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

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Fiscal Year 2009-2010
The State Treasurer’s Annual Report
to the People of North Carolina
North Carolina
Department of
State Treasurer
State Treasurer
Janet Cowell
22
Dear Fellow Citizens:
As the 27th popularly-elected Treasurer of the State of North Carolina, I am pleased to provide you with the 2009-2010 Annual
Report, which summarizes key activities and outcomes for the Department of State Treasurer.
The 2009-2010 fiscal year was characterized by continued financial turbulence following the stock market crises of 2008.
Stock markets rebounded during the fiscal year, recovering some of the State pension fund value that was lost in 2008. Our
Investment team worked to navigate difficult financial markets by seeking and obtaining additional investment authority from the
General Assembly.
Our State and Local Government Finance Division staff worked with state and local governments to take advantage of the
American Reinvestment and Recovery Act (ARRA) or federal stimulus program. Some $1.3 billion of stimulus monies were
injected into the State’s economy since the inception of the program late in the 2009 fiscal year. This included $114 million
in Qualified School Construction Bonds, $80 million for Recovery Zone Facility Bonds, and $232 million for Recovery Zone
Economic Development Bonds. The State maintained its AAA bond rating by all three major bond rating houses during this time.
While busy managing external challenges, the Department staff still dedicated much time and effort to improving operations and
controlling risk within the Department. We established a number of new ethics rules, expanded our internal audit program, and
completed a fiduciary review of our Investment Division.
We also initiated innovative new programs such as the Innovation Fund, a $230 million fund dedicated to investing in businesses
with a base in North Carolina. The Innovation Fund must achieve a market, risk-adjusted rate of return in order to fulfill our
fiduciary responsibility to pensioners and the State, but we also saw the opportunity to earn good returns by investing in
growing businesses within our State.
I recognize the tremendous responsibility vested in me as State Treasurer, and am grateful to the citizens of this state for placing
their trust and confidence in me. I am also grateful to the many financial and other expert partners who helped me and my staff
execute our responsibilities. Last, but not least, I am thankful for the professional staff within the Department of State Treasurer
that are dedicated to public service.
Thank you for your interest in the Department of the State Treasurer and for taking the time to read our Annual Report. I look
forward to working with you to maintain a fiscally sound and prosperous North Carolina.
Sincerely,
Janet Cowell
North Carolina State Treasurer
325 NORTH SALISBURY STREET, RALEIGH, NORTH CAROLINA 27603-1385 n (919) 508-5176 n FAX (919) 508-5167
WWW.NCTREASURER.COM
Table of Contents
Treasurer’s Letter . .2
Table of Contents . .3
Introduction . 7
Statistics . .8
Protecting the Pension Fund . .9
Maintaining the State’s AAA Bond Rating . .9
Ensuring Transparency, Ethics, and Accountability . .10
Increasing Customer Service . .10
Increasing Operational Efficiencies and Improving Risk Management . .11
Contributing to State Innovation and Economic Development . .11
Advancing Financial Literacy . .11
Retirement Systems Division . .12
Statistics . .13
Overview of the Retirement Systems Division . .14
History of North Carolina Retirement Systems . .15
The Basic Functions . .16
Retirement Systems’ Boards of Trustees Structure . .17
Division Structure . .18
	 Director’s Office . .18
	 Accounting Section . .18
	 Benefits Processing Section . .18
	 Member Services Section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
	 Records Section . .19
	 Retirement Processing Section . .19
Funding the Systems . .20
	 Actuarial Valuation . .20
	 Actuarial Assumptions . .20
	 Funding of the Systems . .21
	 Funding Status of the Systems . .21
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The Systems and Plans . .22
	 Teachers’ and State Employees’ Retirement System of North Carolina . .22
	 Local Governmental Employees’ Retirement System of North Carolina . .23
	 Consolidated Judicial Retirement System of North Carolina . .24
	 Legislative Retirement System . .25
	 Supplemental Retirement Income Plan of North Carolina (401(k) Plan) . .26
	 The North Carolina Public Employee Deferred Compensation Plan . .27
	 Teachers’ and State Employees’ Benefit Trust . .28
	 Firemen’s and Rescue Squad Workers’ Pension Fund . .29
	 Retirees’ Health Premiums Funds . .30
	 Legislative Retirement Fund . .30
	 Disability Income Plan . .30
	 Public Employees’ Social Security Agency . .31
	 National Guard Pension Plan . .31
	 Registers of Deeds’ Supplemental Pension Fund . .31
The Year’s Highlights . .32
	 Established the Future of Retirement Study Commission . .32
	 Increased Membership in NC 401(k)/NC 457 Plans . .32
	 Legislation . .32
Communications . .32
Investment Management Division . .33
Investment Management Division Statistics . .34
Overview of Investment Management Division . .35
Cash Management Program Review . .36
	 Short-Term Investment Fund . .36
	 STIF Top Ten Positions as of June 30, 2010 . .38
	 STIF Summary of Brokers Utilized During Fiscal Year 2009 - 2010 . .38
Pension Fund Investment Program Review . .39
	 Operating Policy . .39
	 Pension Fund Strategy . .40
	 National Average Returns and Exposure to Risk . .40
	 Fiscal Year Review . .40
	 Total Pension Fund Structure . .41
	 Current and Historical Strategic Targets . .41
	 Total Fund Performance . .42
Corporate Governance . .44
	 Financial Regulatory Reform . 44
Diversity . 44
	 Company Engagement – Massey Energy . 44
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Fixed Income . .45
	 Core Fixed Income Structure . .45
	 Fixed Income Market Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
	 Core Fixed Income Performance . .47
	 Non-Core Fixed Income Structure . .47
	 Non-Core Fixed Income Performance . .47
Global Equity . .48
	 Global Equity Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
	 Global Equity Market Overview . .50
	 Global Equity Performance . .50
	 Global Equity Portfolio Investment Advisors . .51
	 Non-U.S. Global Equity Portfolio Investment Advisors . .52
Hedged Strategies
	 Hedged Strategies Structure . .53
	 Hedged Strategies Performance . .54
	 Hedged Strategies Investment Advisors . .54
Real Estate . .55
	 Real Estate Structure . .55
	 Real Estate Market Overview . .57
	 Real Estate Performance . .58
	 Real Estate Investment Advisors . .59
Private Equity . .60
	 Private Equity Structure . .60
	 Private Equity Market Overview . .61
	 Private Equity Performance . .61
	 Private Equity Investment Advisors . .62
Credit Strategies . .63
	 Credit Structure . .63
	 Credit Market Overview . .63
	 Credit Strategies Performance . .63
	 Credit Strategies Investment Advisors .63
Inflation Protection Portfolio . .64
	 Inflation Protection Structure . .64
	 Inflation Market Overview . .64
	 Inflation Protection Portfolio Performance . .64
	 Inflation Protection Portfolio Investment Advisors .64
Ancillary Investment Programs Review . .65
	 Escheat Investment Program . .65
UNC and Public Hospitals . .66
Other Post-Employment Benefits Fund .67
	 Other Non-Pension Long-Term Investment Portfolio Participants . .67
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State & Local Government Finance Division . .68
State & Local Government Finance Division Statistics . .69
State & Local Government Finance Division Overview . .70
The Local Government Commission . .70
The North Carolina Capital Facilities Finance Agency . .70
The North Carolina Infrastructure Finance Corporation . .70
Debt Management . .71
Fiscal Management . .74
Outreach and Communication . .75
Other Highlights . .76
	 Federal Stimulus Legislation and Bonds . .76
	 Fiscal Analysis Dashboard Project . .76
	 Interest Rate Swaps & Variable Rate Markets . .76
Unclaimed Property and Escheats Division . .79
Unclaimed Property and Escheats Division Statistics . .80
Unclaimed Property and Escheats Division Overview . .81
Unclaimed Property Facts . .82
Financial Operations Division . .83
Financial Operations Division Statistics . .84
Financial Operations Division Overview . .85
History of Financial Operations . .85
Banking Operations . .86
Bank Reconciliation Unit . .86
Statewide Accounting Operations . .86
Departmental Accounting . .86
The Year’s Highlights . .86
Statistical Tables . .87
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Introduction
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The vision of the North Carolina Department of State Treasurer is to create and maintain a fiscally sound and economically
prosperous North Carolina. The Department of State Treasurer has broad state financial authority with which to achieve this
vision. The following table details key responsibilities and Divisions within the Department responsible for carrying them out.
Introduction
Key Responsibilities Division with the Department of State Treasurer
Act as fiscal advisor to the State and local governments All divisions
Administer retirement plans and other benefit programs
for public employees Retirement Systems Division (RSD)
Invest and oversee short-term funds for government
entities and long-term funds primarily for the pension fund Investment Management Division (IMD)
Oversee local government finance, manage state and local
debt issuance, and interface with bond rating agencies State and Local Government Finance Division (SLGFD)
Operate the State Bank and provide internal accounting and
financial reporting Financial Operations Division (FOD)
Manage Unclaimed Property Program Unclaimed Property Division (UPP)
At the heart of the Department’s work are its core values,
which are implemented consistently at all levels and
across all Divisions. These include:
n Accountability
n Customer service
n Diversity
n Expertise
n Integrity and ethics
n A long-term view
In the interest of promoting these core values, the
Department identified its highest priorities and outlined
detailed plans for their achievement. The Department took
decisive steps toward accomplishing these goals during
the 2009-2010 fiscal year, and continues to incorporate
them into its work for the State of North Carolina.
n Protecting the pension fund
n Maintaining the State’s AAA bond rating
n Ensuring transparency, ethics, and accountability
n Increasing customer service
n Increasing operational efficiencies and improving risk
management
n Contributing to State innovation and economic
development
n Advancing financial literacy across North Carolina
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Protecting the Pension Fund
One of the primary responsibilities of the Department of
State Treasurer is to administer the retirement plans for
North Carolina’s 820,000 public employees, including
teachers, police officers, firefighters, and public servants
from all over the state.
The North Carolina pension fund is conservatively invested
for the long term. This keeps our State prepared to pay out
obligatory pension benefits.
Below are a few of the initiatives undertaken during the
fiscal year to help ensure the fiscal health of our pension
fund.
n Expanded the Investment Advisory Committee (IAC) from
five to seven members, increasing the financial expertise
available to the Treasurer for investment decisions. The
Department also established a new charter and code of
ethics for the IAC to preserve integrity and maintain high
ethical standards in conducting business.
n Released the findings of a year-long fiduciary review
conducted by EnnisKnupp, a consulting firm, designed
to analyze and make recommendations to improve
investment operations and strategy. Recommendations
included filling vacant positions, including the Chief
Investment Officer, and hiring an internal auditor and risk
manager to better asses and manage risk.
n Sought and gained additional investment flexibility during
the 2009-2010 legislative session, creating the credit and
inflation asset allocations within the portfolio.
n Convened the Future of Retirement Study Commission,
a diverse group of citizens and experts dedicated to
evaluating the retirement benefit design for future North
Carolina state and local government employees.
Maintaining the State’s AAA Bond
Rating
A triple-A bond rating indicates that North Carolina has
followed well-defined financial management policies
and demonstrated strong debt management practices.
Standard and Poor’s, Moody’s Investors Service, and
Fitch Ratings – the three primary bond rating agencies
– all reaffirmed the “AAA” rating for North Carolina in
the 2009–2010 fiscal year. North Carolina remains one
of only seven states to enjoy top-tier rankings from all
three of the rating agencies.
While maintaining this strong rating is a good sign of
the State’s fiscal health, it will be a challenge to sustain
the triple-A rating as we face substantial budget deficits
following the economic recession. Bond ratings are
dependent on the economic stability and diversity of
revenues, debt management practices, reserve levels,
and funding of long-term benefit programs such as the
retirement systems and health care.
Below are a few of the achievements in maintaining the
triple-A bond rating:
n Oversaw the issuance of $6.5 billion in local debt
($4.9 billion in 2009), $2.5 billion in revenue bonds for
special State and Local Authorities and Agencies ($2.5
billion in 2009), and $1.73 billion in State debt ($600
million in 2009).
n Released 2010 Debt Affordability Study, which
provides the Governor and General Assembly with a
basis for assessing the impact of future debt issuance
on the State’s fiscal position as well as enabling
informed decision-making regarding both financing
proposals and capital spending priorities.
n In conjunction with UNC School of Government,
began development of a free, web-based County
and Municipal Fiscal Analysis tool to enable finance
officers, public officials, and citizens to better
understand the fiscal health of North Carolina’s cities,
towns, and counties.
Introduction
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Ensuring Transparency, Ethics, and
Accountability
Access to government meetings and documents is
enshrined in the State’s constitution and is one of the
pillars of a strong democracy.
In the interest of promoting ethics and transparency,
the Department aims to institute and comply
with transparent and ethical practices, increase
accountability through performance measurement/
management, reduce the risk of fraud and abuse in all
Department activities, and strengthen board oversight.
During the fiscal year, the Department introduced a
number of reforms:
n Implemented reforms and policies to: create
safeguards against misuse of insider information;
provided employees with guidelines for reporting
unethical or improper government activities; outlined
restrictions during the procurement process when
firms are bidding on contracts with the Department;
outlined restrictions on soliciting charitable
contributions; and put into place a Department-wide
gift ban.
n Began process of replacing Internet and Intranet
infrastructure to support transparency as well as
centralize electronic document management for the
Department.
Increasing Customer Service
Customer service is included in the list of core values
for the Department and continuous improvement of
customer service is a strategic goal. In 2010–2012,
we will be improving technology for self-service,
responsiveness, and quality, as well as processes that
aim to provide each North Carolina citizen time savings
and solid customer service when accessing or inquiring
about Department of State Treasurer services.
The Department introduced the following initiatives to
improve customer service:
n Improved self-service capabilities in the Online
Retirement Benefits through Integrated Technology
portal (ORBIT), allowing retirement plan members to
access information and conduct business 24 hours
a day.
n Sought and achieved the passage of legislation to
regulate businesses and individuals that charge
consumers for retrieving unclaimed property being
held by the State. The law, passed in July 2009,
protects consumers from being charged unfair fees for
services provided free of charge by the Department’s
Unclaimed Property Division.
n Began a full Internet redesign project to offer wider
range of services, improve customer experience, and
support call center.
Introduction
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Increasing Operational Efficiencies and
Improving Risk Management
The Department of State Treasurer is consistently
looking for ways to increase efficiencies and reduce
risks. We assessed and identified operational areas
for efficiency gains in 2009-2010. As a result,
we implemented new technologies, as well as
improvements in personnel and project management,
that will produce time and cost savings for the
Department while allowing us to maintain a high level
of service to the citizens of North Carolina.
In the interest of boosting operational efficiency, the
Department took the following steps:
n Centralized core functions, including Internal Audit,
Communications, Legal, Training, and Human
Resources staff to provide a more consistent level
of support.
n Negotiated investment manager fee reductions
that resulted in an annual cost savings of millions of
dollars for North Carolina’s pension fund. The request
for lower fees was the result of a fiduciary review of
the Investment Management Division conducted by
EnnisKnupp.
Contributing to State Innovation and
Economic Development
Treasurer Cowell recognizes the importance of
economic development in building and maintaining a
financially strong and prosperous North Carolina.
In order to encourage innovation and economic
development throughout North Carolina, the
Department:
n Created a $230 million North Carolina Innovation Fund
to support and invest in businesses with significant
operations in the State while maintaining a market
rate of return consistent with the overall fiduciary
responsibilities of the Department. The Treasurer
spoke about the Fund to over 40 companies at CED’s
Venture conference in Pinehurst in April.
n Established Diversity Council to promote diversity in
race, culture, and ideas throughout the Department.
The Council seeks to recruit and retain ethnic
minorities for employment and internships, as well as
ensure that diverse perspectives are considered in
Departmental decision-making.
Advancing Financial Literacy
The Department of State Treasurer is committed
to helping North Carolinians’ families increase their
understanding of finances and ability to grow personal
wealth. Financial literacy helps provide citizens of all
ages with the information and resources to manage
their finances and make important financial decisions.
Below are a few of the efforts that we engaged in during
the 2009-2010 fiscal year.
n Embarked on Student Debt Tour to educate college
students throughout North Carolina on credit card use
and student debt.
n Hosted North Carolina bus tour to provide citizens
in Raleigh and Greensboro one-on-one consultation
with financial advisors to discuss budgeting, saving,
reducing debt, investing, and other financial topics.
n Participated in the Military Saves Month financial fair
to encourage military personnel and their spouses
to save money, reduce debt, and focus on building
wealth over time. At the fair, the Treasurer also
promoted several programs that can help military
families with tax preparation, debt assistance,
budgeting, and financial crisis management.
n In partnership with State Superintendent of Public
Instruction June Atkinson, conducted a School
Financial Literacy Tour to promote financial literacy
education in elementary and high schools throughout
the state.
n Launched a Financial Literacy Tour for local
government officials across North Carolina. During the
tour, the Treasurer discussed the need for Financial
Literacy in the workplace, resources offered by
the Department, and ways to enhance employee
preparation for retirement.
Introduction
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Retirement Systems Division
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Retirement Systems Division
2007-2008 2008-2009 2009-2010
Amount Delivered to Retirees $3.7 billion $3.9 billion $4.2 billion
Number of Retirees Receiving Benefits 211,000 220,000 229,000
Average Hold Times for RSD Call Center 5:27 minutes 2:16 minutes 1:20 minutes
(327 seconds) (136 seconds) (80 seconds)
Number of New Retirements Processed During the Year 13,009 14,318 13,472
Number of 401(k) Plan Members 213,400 217,847 221,052
Number of 457 Plan Members 29,968 29,155 30,692
Retirement Systems Divisions Statistics
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The Retirement Systems Division (RSD) of the Department
of State Treasurer administers the retirement and benefit
plans that cover public employees in the State.
The North Carolina public pensions include more than
820,000 North Carolinians, including:
n Teachers
n State employees
n Firefighters
n Police officers
n Other public workers
The North Carolina Retirement Systems (Systems) is the
32nd largest in the world and the 10th largest pension fund
in the U.S.
RSD manages the flow of funds in and out of the systems,
for the employees’ trust funds. Staff continuously reviews
features and options within the defined benefit programs
to ensure that plans and benefits are sustainable over
time and are an efficient use of employees’ and taxpayers’
contributions. RSD also administers benefit plans including
the NC 401(k) and Deferred Compensation (457) Plans,
Disability, Death and certain benefits unique to law
enforcement officers.
A key purpose of the retirement systems and benefit plans
is to assist the State in recruiting and retaining skilled
employees for careers in public service by providing
valuable post-employment benefits, including replacement
income at retirement, as well as disability or survivor
benefits.
The Systems’ assets, referred to as the North Carolina
Pension Fund, were valued at $66.4 billion at the end of
the 2009 calendar year, an increase of $6.6 billion from the
previous fiscal year.
Retirement Systems Division
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Retirement Systems Division
History of North Carolina Retirement
Systems
The North Carolina Retirement Systems Division was
established in 1941. Prior to establishing RSD, the only
pension system that was established in the State was for
Confederate soldiers.
The first pension law went into effect in 1885 and granted
a pension of $30 annually to Confederate veterans who
were unable to work due to the loss of an eye, leg, or arm.
These benefits were also available to soldiers’ widows as
long as they did not remarry. The system expanded later
in 1885 to include widows of soldiers who had died of
disease while in active service.
By 1901 the pension became available to all widows,
soldiers, and sailors who were unable to perform manual
labor due to injuries sustained while serving on behalf of
the State of North Carolina or the Confederate States of
America. Pension benefits to members of the Confederate
military were:
n First class: totally disabled – $72 annually
n Second class: loss of leg or arm – $60 annually
n Third class: loss of hand or foot – $48 annually
n Fourth class: widows, those who had lost an eye, and
those who were disabled due to other wounds not
classified in the prior categories – $30 annually
In 1927, pensioners were reclassified to include slaves that
had been servants to soldiers or slaves that had served in a
role for soldier support.
Today, public pensions have expanded to include many
more North Carolinians under the management of the
Department of the State Treasurer. More currently:
n In 1939, the Local Governmental Employees’ Retirement
System was established. The System framework was
in place; however, the System did not begin acquiring
members until 1945.
n In 1941, the Teachers’ and State Employees’ Retirement
System was established. Parts of the Division were
under the State Auditor, and parts were under the State
Treasurer.
n In the 1970s, the General Assembly created the Disability
Salary Continuation Program for members of the
Teachers’ and State Employees’ Retirement System. The
program designed as a temporary disability program was
discontinued, and reestablished in 1988 as two separate
programs, one for LGERS members and one for TSERS
members.
Today, the Retirement Systems also processes death
benefits and return of contributions to its members, far
beyond the services provided in the late 1800s.
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The Basic Functions
The Retirement Systems administers four major retirement systems and 11 smaller systems and pension funds:
Retirement Systems Division
System No. of Members Value
Teachers’ and State Employees’ Retirement System (TSERS) 577,845 $50.3 billion
Local Governmental Employees’ Retirement System (LGERS) 208,031 $16.1 billion
Consolidated Judicial Retirement System (CJRS) 1,140 $398 million
Legislative Retirement System (LRS) 522 $27 million
Firemen’s and Rescue Squad Workers’ Pension Fund 49,903 $284 million*
National Guard Pension Plan 14,505 $74 million
Legislative Retirement Fund 522 N/A
Registers of Deeds’ Supplemental Pension Fund 184 $38 million
* Population as of June 30, 2010, all other values as of December 31, 2009.
The Division also offers a number of supplemental plans and benefit programs:
Program/Plan Service
Disability Income Plan  Provides equitable replacement income for eligible members
temporarily or permanently disabled
Public Employees’ Social Security Agency  Administers the State’s responsibility under the Social Security
Agreement of July 16, 1951
Teachers’ and State Employees’ Benefit Trust  Provides group death benefits for members of TSERS and
LGERS. The Trust also includes the Separate Insurance
Benefits Plan for state and local governmental law
enforcement officers.
Supplemental Retirement Income Plan – NC 401(k)  Provides members with voluntary savings/investment
program to supplement retirement income
Public Employee Deferred Compensation Plan – NC 457  Provides members with voluntary tax-deferred savings/
investment program to supplement retirement income
Contributory Death Benefit for Retired Members  Offers an optional benefit that gives retirees a one-time death
benefit, up to the amount of $10,000
Supplemental Insurance  Provides retired members with optional supplemental
insurance, i.e., dental, vision or life
Health Trust Fund  Managed trust fund for retired members who receive health
insurance through the State Health Plan of North Carolina
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Retirement Systems’ Boards of Trustees Structure
The four largest systems and the Supplemental Retirement Plans are overseen by boards that maintain the administration and
responsibility for the proper operation of each system or plan. Below are the responsibilities and structures of each.
Retirement Systems Division
State Treasurer
is ex-officio
chairperson
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
Teachers’ and
State Employees’
Retirement System
Board of Trustees
Local Governmental
Employees’
Retirement System
Board of Trustees
Firemen’s and
Rescue Squad
Workers’ Pension
Fund
Consolidated
Judicial Retirement
System and
the Legislative
Retirement System
Supplemental
Retirement
State Treasurer
is ex-officio
chairperson
14 members,
including the
same seven
ex-officio or public
Teachers’ and
State Employees’
Retirement
System Board
members, plus
seven members
representing local
governments
State Treasurer
is ex-officio
chairperson
Five members,
including actively
working employees,
volunteers, and
a member of the
public
State Treasurer
is ex-officio
chairperson
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. CJRS and
LRS topics are
included during the
TSERS and LGERS
Board of Trustees
meetings
State Treasurer
is ex-officio
chairperson
Nine members,
including six
members appointed
by the Governor
(experience in
finance and
investments; One
shall be a State
employee), one
member appointed
by the General
Assembly upon
recommendation
of the Speaker
of the House of
Representatives,
one member
appointed by
the General
Assembly upon
recommendation
of the President
Pro Tempore of the
Senate
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Division Structure
Staff efforts are devoted to accurate and timely benefit
distribution in the most efficient and cost-effective manner
possible. In order to optimize its administration efforts, the
Retirement Systems Division is divided into six working
groups:
n The Director’s Office
n The Accounting Section
n The Benefits Processing Section
n The Member Services Section
n The Records Section
n The Retirement Section
Director’s Office
The Systems Director and his 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 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 overall Division operations include processing
applications for retirement; processing applications to
receive benefits such as contribution refunds, disability or
death benefits; maintaining retirement accounts and data;
and providing customer service to all active and retired
employees.
Accounting Section
The mission of the Accounting 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 Systems and receiving and processing
payroll contribution reports from more than 1,200
participating State and local units of government. This
Section is also responsible for the distribution of retiree,
disability, and beneficiary monthly payrolls.
During the 2009 – 2010 fiscal year, the Accounting Section:
n Processed and balanced contribution information from
employers’ payroll reports submitted each month to
individual accounts in ORBIT. The employer payroll
information identifies the 6 percent each employee
contributes to their retirement every pay period. By the
end of the fiscal year, 420,318 members’ accounts were
posted.
n Enrolled 39,678 new members during the fiscal year
n Distributed a total of $4.2 billion in benefits for the
fiscal year
Benefits Processing Section
The mission of the Benefits Processing Section is to ensure
prompt delivery of contribution refunds, disability and death
benefits to employees, retirees and their beneficiaries in an
effective and efficient manner.
Staff in this section is responsible for the calculation and
the payment of returns of accumulated contributions,
known as refunds, to terminated employees. Members
who terminate employment with their public sector
employer can apply to have their 6 percent of contributions
made to the Retirement System refunded 60 days after
termination of employment.
The Benefits Processing Section also manages the various
death benefit programs related to the Systems and the
Separate Insurance Benefits Fund. Responsibilities include
the calculation and payment of death benefits, survivors’
alternate benefits, and other lump sum payments.
The staff works closely with the Retirement System’s
Medical Review Board to:
n Determine and administer disability benefits under the
provisions of the Disability Income Plan for teachers and
State employees
n Determine eligibility for disability benefits from the other
retirement systems
Retirement Systems Division
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Additional 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.
For the period of July 2009 through June 2010, the
Benefits Processing Section processed:
n 2,619 short-term disability reimbursements to employers
totaling $22,802,786
n 6,781 death notifications
n 15,899 payments for return of accumulated contributions,
known as refunds, to terminated employees
n 3,185 new disability applications to the medical board, a
9 percent increase from the previous fiscal year
n 1,719 re-examinations for determination of continued
disability benefits by the medical board
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 and face-to-face inquiries with members and
employers participating in the Systems and other benefit
programs. The staff responds to a large number of
questions about benefits.
Accordingly, during the 2009 – 2010 fiscal year, Member
Services:
n Responded to 17,669 letters, e-mails, and faxes
n Answered 256,281 telephone calls through the Call
Center, with an average hold time of 1.20 minutes, down
.50 minutes from the previous fiscal year. The improved
customer service represents a 38 percent decrease in
hold-time for the average caller.
n Met with 3,148 members in the Visitors’ Office
n Conducted more than 180 retirement planning
conferences reaching over 10,500 members
n Provided 18 employer education seminars, many of
which included a newly developed employer disability
curriculum
n Enrolled local government employers with 261 new
members 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 was primarily responsible for:
n Processing 80,800 membership support documents, a
21 percent increase over last fiscal year
n Processing 46,917 new beneficiary designation forms
n Electronic distribution of more than 790,000 pages to
operational staff
n The creation, maintenance and storage of electronic
files for individuals who are currently, or have been at
one time, members of any of the State-administered
retirement systems
n Maintaining 19.2 million documents in an electronic
document imaging system
Retirement Processing Section
The mission of the Retirement Processing Section is to
process applications for benefits in a prompt, accurate and
efficient manner.
This Retirement Processing Section is responsible for:
n Determining eligibility for monthly retirement allowances
n Processing payment of benefits for all retirement systems
governed by the boards of trustees and administered by
this Department
n Performing service credit purchase cost calculations for
the various retirement systems
For the period July 2009 through June 2010, the
Retirement Processing Section:
n Set up 13,472 new retirements for payment, a 15 percent
increase from the previous fiscal year
n Calculated 5,762 service purchase cost calculations
with a 53 percent improvement in processing time and
a corresponding 15 percent decrease in the volume of
requests for manual cost calculations
n Estimated 6,606 benefits with a 21 percent improvement
in processing time
n Monitored more than 338,898 benefit estimates through
the online Benefits Estimators on the Department of
State Treasurer’s website, and in the members’ personal
ORBIT accounts. This represents a 51 percent increase
from the previous fiscal year. Despite the use of the
online estimator, requests for manually calculated benefit
estimates continued to increase by 19 percent from the
previous year.
Retirement Systems Division
20
Funding the Systems
Actuarial Valuation
An actuarial valuation is prepared by an actuary to assess
the funding progress of each 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 the active (both
in-service and terminated) members and all the retired
members and other beneficiaries who are receiving benefit
payments. 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 also is 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
Actuarial assumptions are estimates made for the
purposes of calculating benefits. Possible variables include
life expectancy, return on investments, interest rates,
and compensation. By calculating the possible payout
of benefits, the actuary can determine what premium to
charge and what amount the insurance company should
set aside as readily available cash or liquid securities.
Retirement Systems Division
n Economic assumptions
used for the actuarial
valuation of all
retirement systems
based on an interest
rate of 7.25 percent per
year.
n Average rates of salary
increase of about
5 percent per year,
based on inflation
assumptions, varying at
different ages.
n Assumed rates for
mortality, withdrawals,
disabilities, and service
retirements based on
actual past experience
and projected future
changes.
Economic
Assumptions
Asset
Valuation
Normal Contribution
Percentage Rate
Experienced Gains
and Losses
n Asset valuation: 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.
n Normal contribution
percentage rate
under the entry age
normal cost method is
calculated on the basis
of the adopted actuarial
assumptions as the
level percentage of the
compensation of the
average new member.
n If contributed
throughout the entire
period of active service,
then this would be
sufficient, together
with contributions, to
support all the benefits
payable on an account.
n Accrued liability is the
difference between
total liabilities and
the present value of
future normal cost
contributions and
the members’ future
contributions.
n TSERS: Experienced
gains and losses are
reflected in the amount
of the unfunded
accrued liability and
thereby affect the period
of liquidation.
n LGERS: Experienced
gains and losses are
reflected in the normal
contribution rate.
n CJRS and LRS:
are funded on a full
actuarial reserve basis
but use the projected
unit credit cost method
with unfunded accrued
liability as the actuarial
cost approach.
21
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
were actuarially calculated for the year ending June 30,
2010. As of July 1, 2010, only the Local Governmental
Employees’ Retirement System, Legislative Retirement
System, and Registers of Deeds’ Supplemental Pension
Fund have actuarially calculated employer contribution
rates. The rates for all other systems are set by the General
Assembly at a rate below the actuarially calculated rate.
Funding Status of the 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 have
a high funded status relative to other public pension funds.
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.
The annual actuarial study of the Teachers’ and State
Employees’ Retirement System (TSERS) reports a funding
status of 95.9 percent. The annual actuarial study is based
on data collected through December 31, 2009 and, as
expected, shows a drop from the previously reported
status of 99 percent.
Even if we achieve investment target returns as the
economy recovers, the funding status will continue to
decline as losses from the 2008 downturn are distributed
over the next several years and as contributions continue
to fall short of the actuarial requirement. If funding
contributions are met, funding status will fall to 90 percent.
Though TSERS has fallen below a fully funded status, it
continues to rank within the top five systems nationally.
Retirement Systems Division
Chart 1: Funded Ratio of the Retirement Systems
2000 – 112.8%
2001 – 111.6%
2002 – 108.4%
2003 – 108.1%
2004 – 108.1%
2005 – 106.5%
2006 – 106.1%
2007 – 104.7%
2008 – 99.3%
2009 – 95.9%
Teachers’ and State
Employees’ Retirement
System
Local Governmental
Employees’ Retirement
System
Consolidated Judicial
Retirement System
2000 – 99.3%
2001 – 99.3%
2002 – 99.4%
2003 – 99.3%
2004 – 99.3%
2005 – 99.4%
2006 – 99.5%
2007 – 99.5%
2008 – 99.6%
2009 – 99.5%
2000 – 108.4%
2001 – 108.9%
2002 – 107.4%
2003 – 107.6%
2004 – 108.6%
2005 – 107.6%
2006 – 107.3%
2007 – 102.9%
2008 – 98.1%
2009 – 92.6%
22
The Systems and Plans
Teachers’ and State Employees’ Retirement
System of North Carolina
N.C.G.S. 135-1 through 135-1 8.5
The Teachers’ and State Employees’ Retirement System
(TSERS) provides benefits to all full-time teachers and
State employees in all public school systems, universities,
departments, institutions, and agencies of the State.
TSERS 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.
TSERS membership at December 31, 2009
Active Members 323,580
Inactive Members 97,474
Retired Members and Beneficiaries
of Deceased Members 156,791
Invested assets at market value amounted to $50.3
billion. For more information about investments for the
NC Retirement Systems, please see the Investments
Management Division section of this Annual Report.
Operations of TSERS during calendar year 2009
resulted in:
n Total receipts of $7,972,020,894
n Total expenditures of $3,218,782,378
The latest Actuary’s Valuation Balance Sheet for TSERS,
as of December 31, 2009, is shown in Table T10 in the
Statistical Tables Section. Based on the latest actuary’s
report, the General Assembly set the employer contribution
rate at 3.57 percent of covered payroll, effective July 1,
2009, and at 4.93 percent of covered payroll, effective July
1, 2010. 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, 2010, the
remaining accrued liability for past service.
Retirement Systems Division
Chart 2: Teachers’ and State Employees’ Retirement System of North Carolina
Year Ended December 31, 2009
Sources of Funds
Employee Contributions $ 846,000,000 10.61%
Employer Contributions $ 491,000,000 6.17%
Other Income* $ 1,600,000 .02%
Investment Income $ 6,632,000,000 83.20%
Applications of Funds
Retiree Benefits $ 3,137,900,000 39.36%
Refunds** $ 68,900,000 .86%
Administrative Expenses $ 11,700,000 .15%
Other Expenses*** $ 174,000 .01%
Addition to Reserves for Future Benefits $ 4,753,200,000 59.62%
* Includes Miscellaneous Income and Restore Inactive Accounts
** Return of contributions
*** Transfer to Restore Inactive Accounts
23
Local Governmental Employees’ Retirement
System of North Carolina
N.C.G.S. 128-21 through 128-38
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, 2009, a total of 884 cities, towns, counties, and local
commissions were participating in LGERS.
LGERS began operations in 1945 with 18 participating
local governments, 2,102 members and assets of
$178,053.
LGERS membership at December 31, 2009
Active Members 123,398
Inactive Members 38,076
Retired Members and Beneficiaries
of Deceased Members 46,557
Invested assets at market value amounted to $16.1
billion. For more information about investments for the
NC Retirement Systems, please see the Investments
Management Division section of this report.
Operations of LGERS during the calendar year 2009
resulted in:
n Total receipts of $2,721,137,343
n Total expenditures of $823,054,745
The latest Actuary’s Valuation Balance Sheet for LGERS,
as of December 31, 2009, is shown in Table T11 in the
Statistical Tables Section. Based on the actuary’s latest
report, the Board of Trustees set the employer normal
contribution rate at 6.35 percent of covered payroll for
general employees and at 6.82 percent of covered payroll
for law enforcement officers, effective July 1, 2010. 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.
Retirement Systems Division
Chart 3: Local Governmental Employees’ Retirement System of North Carolina
Year Ended December 31, 2009
Sources of Funds
Employee Contributions $ 330,900,000 12.16%
Employer Contributions $ 274,300,000 10.08%
Other Income* $ 4,700,000 .17%
Investment Income $ 2,111,000,000 77.58%
Applications of Funds
Retiree Benefits $ 778,900,000 28.63%
Refunds** $ 39,000,000 1.44%
Administrative Expenses $ 4,900,000 .18%
Other Expenses*** $ 36,000 –
Addition to Reserves for Future Benefits $ 1,898,000,000 69.75%
* Fee, Licenses and Fines Court Costs, Miscellaneous Income and Restore Inactive Accounts
** Return of contributions
*** Transfer to Restore Inactive Accounts
24
Consolidated Judicial Retirement System of
North Carolina
N.C.G.S. 135-50 through 135-72
The Consolidated Judicial Retirement System (Judicial
System) was created by the 1983 session (Regular
Session, 1984) of the General Assembly, effective January
1, 1985. The Judicial 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.
CJRS membership at December 31, 2009
Active Members 559
Inactive Members 52
Retired Members and Beneficiaries
of Deceased Members 529
The invested assets at market value were about $398
million. For more information about investments for the
NC Retirement Systems, please see the Investments
Management Division section of this report.
Operations of the Judicial System during the calendar year
2009 resulted in:
n Total receipts of $67,281,020
n Total expenditures of $29,129,744
The latest Actuary’s Valuation Balance Sheet for the
Judicial System, as of December 31, 2009, is shown
in Table T12 in the Statistical Tables Section. Based on
the actuary’s latest report, the General Assembly set the
employer contribution rate at 15.11 percent of covered
members’ payroll, effective July 1, 2010. On this basis, the
total number of member and employer rates of contribution
is adequate to fund all future benefits presently authorized
based on current service.
Retirement Systems Division
Chart 4: Consolidated Judicial Retirement System of North Carolina
Year Ended December 31, 2009
Sources of Funds
Employee Contributions $ 4,800,000 7.19%
Employer Contributions $ 9,900,000 14.76%
Other Income* $ 1,000 –
Investment Income $ 52,500,000 78.05%
Applications of Funds
Retiree Benefits $ 28,900,000 43.07%
Refunds $ 114,000 .17%
Administrative Expenses $ 34,000 .06%
Other Expenses $ 0 –
Addition to Reserves for Future Benefits $ 38,100,000 56.70%
* Miscellaneous Income
25
Legislative Retirement System
N.C.G.S. 120-4.8 through 120-4.29
The Legislative Retirement System was created by the
1983 session of the General Assembly as a retirement plan
for members of the General Assembly. The membership
also includes:
n Members who were vested or had maintained
contributions in the Legislative Retirement Fund
n Those retirees receiving a benefit from the Legislative
Fund who elect to transfer to the Legislative Retirement
System
LRS membership at December 31, 2009
Active Members 169
Inactive Members 83
Retired Members 270
As of December 31, 2009, assets totaled $27,152,167.
For more information about investments for the NC
Retirement Systems, please see the Investments
Management Division section of this report.
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, 2010. On
this basis, the total of employee and employer rates of
contribution is adequate to fund all future benefits presently
authorized.
Retirement Systems Division
26
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 the Supplemental Retirement Board of
Trustees.
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 and record-keeping.
nc 401(K) plan membeRship at June 30, 2010
Plan Membership 221,052
Employer Contributions* $135,481,150
Member Contributions $240,443,147
* Many local government employers contribute to employee plans.
State government employers do not contribute to employee plans.
The total assets at market value of the Plan increased by
16.3 percent over the previous year to $4,423,983,205.
Under the current contract, members may select from 11
separate account investment options including a stable
value fund. Some members also have assets invested in
the frozen mutual funds that were previously offered in the
Plan. As of June 30, 2010, 33.86 percent of the assets
were invested in Stable Value, 9.16 percent of the assets
were invested in fixed income and 56.98 percent were
invested in equity funds. In addition, the outstanding loan
balances totaled $222,194,750.
Retirement Systems Division
membeRs’ 401(K) investment choices
Stable Value
33.86%
Equity Funds
56.98%
Fixed Income
9.16%
27
The North Carolina Public Employee
Deferred Compensation Plan
N.C.G.S. 143B-426.24
The North Carolina Public Employee Deferred
Compensation 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. This Plan is also governed by the
Supplemental Retirement Board of Trustees; the State
Treasurer is the chairperson of the Board.
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, including communications
and record-keeping.
nc DefeRReD compensation plan
membeRship at June 30, 2010
Plan Membership 30,692
Member Contributions $41,404,927
The total assets at market value of the Plan increased by
11 percent over the previous year to $703,960,506.
Under the current contract, members may select from 11
separate account investment options including a stable
value fund. Some members also have assets invested in
the frozen mutual funds that were previously offered in the
Plan. As of June 30, 2010, 46.76 percent of the assets
were invested in Stable Value, 6.68 percent of the assets
were invested in fixed income and 46.56 percent were
invested in equity funds. In addition, the outstanding loan
balances totaled $10,268,956.
Retirement Systems Division
Fixed Income
6.68%
Stable Value
46.76%
Equity Funds
46.56%
membeRs’ DefeRReD compensation investment choices
28
Teachers’ and State Employees’
Benefit Trust
N.C.G.S. 135-5(I); 143-166.20; and 143-166.60
The Teachers’ and State Employees’ Benefit Trust (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. The Contributory
Death Benefit, Retiree Death Benefit Plan, and the active
member death benefit are included in the Benefit Trust.
All contributions to fund the death benefits plans are held
separate and apart from any pension or retirement funds.
In 2009, 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 are funded
through employer contributions. TSERS employers’ submit
.16% of their contribution rate. LGERS employers’ rate is
determined by actuary valuation and is adjusted for each
agency annually.
Death Benefit Payments Calendar Year 2009
Retirement System Number of Payment
Members Payments Amount
Teachers’ and State Employees’ 534 $19,900,000
Local Governmental Employees’ 124 $4,700,000
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 below 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 2009 are also provided in the
chart below.
Retirement Systems Division
Chart 5: North Carolina Teachers’ and State Employees’ Benefit Trust
Year Ended December 31, 2009
Sources of Funds
Local Governmental Employees’ Retirement System Death Benefit $4,600,000 7.12%
Retirees’ Death Benefit $18,800,000 28.64%
Teachers’ and State Employees’ Retirement System Death Benefit $22,000,000 33.57%
Investment Income $20,100,000 30.67%
Applications of Funds
Local Death Benefits Paid $5,000,000 7.68%
Death Benefits and Insurance Paid SIF $822,000 1.25%
Administrative Expenses $750,000 1.14%
Retiree Death Benefits Paid $13,400,000 20.46%
State Death Benefits Paid $19,900,000 30.35%
Addition to Reserves for Future Benefits $25,700,000 39.12%
29
Firemen’s and Rescue Squad Workers’
Pension Fund
N.C.G.S. 58-86-1 through 58-86-90
The Firemen’s and Rescue Squad Workers’ 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.
Firemen’s and Rescue Squad Workers’ membership
at June 30, 2010
Active Members 38,484
Retired Members 11,298
Invested assets at market value amounted to about
$283.78 million. For more information about investments
for the NC Retirement Systems, please see the
Investments Management Division section of this report.
Operations of the Firemen’s and Rescue Squad Workers’
Pension Fund during the 2009 fiscal year resulted in:
n Total receipts of $43,935,908
n Total expenditures of $23,991,647
The latest Actuary’s Valuation Balance Sheet, as of June
30, 2010, is shown in Table T13 in the Statistical Tables
Section. Based on the latest actuary’s report, the General
Assembly appropriated $10,079,671 for the 2009–2010
fiscal year. The annual appropriations will fund all future
benefits, based on current service, and will fund, over a
period of nine years from June 30, 2010, the remaining
accrued liabilities for past service.
Chart 6 presents the distribution of revenues by source and
expenditures by purpose.
Retirement Systems Division
Chart 6: Firemen’s and Rescue Squad Workers’ Pension Fund
Year Ended December 31, 2009
Sources of Funds
Appropriation $10,000,000 22.94%
Member Contributions $2,600,000 5.96%
Investment Income $31,200,000 71.08%
Miscellaneous Income $5,000 .02%
Applications of Funds
Pension Benefits $22,600,000 51.59%
Refunds $431,000 .98%
Administrative Expenses $894,000 2.04%
Addition to Reserves for Future Benefits $19,900,000 45.39%
30
Retirees’ Health Premiums Funds
Funds are remitted from employers through their monthly
ORBIT payroll reporting process 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
Retirees’ 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 2009
Beginning Fund Balance $434,768,521
Additions
Employer Contributions $654,908,753
Investment Income $10,511,518
Deductions
Health Premiums Paid $543,514,274
Administrative Expense $371,479
ENDING FUND BALANCE $556,303,039
Legislative Retirement Fund
N.C.G.S. 120-4.1 through 120-4.2
The Legislative Retirement 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 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 1974, are still in receipt of monthly allowances
or may apply for and receive monthly allowances at age 65.
In the year that ended December 31, 2009, there were
13 former members and officers of the General Assembly
in receipt of allowances with a cost of $18,900. This 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. This fund is
not operated as a retirement fund, but as an expendable
trust fund. In this expendable trust, money is not added to
the fund. Only the 13 members who applied for retirement
during the years of operation are covered in this fund.
Disability Income Plan
N.C.G.S. 135-100 through 135 -113
The Disability Income Plan of North Carolina was created
in 1987 by the North Carolina General Assembly. 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, 2010.
The following are Disability Income Plan 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 2008
and 2009.
Retirement Systems Division
2008 2009
Number of Disabled Members 6,214 6,089
New Claims During the Year 958 824
Employer Contributions $78,200,000 $78,600,000
Investment Income $23,700,000 $21,500,000
Amount of Benefit Payments $75,900,000 $72,500,000
Disability Income Plan Statistics
Calendar Years 2008 and 2009
31
Public Employees’ Social Security Agency
N.C.G.S. 135-19 through 135-26
The Public Employees’ 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
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. Benefit payments
are funded by State General Fund appropriations by the
General Assembly.
Guard Plan membership at December 31, 2009
Beneficiaries in receipt of monthly allowances 3,677
Monthly allowances $6,275,428
The 1983 session of the General Assembly enacted
legislation creating a trust fund for financing 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 1984
session appropriated $1,717,977 to begin actuarial reserve
funding. The funding after mid-year budget cuts was
$5,891,793.
Registers of Deeds’ Supplemental
Pension Fund
N.C.G.S. 161-50 through 161-50.5
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 Registers
of Deeds’ Supplemental Pension Fund. Benefits from the
Registers of Deeds’ Supplemental Pension Fund became
payable beginning July 1, 1988.
Effective July 1, 2007, this funding was reduced to 1.5
percent.
n As of December 31, 2009, this fund had total assets in
the amount of $38,043,269.
n For the year ending December 31, 2009, the Fund paid
total benefits in the amount of $1,513,935.
Retirement Systems Division
32
The Year’s Highlights
Established the Future of Retirement
Study Commission
The TSERS and LGERS Boards of Trustees voted to
initiate a Future of Retirement Study Commission. The
Commission was created to deliberate on the design of the
retirement system for future public employees in response
to the changing economy and help the State attract, retain
and manage its workforce.
The 13-member Commission, composed of government
employees, retirees, human resource experts, and private
sector leaders, met throughout 2010 to review major
aspects of benefit design, taking into account both the
needs of public employees as well as fiscal impacts.
At a January 2011 meeting, the Boards will decide which of
the Commission’s recommendations should be presented
to the General Assembly for consideration.
Increased Membership in NC
401(k)/NC 457 Plans
The Supplemental Retirement Income plans continued
to experience an increase in membership during the
fiscal year.
n Membership in the NC 401(k) plan increased from
213,400 in the 2008-2009 fiscal year to 221,052 in the
2009-2010 fiscal year.
n Membership in the NC 457 plan increased from 29,155
in the 2008-2009 fiscal year to 30,692 in the 2009-2010
fiscal year.
Providing Customer Information Online
Retirement Systems members’ registration to Online
Retirement Benefits through Integrated Technology (ORBIT)
increased from 100,000 in 2008-09 to more than 147,000
in 2009-10 since the launch of the web portal in 2007.
ORBIT enables members to access account information
immediately, provides self-service for customers, and
has helped eliminate the amount of paper generated and
mailed by the Division. It has provided our members with
more than 338,898 estimates of benefits, a newly improved
service credit purchase calculator, and the ability to
designate or change beneficiaries.
n For the first time, members were able to access their
2009 Annual Benefits Statements online. Statements
were not mailed. This allowed members to access
statements anywhere, at any time.
n Retirement System members with less than 10 years of
service can designate beneficiaries through ORBIT for the
employee death benefit or for a return of contributions in
the event of the member’s death.
n Electronic “Welcome” Packets. The “Welcome” packet
process for newly hired, first-time employees was
modified to enable Retirement System members to
complete their beneficiary designations, and to learn
about the retirement system to which they belong and the
benefits available to them.
Legislation
This was the first year the Board of Trustees governing the
Teachers’ and State Employees’ Retirement System and
the Local Governmental Employees’ Retirement System
could neither recommend nor provide a cost-of-living
adjustment.
Communications
n The Retirement Systems Division launched its first
electronic newsletter to active public sector employees.
The e-version of On the Horizon newsletter was sent to
active members who provided e-mail addresses when
registering for ORBIT. The e-news supplements the one
printed newsletter mailed annually to active members.
n Targeted communications were created to inform
members of their benefits based on where they are in
their public sector career. The segmented messages
target newly vested members, members within five years
of retirement, and members eligible to retire.
n For the first time in its 68-year history, the Division
conducted a survey to better understand members’
needs and expectations, and identify areas for process
improvement. More than 25,000 members provided
valuable feedback that will help shape the Division’s
short-term and long-term plans.
n Customer service surveys were created to measure
members’ experiences when calling or e-mailing the
Division, or when completing the process for a retirement
benefit, a refund of contributions or a new level of
disability benefit. Beneficiaries also receive a survey when
they complete the process to receive a death benefit.
Retirement Systems Division
33
Investment Management Division
34
Investment Management Division
2007-2008 2008-2009 2009-2010
Total assets of NC Retirement Systems $72.3 billion $60.2 billion $65.3 billion
Investment Performance for the NC Pension Fund 2.1% decrease 14.2% decrease 12.0% increase
Returns from Each Asset Class with the Total Pension Fund
Fixed Income 7.94% 7.62% 13.22%
Global Equity -10.45% -27.76% 14.31%
Private Equity 12.92% -21.53% 12.88%
Hedge Funds -0.93% -16.77% 10.25%
Real Estate 8.74% -31.43% -16.74%
Funded Status
Funded Status of the Teachers’ and State Employees’ 104.7% 99.3% 95.9%
Retirement System (TSERS)
Investment Management Division Statistics
35
The Investment Management Division serves as the
investment arm for the Department of State Treasurer. This
Division employs over 20 investment professionals that
provide the expertise for state government investing.
The Investment Management Division (IMD) is responsible
for the management of:
n The Cash Management Program – responsible for
managing the operating funds of the State. The main
participants in this program are the State’s General Fund
and Highway Funds.
n The Pension Fund Investment Program (Pension Fund)
– responsible for managing assets of the Teachers’ and
State Employees’ Retirement System, the Consolidated
Judicial Retirement System, the Firemen’s and Rescue
Workers’ Pension Fund, the Local Governmental
Employees’ Retirement System, the Legislative
Retirement System, and the North Carolina National
Guard Pension Fund. Collectively, these systems and
funds are referred to as the North Carolina Retirement
Systems (Systems) and each has a proportionate share
of the Equity Fund, Fixed Income Fund, Real Estate Fund,
Alternative Fund, Credit Fund and Inflation Fund. (See the
Pension Investment Program Review for definitions on
page 39).
n The Ancillary Investment Programs – as authorized by
the General Assembly, responsible for managing assets
for the Escheats Fund, UNC and Public Hospital Funds,
the Local Government Other Post-Employment Benefits
Fund, and other non-Pension assets invested in the core
fixed income portfolio. At the end of the fiscal year closing
June 30, 2010, total assets of the Cash Management
Program, the Pension Fund Investment Program, and
Ancillary Investment Programs were $78.0 billion.
Program Percentage of Total Assets in 2010
Cash Management Program 14.4%
Pension Fund Investment Program 83.7%
Ancillary Investment Program 1.9%
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 has full powers as a fiduciary and,
with the Investment Team, shall manage the investment
programs so assets may be readily converted into cash
when needed.
The total of these programs represents the aggregate
assets of seven retirement systems, various 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. In addition to the Treasurer
and the Investment team managing these programs, the
Investment Advisory Committee (IAC) provides opinion
on policies and general strategy for achieving investment
of the Pension Fund, including asset allocation, in
consultation with IMD staff.
Investment Management Division
36
0%
2%
4%
6%
FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010
Cash Management Program Review
The Cash Management Program’s objective is to maximize
income consistent with the principals of 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. These investments include short-term
money market accounts and bonds that typically get the
best interest rates. Additionally, this program included
state bank deposits overseen by the Department of State
Treasurer as the State’s banker.
Short-Term Investment Fund
The Short-Term Investment Fund (STIF) comprises 95.6
percent of the Cash Management Program. The Bond
Proceeds Fund, managed by Sterling Capital, accounts for
4.4 percent of the Program.
The STIF is an internally managed portfolio of highly liquid
fixed income securities. These securities are primarily
money market instruments and short to intermediate term
U.S. 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 consideration in making investments is safety and
liquidity; the secondary consideration is income. For the
fiscal year 2010, the STIF generated a cash return of 1.6
percent. The following chart provides historic returns for the
fund performance as of June 30, 2010.
Investment Management Division
STIF Fiscal Year Performance
FY 2003 2004 2005 2006 2007 2008 2009 2010
4.3%
3.2%
2.9%
3.6%
4.7%
5.2%
3.4%
1.6%
37
The following graph provides STIF Asset Allocation as of June 30, 2010.
definitionS:
U S Treasuries – government debt issued by the United States Department of the Treasury
Certificates of Deposit – financial product commonly offered to consumers by banks, thrift institutions and credit unions
Corporates – debt from a company or corporation
FDIC – FDIC-guaranteed notes
Repurchase Agreements – short-term collateralized loan
U S Agencies – debt from a federal government agency or government sponsored enterprise such as the Government National Mortgage
Association (GNMA or Ginnie Mae), the Federal National Mortgage Association (FNMA or Fannie Mae), the Federal Home Loan Mortgage
Corporation (FHLMC or Freddie Mac), Federal Home Loan Banks, and Federal Farm Credit Banks
Investment Management Division
stif asset allocation as of June 30, 2010
U.S. Agencies
48.7%
U.S. Treasuries
35.7%
Certificates of Deposit
0.4%
Corporates
0.1%
FDIC
3.4%
Repurchase
Agreements
11.7%
38
STIF Top Ten Positions as of June 30, 2010
The chart below shows the top ten positions for the fiscal year for the Short Term Investment Fund as of June 30, 2010.
Investment Management Division
Issuer Coupon Maturity Date Par Value ($)
HSBC Securities Repo 0.100% 07/01/2010 500,000,000
UBS Warburg Repo 0.070% 07/01/2010 500,000,000
Wachovia Repo 0.050% 07/01/2010 350,000,000
U.S. Treasury Note 1.250% 11/30/2010 350,000,000
U.S. Treasury Note 0.875% 12/31/2010 350,000,000
U.S. Treasury Note 0.875% 01/31/2011 350,000,000
U.S. Treasury Note 0.875% 02/28/2011 350,000,000
U.S. Treasury Note 0.875% 03/31/2011 350,000,000
U.S. Treasury Note 0.875% 04/30/2011 350,000,000
U.S. Treasury Note 0.875% 05/31/2011 350,000,000
STIF Summary of Brokers Utilized During Fiscal Year 2009 - 2010
Brokers are used to execute buy and sell orders on behalf of the fund, adding the benefit of experience in the field to investment
decisions. Below is a list of Brokers used to facilitate trades of securities during the 2010 fiscal year.
Bank of America
Citigroup
Credit Suisse Securities
Deutsche Bank Securities
First Tennessee Bank
Goldman Sachs
HSBC Securities
Jefferies
JPMorgan Chase
Loop Capital
Mizuho Securities
Morgan Keegan
Morgan Stanley
Raymond James
RBC Capital Markets
RBS Greenwich Capital
UBS Warburg
Wachovia Capital Markets
Williams Capital
STIF Top Ten Positions as of June 30, 2010
STIF Summary of Brokers Utilized During Fiscal Year 2009 - 2010
39
Pension Fund Investment Program
Review
Pension Fund Investment
Program Review
The Pension Fund Investment Program’s objective is
to generate returns that match or exceed those of the
appropriate benchmarks over a three to five year basis,
maintaining the long-term strength of the Systems by
providing a consistent long-term actuarial rate of return
while simultaneously minimizing risk in the portfolio. These
are long-term investments in stocks, bonds, real estate,
private equity, hedged strategies, credit strategies, and
inflation protection. 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 processes, and other issues.
Operating Policy
In all transactions executed for any investment program
managed by the State Treasurer, the objective is to perform
such business in the best interest of the beneficial owners
of the trusts’ assets, which are North Carolina’s public
employees, teachers, firefighters, police officers, and
other public workers. Within the Pension Fund, assets are
divided into various classes of investments defined in the
chart below.
Investment Management Division
Portfolio Investment Mandate Examples
Longer Term
Investments
Equity Securities
Real Estate
Private Equity
Hedge Funds
Credit Oriented
Investments
Inflation-linked
Investments
Fixed Income Investment
Portfolio
Global Equity Investment
Portfolio
Real Estate Investment
Portfolio
Private Equity Investment
Portfolio
Hedged Strategies
Investment Portfolio
Credit Strategies
Investment Portfolio
Inflation Protection
Investment Portfolio
Investment Grade Corporate Securities, Treasuries,
Agencies, MBS
Fiduciary Relationships with experienced investment advisors
Limited Partnerships* managed by experienced real estate
advisors
Limited Partnerships* managed by experienced private
equity advisors
A diversified mix of hedged strategies managed by
experienced hedge fund of funds
A diversified mix of credit focused investment vehicles
managed by experienced investment advisors
A diversified mix of inflation-linked investment vehicles
managed by experienced investment advisors
* Limited Partnerships are the standard vehicle for investment in private equity and real estate funds with a main purpose of buying
interests in investments that, in general, are not publicly traded. The partnership has a General Partner whose responsibilities include
making and monitoring investments, ultimately exiting investments to generate returns on behalf the investors. The investors are known
as Limited Partners.
Pension Fund Asset Classes
40
Investment Management Division
1 Year 3 Year 5 Year 10 Year
Returns
25th Percentile 14.86% -2.54% 3.79% 3.99%
Median 13.52% -3.51% 3.01% 3.44%
75th Percentile 11.82% -4.99% 2.38% 2.90%
NC Pension Fund 12.42% -1.65% 3.29% 3.83%
Risk
	
	
	
25th Percentile 10.69 14.37 11.89 10.81
Median 9.50 13.49 11.27 10.27
75th Percentile 8.28 12.31 10.27 8.96
NC Pension Fund 8.37 11.49 9.46 8.77
source: BNY Mellon Total Funds – Public Funds $1+ Billion (Gross of Fees)
National Average Returns and Exposure to Risk
The Investment Management Division’s (IMD) goal is to
maintain the long-term strength of the retirement systems
by providing a consistent long-term actuarial rate of return
while simultaneously minimizing risk in the portfolio.
North Carolina is consistently ranked in the top five of state
retirement funding ratios.
Fiscal Year Review
The fiscal year ending June 30, 2010 saw a significant
rebound in almost all asset classes from the lows of 2009,
although much economic uncertainty remains. The Pension
Fund was able to successfully participate in this rally,
outperforming its actuarial rate of return for the fiscal year.
To offer perspective on the fiscal year’s events, investors
experienced: numerous monetary and fiscal stimulus
measures; the evolution of the sovereign debt crisis; the
rapid spread of the credit crisis; government backed
private equity Dubai World’s failure to meet debt obligations
resulting in the perceived collapse of commercial real
estate; the BP oil spill in the Gulf of Mexico; and the “flash
crash” of May 6.
The rally from March 2009 through April 2010 was
characterized by a sharp degree of uncertainty in investor’s
“risk on, risk off” behavior throughout the fiscal year.
Volatility mirrored the market’s risk sentiment as the VIX
“fear index” dropped below 16 in April and rose sharply in
May to a peak of 45 before ending the quarter at 35, well
below its 2008 peak of 80.
The fiscal year did see the Pension Fund make a number
of significant new investments and continue its effort to
diversify the portfolio and enhance returns. Two new
asset classes, the Credit Strategies investment portfolio
and the Inflation Protection investment portfolio, were
created at the beginning of the calendar year to continue to
diversify the portfolio to mitigate risks and take advantage
of opportunistic markets which will help enhance returns.
Authority for these allocations was received in the 2009
legislative session.
National Average Returns and Exposure to Risk
Pension Fund Strategy
The tradition of conservative fiscal management has
served North Carolina’s public workers and taxpayers
well throughout the years. The Pension Fund continues
that tradition with a significant 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 and financial market environments, and
steady in bull markets. The chart below outlines the one-,
three-, five-, and ten-year average returns and exposure
to risk within the different percentiles of public funds in
comparison to the performance and exposure to risk of the
North Carolina Pension Fund.
41
Total Pension Fund Structure
As of June 30, 2010, the Pension Fund maintained a market value of $65.3 billion. The Investment Management Division is
constantly monitoring the overall Pension Fund in an effort to control risk. The following chart highlights the strategic asset
allocation targets over the past seven years.
Investment Management Division
Current and Historical Strategic Targets
June 2004 June 2005 June 2006 June 2007 June 2008 June 2009 June 2010
Fixed Income 41.0% 39.5% 39.5% 39.5% 39.5% 39.5% 38.0%
Global Equity 54.0% 54.5% 54.5% 52.0% 50.0% 50.0% 48.0%
U.S. 46.5% 46.8% 41.5% 36.0% 34.0% 34.0% 33.0%
Non-U.S. 7.5% 8.0% 13.0% 16.0% 16.0% 16.0% 15.5%
Real Estate 3.5% 3.5% 3.5% 5.0% 6.0% 6.0% 6.0%
Private Equity 0.75% 1.1% 1.25% 1.75% 3.15% 3.15% 3.15%
Hedged Strategies 0.75% 1.1% 1.25% 1.75% 1.35% 1.35% 1.35%
Credit Strategies 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.5%
Inflation Portfolio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.5%
Current and Historical Strategic Targets
The Investment Management Division utilizes rebalancing to ensure the overall portfolio weights stay in line with the target
ranges. Asset allocation and a disciplined approach to rebalancing ultimately controls the level of risk that an investment portfolio
experiences.
Market Value Portfolio Weight Target Weight Target Range
Fixed Income $26,182,168,585 40.1% 39.5% 35.0% - 44.0%
Global Equity 31,242,202,610 47.9% 50.0% 45.0% - 55.0%
Real Estate 2,914,523,551 4.5% 6.0% 5.0% - 55.0%
Private Equity 2,737,956,231 4.2% 3.15% 3.5% - 5.0%
Hedged Strategies 621,944,512 1.0% 1.35% 3.5% - 5.0%
Credit Strategies 839,898,539 1.3% 1.5% 0% - 5.0%
Inflation Portfolio 714,748,390 1.1% 1.5% 0% - 5.0%
TOTAL FUND $65,253,442,418 100% – –
Pension Fund Asset Allocation as of June 30, 2010
42
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Total Pension Fund Custom Benchmark
Fiscal 2010 Tr. 3 Yr Tr. 5 Yr Tr. 10 Yr
Investment Management Division
Total Fund Performance
The Pension Fund has outperformed its custom benchmark over the past fiscal year, attributable to the selection of investments
and its emphasis on downside protection. The following chart provides fiscal year returns for each asset class within the total
Pension Fund.
2010 Fiscal Year Returns Total Pension Fund
Fixed Income 13.2%
Global Equity 14.3%
Real Estate -16.7%
Private Equity 12.9%
Hedged Strategies 10.3%
Credit Strategies* 8.4%
Inflation* 0.8%
TOTAL PENSION FUND 12%
* Investments began in January 2010 and represent only two
quarters of performance.
For the fiscal year 2010, the Fund returned 12.0 percent, net of fees. Over longer time periods, the Pension Fund outperformed
its benchmark for the annualized three, five and ten year periods ending June 30, 2010. Compared to its peer group plans, the
Fund also outperformed the median public plan with greater than $1 Billion across the three, five and ten year time periods,
according to BNY Mellon. The charts below provide a snapshot for the total pension fund’s annualized performance and
performance by asset class for one-, three-, five-, and ten-year periods.
n Total Pension Fund n Custom Benchmark*
* 48.5 percent Custom Global Equity Benchmark, 38% Custom Fixed Income Benchmark, 6% Custom Real Estate Benchmark,
4.5% Custom Alternatives Benchmark (70% Custom Private Equity Benchmark and 30% Custom Hedge Fund Benchmark), 1.5%
Custom Credit Benchmark, and 1.5% Custom Inflation Benchmark. The following chart details performance by asset class and also
provides the benchmarks or target returns.
Total Pension Fund Annualized Performance
12.0%
12.8%
-2.0% -2.1%
3.0%
3.7% 3.4% 2.8%
Fiscal 2010 Tr. 3 Year Tr. 5 Year Tr. 10 Year
43
Investment Management Division
1-Year 3-Year 5-Year 10-Year
Total Pension Plan 12.0% -2.0% 3.0% 3.7%
Total Pension Custom Benchmark1 12.8% -2.1% 2.8% 3.4%
Fixed Income Portfolio 13.2% 9.6% 6.4% 7.8%
Custom Fixed Income Benchmark2 12.8% 8.8% 5.8% 7.4%
Global Equity Investment Portfolio 14.3% -9.6% 0.0% 0.2%
Custom Global Equity Benchmark3 13.2% -10.5% -0.4% -0.8%
Real Estate Investment Portfolio -16.7% -14.7% -2.2% 2.2%
Custom Real Estate Benchmark4 -14.2% -10.5% 0.1% 4.9%
Private Equity Investment Portfolio 12.9% 0.0% 7.4% -3.6%
Custom Real Estate Benchmark5 54.9% -1.3% 5.0% 2.5%
Hedge Strategies Investment Portfolio 10.3% -3.1% 2.4% –
Custom Hedge Strategies Benchmark6 4.2% 5.6% 6.8% 6.7%
Credit Strategies Portfolio – – – –
Custom Credit Strategies Benchmark7 – – – –
Inflation Protection Investment Portfolio – – – –
Custom Real Estate Benchmark8 – – – –
Annualized Performance as of June 30, 2010
1 48.5% Custom Global Equity Benchmark, 38.0% Custom Fixed Income Benchmark, 6% Custom Real Estate Benchmark, 4.5% Custom
Alternatives Benchmark (70% Custom Private Equity Benchmark and 30% Custom Hedge Fund Benchmark), 1.5% Custom Credit
Benchmark, and 1.5% Custom Inflation Benchmark.
240% Govt 5+Yr, 35% Corp (Investment Grade – BBB Max 25%) 5+Yr, and 25% Mortgage Master.
368% Russell 3000 Index and 32% Custom International Equity Benchmark (90% MSCI EAFE Index/10% MSCI EM Index).
490% NCREIF Open End Funds Index and 10% FTSE EPRA/NAREIT Global Securities Index.
5Russell 3000 Index lagged 3 months + 250 basis points.
6U.S. T-Bill + 400 basis points.
77.5% annualized return.
8Consumer Price Index + 300 basis points.
44
Investment Management Division
Corporate Governance
The Department of State Treasurer maintains a corporate
governance program. The pension fund works through
proxy voting, shareholders resolutions, dialogue
with corporate leaders and regulatory agencies, and
collaboration with other institutional investors to create
long term value for portfolio companies. For fiscal year
2009-2010, the North Carolina Retirement Systems (the
formal name of the pension fund) began to pursue formal
corporate governance initiatives. These initiatives are
designed to enhance long-term shareowner value. They
include the following strategic objectives:
n Financial regulatory reform
n Board diversity
n Sustainability
n Company engagement
Financial Regulatory Reform
During congressional debate of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, the North Carolina
Retirement Systems signed a letter, along with 19 other
pension funds, urging United States Senator Christopher
Dodd and United State House of Representatives
Barney Frank to reaffirm the authority of the Securities
and Exchange Commission to give shareowners “proxy
access.” Proxy access gives a group of shareowners the
right to put candidates on a corporate ballot. Such access
provides investors a necessary tool to ensure transparency,
accountability and management risk at the board level. The
June 2010 letter represented more than seven million active
and retired employees with assets in excess of $1 trillion.
Diversity
In May 2010, the Department partnered with Director
Diversity Initiative (DDI), a joint project with the Center of
Banking and Finance and the Center for Civil Rights at
the University of North Carolina at Chapel Hill School of
Law. The partnership includes identifying and encouraging
potential directors to attend the one day board training as
well as encouraging them to register with DDI Database.
Company Engagement – Massey Energy
Following the tragedy at the West Virginia Upper Big
Branch mine, the North Carolina Retirement Systems,
along with eight other public pension funds, sent an April
2010 letter to Admiral Bobby Inman, Lead Director of
Massey Energy Company, expressing concern about poor
corporate governance practices and requesting that Don
Blankenship step down as Chair of the Board, and Director
Lady Barbara Thomas Judge, Chair of the Nominating and
Governance Committee, resign. Judge was asked to resign
because she serves as a director on nine public companies
and the Chair of the United Kingdom Atomic Energy
Authority. Subsequently, Director Judge stepped down from
Massey’s board.
In addition, the coalition of funds urged shareholders to
withhold votes from Directors Dan Moore, Baxter Philips,
Jr., and Richard Gabrys at the annual meeting in May 2010.
Shareholders cast between 48 to 49 percent of their shares
against all three Directors, some of the highest opposition
votes against any S&P 500 company in 2010.
45
Investment Management Division
Fixed Income
As of June 30, 2010, the fixed income allocation
maintained a market value of $26.2 billion, representing
40.1 percent of the Pension Fund. The Pension Fund’s
core Long-Term Investment Portfolio (LTIP) represents
the bulk of the fixed income assets with a market value of
$24.1 billion. The balance of the fixed income assets are in
non-core strategies.
Core Fixed Income Structure
The LTIP is an internally managed investment grade fixed
income portfolio that takes an enhanced approach of
generating excess returns versus an assigned benchmark.
The portfolio is structured to provide an intermediate
duration profile that better matches the Pension Fund’s
longer duration liability stream versus a short duration
fixed income portfolio. Because of this approach, the
duration of the portfolio tends to be relatively long.
Duration is a measure of a bond’s price sensitivity to
changes in interest rates. The portfolio is comprised of
U.S. Treasuries, Agencies, Corporate Bonds, and GNMA
mortgage-backed securities. The following chart displays
the allocation of the LTIP by investment and by quality, or
credit rating, of investment.
ltip sectoR allocation as of June 30, 2010
Government
(U.S. Treasuries &
Agencies)
36.2%
Corporates
37.4%
Mortgage-Backed
25.5%
Cash
0.9%
ltip quality* allocation as of June 30, 2010
A
20.3%
U.S. Agencies
(Debt & MBS)
36.2% U.S. Treasuries
25.7%
High Yield
0.7%
BBB
10.5%
AA
6.2%
AAA
0.4%
*Credit Quality based on Moody’s Ratings
46
Investment Management Division
Fixed Income Market Overview
The fiscal year began with positive economic signals and
an accommodative Federal Government that was focused
on supporting the market. By year end, the optimism
over the recovery had waned as concerns mounted over
elevated unemployment and a European debt crisis that
was hampering global growth expectations. The results of
the economic uncertainty and subdued inflation to possible
deflation were lower rates across the Treasury curve.
U.S.Treasury yields were down 60-80 basis points across
the intermediate part of the yield curve and 45 basis points
lower on the 30 year Treasury. Investment grade corporate
bonds continued their strong rally from early 2009, rallying
back to levels not seen since before the credit crisis of
2008. Below are the lists of the top ten corporations
within the LTIP and a summary of brokers utilized to trade
securities for the portfolio.
coRPoRate iSSueR % of LtiP
Bank of America 1.7%
General Electric 1.2%
AT&T Inc. 1.2%
JPMorgan Chase 1.1%
Citigroup 1.0%
Wells Fargo 1.0%
Goldman Sachs 1.0%
Verizon Communications 0.8%
Morgan Stanley 0.8%
Wal-Mart 0.7%
ltip top 10 coRpoRate positions as of June 30, 2010
Bank of America
Barclays Capital
Cantor Fitzgerald
Carolina Capital Markets
Citigroup
Credit Suisse Securities
Deutsche Bank Securities
First Tennessee Bank
ltip summaRy of bRoKeRs utilizeD DuRing fiscal yeaR 2010
Goldman Sachs
HSBC Securities
JPMorgan Chase
Jefferies & Company
KeyBank Cap Mkts
Loop Capital
Mizuho Securities
Morgan Keegan
Morgan Stanley
Raymond James
RBC Capital Markets
RBS Greenwich Capital
Stifel Nicolaus
Suntrust Capital Markets
UBS Securities
Wachovia Capital Markets
47
Investment Management Division
Core Fixed Income Performance
For the fiscal year, the LTIP returned 13.3 percent net
of fees, outperforming the benchmark return of 12.8
percent performance. The excess returns for the fiscal
year continued to build upon the portfolio’s history of
strong performance across all respective time periods.
The portfolio’s overweight to an improving corporate
bond market had the biggest impact on positive relative
performance for the fiscal year.
Non-Core Fixed Income Structure
The non-core component consists of a liquidity allocation
to the Short-Term Investment Fund (STIF) and two
opportunistic allocations to externally managed high
quality Residential Mortgage-Backed Securities (RMBS)
and Commercial Mortgage-Backed Securities (CMBS)
strategies. The RMBS and CMBS strategies were executed
in response to market dislocations during the credit crisis
and were structured to take advantage of attractive risk/
return opportunities in high quality mortgage debt.
The non-core strategies include allocations to STIF
($0.6 billion), and investment grade RMBS ($1.1 billion) and
CMBS ($0.5 billion).
Non-Core Fixed Income Performance
The non-core fixed income composite posted a return
of 12.0 percent for the fiscal year. The mortgage-backed
securities strategies produced strong results, with the
RMBS and CMBS portfolios producing returns of 19.2
percent and 33.6 percent, respectively, for the fiscal year
ending June 30, 2010.
0%
2%
4%
6%
8%
10%
12%
14%
Non-Core Fixed Income
Fiscal 2010 Tr. 3 Yr
n Non-Core Fixed Income
Fiscal 2010 Tr. 3 Year
12.0%
8.6%
Non-Core Fixed Income Performance
48
Investment Management Division
Global Equity
Global Equity Structure
The Global Equity portfolio ended fiscal year June 30, 2010
at $31.2 billion, with $21.5 billion in U.S. equity and $9.7
billion in non-U.S. equity. As a percentage of the Pension
Fund’s assets, the Global Equity allocation was 47.9
percent on June 30, 2010 versus 47.1 percent on
June 30, 2009.
All investments of the Global Equity 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
portfolios give the manager discretion to make investment
decisions within the parameters of the portfolio’s mandate.
The following chart provides percentage of distribution
between these types of strategies.
global equity stRategy allocation
Enhanced
10.4%
Passive
26.7%
Active
62.9%
49
The Global Equity portfolio maintains prudent diversification within the broad equity market. The Global Equity portfolio is also
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.
Investment Management Division
global equity style allocation
Value
20.4%
Growth
24.4%
global equity size allocation
U.S. Small-Cap
Equity
7.4%
U.S. Large-Cap
Equity
50.8% Non-U.S.
Equity
31.2%
U.S. Mid-Cap
Equity
10.6%
Core
55.2%
50
Investment Management Division
-15%
-10%
-5%
0%
5%
10%
15%
20%
Global Equity Investment Portfolio Custom Equity Benchmark
Fiscal 2F0is1c0a l 2010 Tr. 3 YeaTrr. 3 Y r Tr. 5 YeaTrr . 5 Y r Tr. 10 YeaTrr. 10 Yr
Global Equity Market Overview
Global equity markets rallied strongly and largely erased
losses from the previous fiscal year in the 12 months
ending June 30, 2010. Macroeconomic concerns about
Greek debt problems spreading throughout Europe and
signs of a potential slowing of the economic recovery
worldwide fueled the flight to safer assets and risk aversion.
The S&P 500 returned 14.4 percent for the year ending
June 30, 2010, compared to -26.2 percent for fiscal 2009.
Small-capitalization stocks, as measured by the Russell
2000 Index, returned 21.5 percent versus -25.0 percent
for the 2009 fiscal year. The Nasdaq Index performed in
line with broad domestic indexes in fiscal 2010, returning
14.9 percent versus -20.0 percent in 2009 and the Dow
Jones Industrial Index returned 18.9 percent and -23.0
percent, respectively. Non-U.S. equities underperformed
those in the U.S. as reflected by the Morgan Stanley All
Country World (ACW) Index ex-U.S. return of 10.9 percent
for the 12-month period ending June 30, 2010, but easily
surpassed Non-U.S. performance of -30.5 percent for the
previous fiscal year.
Global Equity Performance
For the fiscal year, the Global Equity investment portfolio
returned 14.3 percent, net of fees, outperforming its
benchmark return of 13.2 percent. The attribution of the
performance can be further dissected as the international
segment of the portfolio outperformed its benchmark by
213 basis points, while the U.S. portfolio outperformed
its benchmark by 56 basis points. The graphic below
illustrates the fiscal year performance against the
benchmark, as well as the three-, five-, and ten-year
trailing returns.
Global Equity Investment Portfolio Annualized Performance
n Global Equity Investment Portfolio n Custom Equity Benchmark
14.3% 13.2%
-9.6% -10.5%
0.0% -0.4%
0.2%
-0.8%
51
Investment Management Division
Global Equity Portfolio Investment Advisors (FY ending 2010)
Below is a list of the Global Equity investment advisor relationships and top ten holdings as of June 30, 2010.
U.S. Equity Investment Advisors Style Market Value ($)
Wellington Biotechnology Small-Cap Active 611,340,254
Earnest Partners Small-Cap Value Small-Cap Active 367,679,258
Sterling Small-Cap Value Small-Cap Active 300,971,374
Numeric Small-Cap Value Small-Cap Active 189,253,624
Brown Small-Cap Growth Small-Cap Active 183,252,112
Turner Quant Micro-Cap Small-Cap Active 142,553,904
Numeric Small-Cap Growth Small-Cap Active 61,259,939
SSGA S&P 600 Small-Cap Passive 453,603,653
Wellington Mid-Cap Opportunities Mid-Cap Active 710,175,428
Hotchkis Mid-Cap Value Mid-Cap Active 366,901,971
TimesSquare Mid-Cap Growth Mid-Cap Active 200,336,112
TimesSquare Mid-Cap Focused Mid-Cap Active 190,354,145
Wells Capital Mid-Cap Mid-Cap Passive 1,285,371,557
MCM Mid-Cap Mid-Cap Passive 551,845,109
BlackRock Russell 3000 Alpha Tilts Large-Cap Active 1,628,733,626
Alliance Relative Value Large-Cap Active 1,456,984,214
Hotchkis Large-Cap Value Large-Cap Active 1,365,753,451
Wellington Growth Large-Cap Active 1,134,995,173
Wellington Technical Equity Large-Cap Active 913,198,087
Sands Large-Cap Growth Large-Cap Active 766,267,857
Wells Capital Russell 200 Enhanced Large-Cap Active 711,889,485
Turner Large-Cap Growth Large-Cap Active 598,566,127
Relational Investors Large-Cap Large-Cap Active 507,786,679
Piedmont Strategic Core Large-Cap Active 498,232,239
Wells Capital Large-Cap Large-Cap Passive 2,031,076,172
First Citizens Large-Cap Large-Cap Passive 1,852,543,693
MCM Large-Cap Large-Cap Passive 1,615,609,515
52
Investment Management Division
Non-U.S. Global Equity Portfolio Investment Advisors
The list below includes investment style and market value. Active investing is highly involved, while passive investing focuses
more on the potential for long-term appreciation. The second list details the top holdings in the portfolio and the percentage
of each.
Non-U.S. Equity Investment Advisors Style Market Value ($)
Baillie Gifford EAFE Non-U.S. Active 1,137,019,543
GMO Intl Non-U.S. Active 1,110,305,219
Wellington Intl Non-U.S. Active 961,227,245
BlackRock Non-U.S. Alpha Tilts Non-U.S. Active 905,156,097
Oeschle EAFE Growth Non-U.S. Active 803,845,829
Invesco Intl Non-U.S. Active 689,010,210
Alliance ACWI ex-U.S. Non-U.S. Active 582,273,103
Mondrian EAFE Value Non-U.S. Active 530,656,071
Alliance Emerging Markets Non-U.S. Active 493,182,209
Walter Scott Intl Non-U.S. Active 408,308,463
Baillie Gifford Emerging Markets Non-U.S. Active 281,784,595
BlackRock Emerging Markets Non-U.S. Active 232,326,980
BlackRock Frontier Markets Non-U.S. Active 157,811,750
Mondrian Emerging Markets Non-U.S. Active 151,536,817
BlackRock EAFE Index Fund Non-U.S. Passive 529,782,096
Longview Global Equity Global Active 767,545,756
Brandes Global Equity Global Active 568,885,194
AGA Global Strategy Global Active 213,998,410
Company % of EIP
Apple 1.2%
Exxon Mobil 1.1%
Microsoft 0.9%
JPMorgan Chase 0.8%
Bank of America 0.8%
Cisco 0.6%
Wells Fargo 0.6%
AT&T 0.6%
Google 0.6%
Pfizer 0.5%
Global Equity Top 10 Holdings (FY ending 2010)
53
Investment Management Division
Hedged Strategies
Hedging techniques are used to reduce exposure to
various risks. Hedging against investment risk means
strategically using instruments in the market to offset the
risk of any adverse price movements. In other words,
investors hedge one investment by making another.
Hedged Strategies Structure
The market value of the Hedged Strategies portfolio at
fiscal year end was $622 million, representing 0.9 percent
of the Pension Fund. As of June 30, 2010, the allocation
of the hedge portfolio was dominated by a 38.0 percent
weight to long/short equity hedge strategies, a 29.6
percent weight to event driven strategies, a 10.0 percent
weight to tactical strategies, and a 7.2 percent weight to
relative value strategies. The following chart displays these
allocations.
Event Driven
29.6%
heDgeD stRategies allocation
Relative Value
7.2%
Equity Hedge
38.0%
Cash
3.1%
Tactical
10.0%
54
Investment Management Division
Hedged Strategies Performance
For the fiscal year, the Hedged Strategies investment portfolio returned 10.3 percent, net of fees, outperforming its custom
benchmark, the 90-Day U.S. Treasury Bill + 400 basis points, by 6.1 percent. The chart below illustrates returns and
benchmarks for the fiscal and trailing years.
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Hedge Fund Custom Benchmark Hedged Strategies Investment Portfolio
Fiscal 2F0is1c0a l 2010 Tr. 3 YeTarr. 3 Y r Tr. 5 YeaTrr. 5 Y r Tr. 10 YeaTrr. 10 Yr
Hedged Strategies Investment Portfolio Annualized Performance
n Hedged Strategies Investment Portfolio n Hedge Fund Custom Benchmark
10.3%
4.2%
-3.1%
5.6%
2.4%
6.8%
NA
6.7%
Hedged Strategies Investment Advisors
(FY ending 2010)
Below is a list of the Hedged Strategies investment advisor relationships as of June 30, 2010.
Hedged Strategy Advisors and Funds Market Value ($)
Franklin Street Partners 444,291,604
SCS Global Series I 115,943,865
BlackRock 49,492,258
Broyhill Fund 10,371,041
DKR Relative Value 1,588,624
Taconic 257,119
55
Investment Management Division
Real Estate
Real Estate Structure
As of June 30, 2010, the Real Estate Investment Portfolio
(REIP) was valued at $2.9 billion. The REIP is an actively
managed portfolio of both open-end and closed-end
commingled funds as well as separate account mandates.
The REIP allocation as a percent of Pension Fund assets
has grown to 4.5 percent at fiscal year end, compared to
1.9 percent at the 2001 fiscal year end.
The REIP maintains a “Core Plus” strategy, seeking the
majority of returns from income as opposed to capital
appreciation. Core real estate is represented by well-located,
stable properties with high occupancy levels.
Core investment returns are primarily driven by property
income with debt levels typically at 0 percent - 50
percent of property value. Value-Add real estate generally
requires some additional leasing and moderate tenant
improvements to improve value before the properties are
sold. Returns are derived from both income and capital
appreciation with debt levels ranging from 50 percent to
65 percent of property value. Opportunistic real estate
investments require significant capital expenditures and
returns are derived from capital appreciation due to the
lack of “going-in” cash flows. These investments have high
debt levels typically between 65 percent and 80 percent of
property value. At fiscal year end, the REIP’s exposure to
Core and Value-Add strategies was 62 percent versus 38
percent in Opportunistic funds. The chart below outlines
these allocations.
Opportunistic
37.4%
stRategy allocation
Value-added
23.9%
Core
38.3%
Cash
0.4%
56
Investment Management Division
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, multi-family residential, single-family residential, retail, and timber. The below chart displays the percentage of each
property type allocation as of June 30, 2010.
Geographically, the REIP has a North American focus, yet is diversified among the South, East, West, and Midwest regions.
International investment exposure is approximately 18.0 percent, with the majority split between Europe and Asia. The following
charts show the U.S. and global geographic allocations as of June 30, 2010.
Lodging
12.4%
pRopeRty type allocation
Industrial
8.3%
Multi-Type
13.3%
Office
19.7%
Retail
11.3%
Debt
0.7%
Land
1.5%
Timber
8.2%
Residential
18.5%
Other
6.1%
East
32%
u.s. geogRaphic allocation
South
30%
Midwest
8%
West
30%
57
Investment Management Division
Asia
13.0%
global geogRaphic allocation
North America
72.0% Europe
13.1%
South America
1.9%
Real Estate Market Overview
During the fiscal year, the commercial real estate market
continued to struggle with price discovery due to a lack
of transaction volume and a propensity among lenders
to continue to extend underwater loans. The global REIT
market gained over 25 percent during the fiscal year,
evidenced by gains in the FTSE/EPRA/NAREIT Global
Securities index (a Global Real Estate Index Series
designed to represent general trends in eligible real estate
equities worldwide). REITs raised nearly $20 billion in
new equity issuances and over $12 billion of unsecured
debt during the fiscal year. This capital has been used to
address balance sheet issues and rebuild acquisitions
platforms. In comparison, private equity real estate funds
found investor demand much weaker and those that were
able to raise third-party capital paid interest in the range of
15 percent to 20 percent.
As fiscal year 2010 began, U.S. GDP growth resumed
on the heels of unprecedented government spending.
Unfortunately, this growth did not translate into meaningful
employment improvements critical for real estate recovery
with 15 million Americans still unemployed and the
unemployment rate stubbornly remaining over 9.5 percent.
High unemployment impacts leasing markets, leading
to declining cash flows and real estate values so returns
continue to falter, although less than fiscal 2009. While the
commercial real estate market certainly improved during
the latter half of the fiscal year, challenges remain with
hundreds of billions in underwater loans maturing next
year and weak NOI growth prospects. The forward
outlook parallels broader economic forecasts of a slow
recovery as real estate fundamentals are closely tied to
economic activity.
The second half of fiscal year 2010 improvements in
commercial real estate were attributable to loosening
capital markets, accommodative monetary policy (low
interest rates), and a global search for yield. Lending to
core properties located in primary markets such as New
York and D.C. became increasingly competitive. A global
search for yield caused investors such as REITs, hedge
funds, institutional investors seeking current cash flow,
and sovereigns taking advantage of a weak dollar to all
focus on core real estate. Transaction levels in secondary
markets or for properties needing leasing or capital
improvements were anemic during the year due to wide bid
and ask spreads. A significant disparity between core and
non-core property valuations arose during fiscal 2010 and
continues today.
Strength among the REITs, core properties, and capital
markets caused commercial real estate to appear to
bottom out late in the fiscal year. However, looming debt
maturities will be an ongoing commercial real estate issue
as well as an opportunity.
58
Investment Management Division
Real Estate Performance
For the fiscal year 2010, the REIP returned -16.7 percent,
net of fees, underperforming its custom benchmark return
of -14.2 percent. The majority of the REIP’s growth as a
percent of the Pension Fund occurred during fiscal years
2006 through 2008. Private equity real estate investments
of such vintages have few realizations this soon after
commencement and most are still in their investment
period. These commitments and their corresponding
management fees translate to large capital outflows until
realizations occur and sale proceeds are distributed,
causing returns to be negative in early years to produce a
J-shaped series of returns. This is known as the “J-curve
effect.” The chart below illustrates returns and benchmarks
for the fiscal and trailing years.
-20%
-10%
0%
10%
Real Estate Investment Portfolio Custom Real Estate Benchmark
Fiscal 2F0is1c0a l 2010 Tr. 3 YeaTrr. 3 Y r Tr. 5 YeaTrr . 5 Y r Tr. 10 YeaTrr. 10 Yr
Real Estate Investment Portfolio Annualized Performance
n Real Estate Investment Portfolio n Custom Real Estate Benchmark
-16.7%
-14.2% -14.7%
-10.5%
-2.2%
0.1% 2.2%
4.9%
59
Investment Management Division
Real Estate Investment Advisors
(FY ending 2010)
Below is a list of the real estate investment advisors and fund relationships as of June 30, 2010.
REIP Advisors and Funds Market Value ($)
MS Global RE Securities 253,833,070
Timberland Inv Res - Nahele 232,082,688
JPMorgan Strategic Property 130,437,559
UBS Trumbull Ppty 98,999,993
Starwood SOF VII 95,260,060
Starwood SOF VII Co-Inv 93,852,406
Warburg Pincus REI 91,830,334
DLJ RECP III 91,558,142
RREEF Global Opp II 91,012,981
CIM URBAN REIT 89,094,343
UBS Trumbull Ppty Income 88,083,607
Sentinel RE Fund 81,877,119
Prudential PRISA 77,202,296
MSREF VI INTL 74,633,202
DRA Growth & Income V 72,942,349
Keystone Industrial Fund 71,314,259
Shorenstein VII 70,099,582
Blackstone RE VI 61,956,759
Blackstone RE V 54,974,263
Angelo Gordon Core Plus II 53,336,798
Terra Firma Deutsche 52,086,141
Rockpoint RE II 50,086,699
Rockwood VI 44,618,130
CBRE Strategic IV 43,932,299
Shorenstein VIII 41,068,889
JER REP III 40,201,058
MSREV V INTL 38,270,820
JER REP IV 36,675,639
Stag II 36,613,154
Value Enhancement IV 36,547,616
Crow Holdings Realty IV 36,493,169
Crossharbor Instl PT 29,231,813
RLJ RE Fund II 28,806,162
DRA Fund V Co-Inv 25,205,240
Rockpoint RE III 28,410,871
DLJ RECP IV 27,312,307
LEM RE Mezzanine II 25,237,164
REIP Advisors and Funds Market Value ($)
DRA Growth & Income VI 21,202,416
DB RE Global Opportunity 20,204,839
Security Cap Focus Select 20,164,641
DRA Growth & Income IV 18,365,145
Benson Elliot RE Fund II 17,464,225
Rockwood VII 17,434,006
Angelo Gordon Core Plus 17,280,253
Hawkeye Scout I-A 17,066,976
Paladin Realty Latin Am Inv III 15,708,070
American Value Partners 13,844,101
Rockpoint RE I 12,562,213
Penwood CSIP I 12,420,950
Value Enhancement II 11,479,268
Shorenstein IX 9,827,116
Crow Holdings Realty IV-A 9,093,815
RLJ RE Fund III 8,346,908
Frogmore RE Fund II 8,224,660
Crow Holdings Realty V 7,816,535
Rockwood VIII 6,860,200
Frogmore RE Fund I 6,630,566
Penwood PSIP II 6,197,226
RMK Emerging Timberland 5,873,592
DLJ RECP II 5,307,188
Cherokee III 4,973,853
CBRE Strategic V 4,303,000
Westbrook RE III 3,772,759
Westbrook RE II 1,461,677
Cherokee IV 939,009
Westbrook RE IV 638,997
DRA Growth & Income III 408,853
CIGNA Open End Fund 296,572
DLJ RECP 281,536
Westbrook RE I 154,166
Benson Elliott RE Fund III –
Keystone Industrial Fund II –
NorthRock Core Fund –
60
Venture Late
4.2%
Investment Management Division
Private Equity
Private Equity Structure
As of June 30, 2010, the Private Equity investment
portfolio maintained a market value of approximately $2.7
billion, representing 4.2 percent of the Pension Fund. The
portfolio invests in limited partnerships which are externally
managed by experienced private equity investment
professionals.
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 funds 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 underperforming
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 Private Equity
investment portfolio’s allocation to these sub-strategies is
displayed below.
Venture Early
8.1%
pRivate equity sub-stRategy allocation
Other
5.1%
Co-Investment
4.6%
Secondary
4.9%
Distressed
4.9%
Growth Equity
Large
2.3%
Growth Equity
Small
1.3%
Large Buyout
25.1%
Mid/Small Buyout
27.1%
Venture Balanced
6.4%
Energy
4.2%
61
Investment Management Division
Private Equity Market Overview
The Private Equity Industry has experienced three
significant downturns:1990, 2000 and 2007/2008. For
buyout strategies, transaction volume is largely driven by
the availability and cost of debt. As lending requirements
tightened, transactions became uneconomic and deal
volumes declined. This was the case recently through the
first half of 2009, as the credit crunch continued to hinder
the ability of buyout investors to borrow. Also, in response
to the worsening economic conditions, venture capital firms
turned away from new deals and focused on keeping their
portfolio companies afloat during the economic slowdown.
The two prior Private Equity downturns have been followed
by a five to six year period of steadily increasing deal
volume. While the large volume of maturing debt held by
Private Equity funds suggests that a greater focus will be
placed on existing portfolios, new deal volume appears to
have turned a corner. Managers have indicated deal flow
is improving in both quantity and quality. This is a function
of various factors. First, managers appear more optimistic
about the current risk-return profile for new investments
and believe they can deliver the targeted returns as
outlined to investors. Companies that have managed
their way through the downturn have generally done so
with healthier financials, potentially making them more
attractive acquisition candidates. Purchase price multiples
have increased, likely the result of better corporate capital
structures and improved visibility. Second, managers
are able to again access the debt markets (leverage),
though this is accompanied by more conservative capital
structures and a higher cost of capital. Third, active
fundraising from prior years has left fund managers with a
significant amount of capital (dry powder) to deploy prior to
the expiration of their investment periods.
In terms of realizations, activity has noticeably increased.
Strategic investors have begun deploying capital and
are expected to continue doing so. Sponsor-to-sponsor
transactions (one fund selling a portfolio holding to another
fund) have become a greater portion of realizations. While
mergers and acquisition (M&A) activity is expected to
remain the primary exit avenue for venture capital, the IPO
market has witnessed more transactions both in the U.S.
and globally, through the first half of 2010 vs. full year 2009.
In addition, the U.S. IPO backlog is increasing.
Private Equity Performance
For the fiscal year, the Private Equity investment portfolio
returned 12.88 percent, underperforming its benchmark
return of 54.94 percent. The Private Equity investment
portfolio is benchmarked against a public equity index.
This can lead to a significant short-term difference between
portfolio performance and benchmark performance. The
portfolio significantly underperformed the strong equity
bull market for the year ending June 2010, but has
outperformed on a 3-year and 5-year timeframe. The chart
below illustrates returns and benchmarks for the fiscal and
trailing years.
-10%
0%
10%
20%
30%
40%
50%
60%
Private Equity Investment Portfolio Private Equity Custom Benchmark
Fiscal 2F0is1c0a l 2010 Tr. 3 YeaTrr. 3 Y r Tr. 5 YeaTrr . 5 Y r Tr. 10 YeaTrr. 10 Yr
Private Equity Investment Portfolio Annualized Performance
n Real Estate Investment Portfolio n Custom Real Estate Benchmark
12.9%
54.9%
0.0%
-1.3%
7.4%
5.0%
-3.6%
2.5%
62
Investment Management Division
Private Equity Investment Advisors
(FY ending 2010)
Below is a list of the Private Equity investment advisors and fund relationships as of June 30, 2010.
Private Equity Funds Market Value ($)
Apollo Investment Fund VI 143,491,299
Credit Suisse NC Fund 2006 141,879,149
WLR Recovery Fund IV 111,985,285
Warburg Pincus X 110,850,662
Parish Capital I 96,066,249
Parish Cap Europe I 93,829,988
TPG Partners V 84,622,734
LG & Bessemer II 83,610,126
Longreach Capital I 76,569,448
Terra Firma III 75,131,657
Parish Capital II 74,757,952
TPG Partners IV 70,940,489
Matlin Patterson Global Opp III 61,089,753
Terra Firma II 58,157,131
Lexington Middle Market 57,638,521
Avista Capital Partners II 54,810,705
CVC Europe Equity IV 54,492,038
Avista Capital Partners 51,263,874
Elevation Partners 49,824,280
Warburg Pincus IX 49,219,726
Francisco Partners II 46,509,185
Perseus Partners VII 45,412,624
KRG Capital Fund III 42,212,828
Coller International IV 42,163,761
Credit Suisse NC Fund 2008 41,105,305
WLR AHM Co-Inv 68,819,255
Chapter IV Special Situations 38,654,125
KRG Capital Fund IV 34,724,051
Apollo Investment Fund VII 31,515,611
Markstone Capital Partners 31,193,727
Perseus Market Opportunity 29,874,421
Quaker Bioventures II 29,499,278
Robeco Clean Tech II 28,177,602
Crestview Partners Fund II 27,926,730
Burrill Life Sciences 27,226,576
Tenaya Capital Fund V 27,093,996
Horsley Bridge Int’l IV 26,516,280
Harvest Partners V 26,200,268
Burrill Life Sciences III 26,156,349
Ampersand 2006 25,823,081
Castle Harlan Partners IV 24,304,987
Angeleno Investors II 22,536,491
Tudor Ventures III 22,072,274
PCA-SYN Investments 20,671,839
Charterhouse Capital IX 19,611,578
CVE Kauffman I 19,463,473
Private Equity Funds Market Value ($)
Robeco Clean Tech II Co-Inv 17,800,847
Lexington Middle Market II 17,460,548
TCV VI 17,096,573
TPB Biotech Partners II 16,229,886
Catterton Growth Partners 16,178,930
TPG Biotech Partners III 15,888,884
Access Capital II 15,240,332
Synergy Life Science 14,686,406
Carousel Capital III 14,260,555
TPG Partners VI 12,517,452
Horsley Bridge IX 11,636,807
Pappas Ventures III, L.P. 10,124,453
AG Private Equity IV 10,053,781
ARCH Venture Fund VII 9,109,295
Harvest Partners IV 8,634,392
Highland Consumer Fund I 8,569,027
Novak Biddle III 7,900,305
Starvest Partners II 7,835,063
Halifax Capital Partners II 7,349,833
Highland Capital VII 7,317,760
Castle Harlan Partners V 7,266,290
WLR AGO Co-Inv 6,401, 963
Hatteras Venture Partners III 5,770,697
Aurora Ventures IV 5,575,724
Lindsay Goldberg III 5,552,538
Aurora Ventures V 5,393,562
Novak Biddle IV 5,000,945
Intersouth Partners VI 4,935,509
KRG Capital Fund II 4,885,006
NCEF Liquidating Trust 4,056,931
NC Economic Opp Fund 3,710,381
Pappas Ventures IV 3,406,950
Credit Suisse NC Fund 2008 – Series II 3,2000,000
Novak Biddles Venture Partners V 3,155,937
Highland Capital Partners VI 1,923,343
AV Management IV 1,892,895
Horsley Bridge Int’l V 1,673,793
DLJ Merchant Banking II 1,299,469
Pappas Ventures II 1,141,073
Franklin Fairview I 945,733
Sprout Growth II 98,056
Intersouth Partners III 55,976
Kitty Hawk Capital III 46,550
Academy Venture Fund 23,042
AG Private Equity IV – Reserve –
Credit Suisse Innovation Fund –
63
Investment Management Division
Credit Strategies
During the 2009 legislative session, the Investment
Management Division gained the ability to utilize inflation
and credit asset classes within the portfolio. The goal
of this legislation is to provide the investment team the
flexibility and tools to increase portfolio return and better
manage risk.
Credit Structure
As of June 30, 2010, the Credit Strategies investment
portfolio maintained a market value of approximately
$840 million, representing 1.3 percent of the Pension
Fund. The portfolio invests in a diversified mix of credit
focused investment vehicles managed by experienced
investment advisors.
Bank Loans
24.4%
stRategy allocation
Structured Credit
36.5%
Mezzanine
8.7%
Distressed Debt
30.4%
Credit Market Overview
The recent credit crisis continues to leave its mark on
the U.S. and global econo