State Treasurer's annual report to the people of North Carolina

              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