimization analysis, strategic targets for the AIP were increased to allow greater diversification within the Trust Fund. Though the AIP did not gain new fund relationships over 2008’ s fiscal year, the AIP did increase its allocation to hedge directional and tactical strategies. Alternative Market Fiscal Year Commentary For the fiscal year ending in 2008, the private equity market experienced a considerable retreat from its large wave of buyout deals and announcements through the first half of 2007. The credit crunch that effectively froze the means for private equity buyout strategies to borrow severely hindered their ability to invest. Venture capital firms had to turn away from searching for deals and focus on keeping their portfolio companies afloat during the economic slowdown. As mergers and acquisition activity slowed dramatically, limited partners have seen limited returns as exit opportunities are lessening. Buyout purchase multiples dropped significantly throughout the year as access to credit is considerably more difficult to achieve. The hedge fund industry has experienced one of the most challenging and volatile markets in recent years. The credit crunch and drastic change in lending restrictions ignited a rise in volatility and financial deleveraging. The most notable impact was in relative value arbitrage in which many hedge funds maintained significant exposure to subprime mortgages and were forced to liquidate a variety of portfolios to cover recalled capital and meet margin calls. This sell- off permeated much of the financial marketplace. However, numerous market dislocations provided attractive opportunities for many hedge fund strategies including tactical hedge funds using dynamic trading techniques. The following page contains a list of the AIP’s investment advisors and fund relationships as of June 30, 2008. 50 Investment Management Division Private Equity Advisors and Fund Relationships as of June 30, 2008 PRIVATE EQUITY MARKET FUNDS VALUE Credit Suisse NC Inv Fund 148,348,746 Apollo Investment Fund VI 120,977,999 TPG Partners V 1 1 8,250,502 Terra Firma III 109,8 1 5,204 TPG Partners IV 105,691 ,1 49 Terra Firma II 98,873,963 Parish Capital I 86,207,799 CVC Euro Eq IV 78,240,444 AG Cap Recovery VI 75,000,000 GSO Capital Opportunity 61,834,470 KRG Capital Fund III 60,1 0 6,787 Parish Cap Europe I 59,927,838 LG & Bessemer II 58,993,25 1 Lexington Mid Market 56,678,465 WLR Recovery Fund IV 56,529,49 1 Quintana Energy 55,792,68 1 Parish Capital II 55,245,085 Warburg Pincus IX 52,1 9 9,649 Warburg Pincus X 5 1 , 997,592 AG Global Strategy RE 51,250,000 Matlin Patterson Glob Opp III 50,1 6 8,787 Elevation Partners 48,277,667 Longreach Capital I 45,150,442 Sheridan Partners 44,426,652 Avista Capital Partners 44,2 1 0,769 Perseus Market Opportunity 40,931,099 Castle Harlan Partners IV 38,390,865 Francisco Partners II 37,843,499 Markstone Capital Partners 32,304,598 Chapter IV Spec Sits 31,290,980 Access Cap II 30,876,1 9 5 WLR AHM Co- Inv 28,086,407 Harvest Partners IV 24,7 10,5 1 5 Burrill Life Sciences 23,894,524 AG Cap Recovery V 22,946,878 Credit Suisse NC Inv 22,223,661 Quintana Energy I Co- Inv 20,699,624 Angeleno Inv II 17,392,208 TCV VI 17,383,964 TPG Biotech II 14,408,379 Ampersand 2006 13,649,227 Novak Biddle III 13,196,343 Horsley Bridge Int’l IV 13,154,434 PRIVATE EQUITY MARKET FUNDS VALUE Tudor Ventures III 12,824,373 PCA SYN Investments 1 1 , 679,567 Synergy Life Science 1 1 , 414,394 CVE Kauffman I 1 1 ,034,632 Perseus Partners VII 10,830,789 Carousel Capital III 10,783,068 Aurora Ventures IV 10,361,451 Lehman Bros V 10,359,126 Burrill Life Sciences III 9,007,962 Pappas Ventures III 8,387,407 Quaker Bioventures II 8,096,342 Highland Consumer I 7,162,779 Harvest Partners V 7,080,62 1 Novak Biddle IV 6,685,880 NCEF Liquidating Trust 6 ,1 47,1 9 2 KRG Capital Fund IV 5,382,530 Intersouth Partners VI 5,253,574 Highland Capital VII 5,219,166 WLR AGO Co- Inv 5,150,000 KRG Capital Fund II 5,125,474 Aurora Ventures V 4,495,970 Halifax Cap Partners II 3,710,310 AV Mgmt IV 3,488,146 Highland Capital VI 3,425,474 NC Economic Opp Fund 3 ,1 3 1 , 9 0 1 ARCH Fund VII 2,471,403 Pappas Ventures II 2,226,383 Hatteras Venture Partners III 2,122,064 Novak Biddle V 1,699,960 DLJ MB II 1,600,789 Horsley Bridge IX 1 ,1 57, 8 1 5 Franklin Fairview I 9 1 3 ,3 1 4 Academy Venture Fund 335,033 CIGNA Open End Fund 295,296 Harbourvest III 246,40 1 Sprout Growth II 2 1 1 , 992 Sprout Capital VI 101 , 560 Intersouth Partners III 97, 1 1 8 Kitty Hawk Capital III 53,910 Carolinas Capital – Castle Harlan Partners V – Crestview Partners Fund II – Pappas Ventures IV – 5 1 Investment Management Division HEDGE FUND ADVISORS AND FUNDS MARKET VALUE Franklin Street Partners 464,963,385 Quellos – CARS 424,097,466 AIG DKR Relative Value 49,784,306 Broyhill Fund 1 2 ,675,847 Taconic Opp Fund 256,5 1 9 Taconic Capital II – Hedge Fund Advisors and Funds as of June 30, 2008 52 Investment Management Division Ancillary Investment Programs Review MARKET PORTFOLIO TARGET VALUE WEIGHT WEIGHT Fixed Income $ 479,908,764 84.2% 80.0% Total Equity $ 41 , 3 96,027 7.3% 1 2 .0% Real Estate $ 23,699,437 4.2% 4.0% Alternatives $ 24,776,787 4.3% 4.0% TOTAL FUND $ 569,78 1 ,0 1 5 100.0% 100.0% Escheat Asset Allocation as of June 30, 2008 Escheats Allocation Short |
OCLC number | 37151920 |