ANNUAL REPORT 2000 CITY OF LOS ANGELES DEPARTMENT OF PENSIONS FIRE AND POLICE PENSION SYSTEMS. July 1, 1999 to June 30, 2000

Transcription

1 ANNUAL REPORT 2 July 1, 1999 to June 3, 2 CITY OF LOS ANGELES DEPARTMENT OF PENSIONS FIRE AND POLICE PENSION SYSTEMS

2 Department of Pensions 36 East Second Street Suite 6 Los Angeles California 912 Electronic Mail: PENSIONS@FPPEN.LACITY.ORG Web Site: Edward Griffiths Assistant Manager, Benefits 2 Annual Report July 1, 1999 to June 3, 2 Gary Mattingly General Manager Tom Lopez Chief Investment Officer Donna Weisz Jones Assistant City Attorney Table of Contents Governing Bodies... 2 General Manager's Letter... 3 System Investments... 4 Actuarial Valuation... 9 Budget Auditors' Report Membership Statistics Active Membership Retired Membership... 4 Legal Summary Summary of Pension Plan Benefits Milestones Department of Pensions 2 Annual Report -1- Fire and Police Pension Systems

3 MAYOR Richard J. Riordan City Attorney James Kenneth Hahn Controller Rick Tuttle Mike Hernandez First District John Ferraro Fourth District Alex Padilla Seventh District Nate Holden Tenth District Jackie Goldberg Thirteenth District CITY COUNCIL John Ferraro, President Joel Wachs, President Pro Tempore Joel Wachs Second District Michael Feuer Fifth District Mark Ridley-Thomas Eighth District Cindy Miscikowski Eleventh District Nick Pacheco Fourteenth District Laura Chick Third District Ruth Galanter Sixth District Rita Walters Ninth District Hal Bernson Twelfth District Rudy Svorinich, Jr. Fifteenth District BOARD OF PENSION COMMISSIONERS Gay L. Harwin, President Steven J. Silberman Vice President Mike Carter Commissioner Charles B. Isgar Commissioner David H. Kim Commissioner Louis F. Moret Commissioner Fredrick A. Tredy Commissioner Department of Pensions 2 Annual Report -2- Fire and Police Pension Systems

4 June 3, 2 The Honorable Richard J. Riordan, Mayor Honorable Members of the City Council In accordance with Section 216 of the Los Angeles Charter, I am submitting the Annual Report of the Department of Fire and Police Pensions for the fiscal year ended June 3, 2. This annual report includes the System s financial statements audited by an independent audit firm and the actuarial valuation summary prepared by the System s actuary. During the Fiscal Year, the Investment Program gained $1.819 billion, reflecting an annual rate of return of 16.3%. Total system assets have grown to $13.23 billion. Favorable investment and actuarial experience increased the funding of pension benefits to 114.4%, a 9.2% improvement. During the same period, the funding of health subsidy benefits decreased to 65.6%, a decline of 1.4%. A 1.7% decline in active membership brought the total to 12,378. Pensioners currently number 11,612, a 2.1% increase. The average monthly benefit paid to pensioners rose to $3,69, a 4.1% increase from the previous year. The new City Charter became effective July 1, 2. As a result, the four Pension Plans, formerly known as Articles XVII, XVIII, XXXV Plan 1 and XXXV Plan 2, are now referred to as Tiers 1, 2, 3 and 4, respectively. Effective January 2, additional benefits were authorized for surviving spouses and domestic partners. Domestic partners may now receive survivor benefits and both surviving spouses and surviving domestic partners may receive a health insurance subsidy, provided certain eligibility requirements are met. A revised investment policy was approved in January 2. The policy incorporates the recommendations from the fiduciary audit and changes required by the new Charter and the Asset Allocation Plan. It is anticipated that the revised investment policy will facilitate the growth of assets to meet the demands of the system. Respectfully submitted, GARY MATTINGLY General Manager

5 System Investments Department of Pensions 2 Annual Report -4- Fire and Police Pension Systems

6 Introduction Summary of Investment Activities During the past five years, the System's assets have grown from $6.346 billion to $13.23 billion. The investment program produced a gain of $1.819 billion for the year ending June 3, 2. $14 $13 $12 $11 $1 $9 $8 $7 $6 $5 $4 $3 $2 $1 $ MARKET VALUE GROWTH OF SYSTEM ASSETS (In Billions) $4. $4.6 $5.4 $5.6 $6.3 $7.3 Investment Environment The bond market (Salomon Bros. Broad Investment Grade Index) produced a positive return of 4.51 percent for the year ending June 3, 2. Large capitalization stocks (S&P 5) achieved a 7.24 percent return. Smaller capitalization stocks (Russell 2 Index) returned percent. International stocks (Morgan Stanley EAFE Index) returned percent. Real Estate, as measured by the Russell-National Council of Real Estate Investment Fiduciaries Index (NCREIF Classic Property Index) continued its recovery from the real estate recession with a 12.5 percent return. Investment Performance $8.66 $13.2 $11.5 $ The investment objective of the total Fund, over a full market cycle (usually 5-7 years), is to earn a return on investments matching or exceeding the required actuarial rate of return and investment performance above the median of a sampling of public funds. For the past five years, the System's annualized return of percent was more than six times the inflation measurement increase of 2.48 percent. For the one-year period, the System's overall investment performance was up 16.3 percent and outpaced the Consumer Price Index increase of 3.73 percent. The System's performance was above median compared with other public funds (Russell/ Mellon Analytical Services Universe) over the past three years. For this past year, the System returned 16.3 percent vs percent for the public funds median return, and returned percent for the past 3 years vs percent for the public funds universe. Our above median performance this year is mainly attributable to the outstanding performance of our Domestic and International Equities. Asset Allocation Decisions Our asset allocation plan establishes the blueprint for investing the System's assets in stocks, bonds, real estate and cash equivalents over a three to five year period. This plan is the single most important factor in managing risk and achieving investment returns necessary to fund benefits. The Board adopted the following asset class targets on December 17, 1998, pursuant to a recommendation by R.V. Kuhns, the Board's asset allocation project consultant. Domestic Equity % U.S. Small Caps % International Equity...11% Domestic Bonds... 2% High Yield Bonds... 6% Real Estate... 8% Alternative Investments... 5% Emerging Markets... 3% Cash Equivalents... 3% The actual asset class percentages of the System will vary from target allocations due Department of Pensions 2 Annual Report -5- Fire and Police Pension Systems

7 to inflows (such as City and member contributions), outflows (such as pension payments) and the movements of the securities markets. Assets are periodically rebalanced to adjust for these movements. As of June 3, 2, the asset values were as follows: ASSET CLASS MARKET VALUE PERCENT (In $ Millions) Stocks 8, Bonds 2, Real Estate Alternative Investments Cash Equivalents Total 13, Investment Activities The manager changes for the year included the termination of one large cap core equity manager, and new hires included three emerging market managers and one enhanced index equity manager. Administrative actions included the re-hiring of two high-yield fixed income managers, two alternative asset consultants, one large cap value equity manager, and one real estate manager. Most of the System's assets are managed by investment managers who try to outperform a market index. The System has one large equity account that is a Standard and Poor's 5 Index fund whose performance matches that index. A list of our managers is at the end of this section. The real estate acquisition program continued with the purchase of office buildings in Washington, D.C., Phoenix, AZ, and Indianapolis, IN.; apartments in Tempe, AZ, and Dallas, TX; warehouse flex/office in Round Rock, TX and Marietta, GA. One property, the Bank of America office building in Glendale, AZ, was sold to the municipality of Glendale. In the commingled portion of the real estate portfolio, the Board made a new investment in Lend Lease's Value Enhancement IV. Proxy Voting The System votes all domestic and available international proxy ballots. Staff voted 813 corporations' proxies and corporate consents in Fiscal Year The international equities managers vote the proxies for their portfolios in accordance with the Board's proxy guidelines, and cast a total of 33 proxy ballots. The System votes affirmatively on preemptive rights, cumulative voting, and confidential voting; opposes anti-takeover measures and generally abstains on issues of a social, political, or environmental nature that have no expected economic impact on the System's assets. The System votes affirmatively on executive compensation bonus plans if the corporation's stock performance in the past year has exceeded the returns of both the Standard & Poor's 5 Index and an appropriate peer group index; supports the nomination of and affirmative vote for the appointment of independent directors to the Board of Directors; and directs an affirmative vote on measures proposed to place independent directors on compensation committees. Department of Pensions 2 Annual Report -6- Fire and Police Pension Systems

8 CHANGE IN ASSET MIX: LAST TEN YEARS Fiscal Year Stocks Bonds Real Estate Alternative Investments Short Term Investments % 51.7% 59.% 58.6% 59.5% 59.2% 58.8% 6.62% 62.48% 64.45% 32.7% 32.2% 26.4% 24.6% 27.9% 29.3% 3.3% 28.79% 24.97% 22.53% 6.1% 5.6% 3.2% 5.8% 6.3% 6.9% 5.2% 3.91% 4.42% 5.55% 1.5% 1.56% 2.65% 9.2% 1.4% 11.4% 11.% 6.3% 4.6% 4.9% 5.63% 6.57% 4.82% ANNUAL RATES OF RETURN Fiscal Year Domestic Equities International Equities Fixed Income Real Estate Alternative Investments Total Fund* CPI** % 15.2% 18.7% 2.7% 25.6% 25.3% 27.9% 23.7% 25.53% 17.91% -9.9% 6.16% 11.81% 22.11% -.37% 14.83% 12.7% 12.42% 17.65% 26.93% 1.5% 17.6% 17.7%.7% 14.3% 7.8% 1.43% 11.84% 2.44% 3.9% -3.% -3.1% -15.3% 9.4% 14.5% 9.5% 13.9% 18.2% 13.% 15.% 1.77% 12.46% 42.14% 4.8% 14.% 16.% 3.5% 14.5% 14.6% 18.52% 17.48% 16.4% 16.3% 4.3% 3.1% 2.8% 2.5% 3.% 2.7% 2.3% 1.69% 1.96% 2.87% *Total fund includes short-term investments **CPI is for the U.S. ending June 3th Department of Pensions 2 Annual Report -7- Fire and Police Pension Systems

9 INVESTMENT ADVISORS STOCK MANAGERS Alliance Capital Management Amerindo Investment Advisors Boston Partners Brown Capital Management CIC Asset Management Daruma Asset Management Delta Asset Management Frontier Capital Management J.P. Morgan Investment Management Inc. Loomis Sayles & Company, L.P. BOND MANAGERS Capital Guardian GEM Capital Management GW Capital HCM Capital Management LM Capital Lend Lease Loomis Sayles & Company, L.P. Magten Asset Management Corporation Reams Asset Management Smith, Graham & Company INTERNATIONAL STOCK MANAGERS Brandes Investment Partners Invista Capital Management Marvin & Palmer Associates, Inc. Montgomery Asset Management LLP Oechsle International Advisors, Ltd. REAL ESTATE MANAGERS AEW Capital Management Heitman Capital Management Lend Lease Lowe Enterprises Investment Management PSI Institutional Realty Sentinel Real Estate Corporation Urdang & Associates ALTERNATIVE INVESTMENT MANAGERS Abbott Capital Management Hamilton Lane Advisors Oaktree Capital Management Trust Company of the West Department of Pensions 2 Annual Report -8- Fire and Police Pension Systems

10 Actuarial Valuation Department of Pensions 2 Annual Report -9- Fire and Police Pension Systems

11 Actuarial Valuations Two actuarial valuations of the assets and liabilities of pension benefits are conducted annually. One study examines the pension benefits paid to members and their beneficiaries, the other study examines the health subsidies allocated to qualifying members. These studies evaluate the funding progress of the system and determine the annual contribution requirements. The funded status of the pension system is examined over a span of several years to determine if funding progress is made. Satisfactory funding progress has occurred over the past ten years. FUNDED STATUS (Pension Benefits-Actuarial Ratio) 12% 8% 6% 4% 2% % 56% 61% 62% 52% How a Valuation is Conducted The actuarial funding method used (Entry Age Normal Cost) is required by the Charter under Section 121 (Fire and Police Pension Plans General Provision section) for Tier 1 (formerly Article XVII), Tier 2 (formerly Article XVIII), Tier 3 (formerly Article XXXV, Plan 1) and Tier 4 (formely Article XXXV, Plan 2). An actuarial valuation examines the membership of the pension system as currently constituted, then projects future liabilities using various assumptions. Non-economic actuarial assumptions on mortality of members and spouses, probability of service retirement and disability, probability of termination prior to retirement, and probability of having a surviving beneficiary are created from studies made of the actual experience of the membership of the System. A new study is conducted every three years. These assumptions are recommended by an actuary and adopted by the Board of Pension Commissioners. The last study was adopted by the Board in November This experience study Actuarial Valuation Summary 94% 15%114% 76% 81% 68% covered the period beginning July 1, 1995 to June 3, An example of projected mortality is as follows: Average Life Expectancy for Retirees Service Retiree (Average Age = 66) years Disabled Retiree (Average Age = 6) years Surviving Spouse (Average Age = 74) years Economic assumptions are also studied, recommended by the actuary, and adopted by the Board. Economic assumptions in effect for this valuation period are: Economic Assumptions Annual Increase in the Consumer Price Index... 5.%** Annual Individual Salary Increase... varies by age Age Annual Salary Increase Under 25 1.% % % % % % 5 and over 5.5% Annual Increases in Total System Payroll... 5.% Annual Interest % (**Tier 3 and Tier 4 are capped at 3%) Pension Benefit Balance Sheet Cost of living and individual salary assumptions are used to project the dollar amount of benefits to be paid. The total liability is then reduced to today's dollar terms using the interest assumption. Once the liabilities of the system are computed, the valuation study projects the member contributions expected to be received, which are reduced to today's dollar terms using the interest assumption. The individual salary assumptions are used to project the total member contributions. The Entry Age Normal Cost contribution, the amount the City would contribute for a hypothetical new entrant into the system, is calculated. This amount would theoretically be sufficient to fully fund a member's retirement on the date of retirement if all assumptions were realized and no benefit changes were made. These potential future contributions are considered assets of the system, along with assets currently being invested by the Department of Pensions. For purposes of determining the contributions to the Sys- Department of Pensions 2 Annual Report -1- Fire and Police Pension Systems

12 tem, the current assets are now valued using a method that phases in, over five years, the unrealized and realized appreciation above that which is expected based upon the assumed rate of return. As can be seen on the Actuarial Pension Benefit Balance Sheet (see page 13), the balance of -$1.38 billion is considered the unfunded actuarial liability. The unfunded liability for health subsidy benefits for all plans combined is $272 million (see page 14). Unfunded Actuarial Liability An unfunded actuarial liability can result from many variables. Often, benefit increases are credited to members while in the middle of their career, or even after they have retired. Since these benefit enhancements did not exist when the funding of the members' benefits began, contributions to fund these increased benefits were not made during all or part of the members' working career. An example of a benefit enhancement that occurred was the lifting of a 2% cap on cost-ofliving increases. This applied to all members, active and retired, and created an immediate unfunded liability. The Milestones section of this report contains more examples of benefit changes. The Entry Age Normal Cost actuarial method normally results in actuarial gains or losses, unless all actuarial assumptions are met each year. These actuarial gains or losses also result in decreases or increases in the unfunded actuarial liability. Occasionally, the actuarial methodology itself is refined according to accepted actuarial practice. For example, salary increases were not utilized in the computations until the late 197s. When this practice was included, it created an additional unfunded liability. Finally, during a period in the history of the Pension System, the funding was on a pay-asyou-go basis, instead of an actuarial basis. When the system shifted to an actuarial basis, an immediate unfunded liability resulted. Contribution Requirements Calculation The contribution is comprised of two parts: (1) the Entry Age Normal Cost contribution and (2) the contribution to amortize the unfunded liability. The unfunded liability is amortized over a time period using a methodology prescribed in the Charter for each plan. The amortization period for Tier 1 and Tier 2 is scheduled to end on June 3, 237. Tier 1 is amortized as a level dollar amount. Tier 2 is amortized as a level percent of all system members' (Tiers 1, 2, 3 and 4 combined) salaries. Tier 3 and Tier 4's amortization basis is a level percentage of plan members' salaries over a continuous fifteen year cycle. Each year's actuarial gain or loss is amortized for fifteen years. Any gains or losses resulting from benefit changes are amortized over a thirty year period. Changes in the unfunded actuarial liability resulting from benefit changes are amortized over a thirty-year period. With this information, the actuary computes the contribution requirements for the City. Entry Age Normal Cost Contribution Requirements Recommended (As a percentage of plan members' salaries) Tier 1 (Article XVII) % Tier 2 (Article XVIII) % Tier 3 (Article XXXV, Plan 1) % Tier 4 (Article XXXV, Plan 2) % Unfunded Liability Contribution Requirements Recommended Tier 1 (Article XVII)...$27,585,716 Tier 2 (Article XVIII) % of total payroll of Tiers 1, 2, 3 & 4 Tier 3 (Article XXXV, Plan 1) % of Tier 3 payroll Tier 4 (Article XXXV, Plan 2) % of Tier 4 payroll Health Subsidy Valuation The health valuation study utilizes the same actuarial assumptions as the study on pension benefits, with the addition of a medical inflation assumption. Currently, medical costs are increasing at a faster pace than inflation. Assumptions in the June 3, 2 actuarial valuation included medical trend rate increases of 7.75% for pre-65 premiums and 7.5% for post-65 premiums in 2; both decreasing gradually to 6.5% in 26 and thereafter. Using the same actuarial methods for pension benefits, the Actuarial Balance Sheet for health subsidy benefits is shown on page 14. Department of Pensions 2 Annual Report -11- Fire and Police Pension Systems

13 The contributions suggested to fund the health subsidy plan are: Entry Age Normal Cost Contribution Requirements Recommended (As a percentage of plan members' salaries) Tier 1 (Article XVII) % Tier 2 (Article XVIII) % Tier 3 (Article XXXV, Plan 1) % Tier 4 (Article XXXV, Plan 2) % Unfunded Liability Contribution Requirements Recommended Tier 1 (Article XVII)...$1,36,696 Tier 2 (Article XVIII) % of total payroll of Tiers 1, 2, 3 & 4 Tier 3 (Article XXXV, Plan 1) % of Tier 3 payroll Tier 4 (Article XXXV, Plan 2) % of Tier 4 payroll Department of Pensions 2 Annual Report -12- Fire and Police Pension Systems

14 Valuation of Pension Benefits Actuarial Balance Sheet As of June 3, 2 ASSETS Tier 1 Tier 2 Tier 3 Tier 4 All Plans Combined 1. Applicable Assets $ (3,962,536) $9,2,273,95 $1,35,54,31 $ 484,12,527 $ 1,985,936,26 2. Present Value of Future Member Contributions 51,579,57 4,483,917 16,166, ,229, Present Value of Future Contributions by the City for: a. Entry Age Normal Costs 7,471 3,492,65 769,895, ,65,558 1,363,19,379 b. Unfunded Actuarial Accrued Liability 296,91,676 (1,381,32,743) (216,525,256) (8,296,26) (1,381,762,529) 4. Total Assets $292,199,611 $8,171,312,869 $2,259,358,67 $856,641,13 $11,579,512,28 LIABILITIES Tier 1 Tier 2 Tier 3 Tier 4 All Plans Combined 5. Present Value of Benefits Already Granted a. Service Retirements $ 72,518,34 $ 3,929,368,748 $ 17,912,21 $ $ 4,19,798,83 b. Disability Retirements 78,639,287 1,194,157,875 61,28,298 1,333,825,46 c. Survivors and Dependents 139,517, ,76,758 25,88, ,474,644 d. Total $ 29,674,655 $ 5,67,63,381 $ 14,82,871 $ $ 6,66,98,97 6. Present Value of Benefits to be Granted a. Service Retirements $ 1,431,545 $ 2,36,759,684 $ 1,643,23,955 $ 655,213,924 $ 4,336,636,18 b. Disability Retirements 88, ,21, ,638, ,913,84 1,52,662,99 c. Survivors and Dependents 4,64 16,273,693 47,978,225 17,933,84 82,19,362 d. Total $ 1,524,831 $ 2,5,54,738 $2,113,848,152 $ 856,6,848 $ 5,471,488, Refund of Employee Contributions $ 125 $ 654,75 $ 4,689,647 $ 58,282 $ 41,924,84 8. Total Liabilities $ 292,199,611 $ 8,171,312,869 $2,259,358,67 $ 856,641,13 $ 11,579,512,28 Department of Pensions 2 Annual Report -13- Fire and Police Pension Systems

15 Valuation of Health Subsidy Benefits Actuarial Balance Sheet As of June 3, 2 ASSETS Tier 1 Tier 2 Tier 3 Tier 4 All Plans Combined 1. Applicable Assets $ 3,973,622 $291,194,399 $166,316,467 $ 57,756,85 $ 519,24, Present Value of Future Contributions by the City for: a. Entry Age Normal Costs ,577, ,37,467 56,965,7 22,58,82 b. Unfunded/(Surplus) Actuarial Accrued Liability 11,127,391 31,951,721 (3,397,362) (1,584,361) 272,97, Total Assets $15,11,388 $64,724,91 $269,956,572 $14,136,731 $993,918,782 LIABILITIES Tier 1 Tier 2 Tier 3 Tier 4 All Plans Combined 4. Present Value of Benefits Already Granted $ 14,981,741 $ 421,538,4 $4,471,91 $ $44,991, Present Value of Benefits to be Granted a. Actives Eligible to Retire 119, ,659,39 1,773,771 2,72, ,273,59 b. Other Actives 11,526, ,71,9 11,416,48 376,654,77 c. Total 119, ,186,87 265,484,671 14,136, ,927, Total Liabilities $15,11,388 $64,724,91 $269,956,572 $14,136,731 $993,918,782 Department of Pensions 2 Annual Report -14- Fire and Police Pension Systems

16 Department Budget Department of Pensions 2 Annual Report -15- Fire and Police Pension Systems

17 Receipts Department Budget Budgeted Actual City Contribution... Member Contributions... Earnings on Investments... Gain on Sale of Investments... UFLAC Settlement... Miscellaneous... Total Receipts... Expenditures Service Pensions... Disability Pensions... Surviving Spouses' Pensions... Minors'/Dependents' Pensions... Refund of Member Contributions... Health Insurance Subsidy... Medicare... Investment Management Expense... Administrative Expense... Total Expenditures... Increase in Fund Balance... $ 19,337,163 61,453,977 28,, -- 5, 65, $ 532,941,14 Budgeted $ 268,5, 87,57, 7,43, 1,18, 4,, 18,5, 1,91, 27,944, 6,746,95 $ 485,88,95 $ 47,6,19 $ 19,337,163 57,568, ,214,43 1,125,,695 5, 599,55 $ 1,997,219,85 Actual $ 267,265,217 85,842,898 67,137,48 1,686,84 3,875,333 19,864,358 1,885,35 26,47,935 5,65,362 $ 479,93,422 $ 1,518,126,383 RECEIPTS EXPENDITURES Other * (.1%) City Contribution (9.5%) Member Contribution (2.9%) Surviving Spouse (14%) Other** (12.3%) Service (55.8%) Disability (17.9%) Investments (87.5%) *UFLAC Settlement and Miscellaneous **Minors'/Dependents' Pensions, Refund of Member Contributions, Medicare, Health Insurance Subsidy, Investment Management Expense and Administrative Expense Department of Pensions 2 Annual Report -16- Fire and Police Pension Systems

18 Auditors' Report Department of Pensions 2 Annual Report -17- Fire and Police Pension Systems

19 Independent Auditors' Report To the Board of Fire and Police Pension Commissioners Los Angeles, California Members of the Board: We have audited the accompanying statements of plan net assets of the City of Los Angeles Fire and Police Pension System (the System) as of June 3, 2 and 1999, and the related statements of changes in plan net assets for the years then ended. These financial statements are the responsibility of the System's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards and Governmental Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such general purpose financial statements present fairly, in all material respects, information regarding the System's plan net assets as of June 3, 2 and 1999, and changes therein for the years then ended in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic 2 and 1999 general purpose financial statements taken as a whole. The supplemental schedules of funding progress, employer contributions, actuarial methods and assumptions, revenues by source and expenses by type, and administrative expenses are presented for the purpose of additional analysis and are not a required part of the basic general purpose financial statements. These schedules are the responsibility of the System's management. Such schedules for the years ended June 3, 2 and 1999 have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, are fairly stated, in all material respects, when considered in relation to the basic financial statements taken as a whole. MILLER, KAPLAN, ARASE & CO., LLP October 2, 2

20 CITY OF LOS ANGELES FIRE AND POLICE PENSION SYSTEM STATEMENT OF PLAN NET ASSETS June 3, 2 Old Pension and New Pension System Old Pension and New Pension Post Employment Health Plan Subsidy Safety Members Pension Plan Safety Members Post Employment Health Plan Subsidy Total ASSETS CASH $ 1,333,616 $ -- $ 1,791,689 $ -- $ 3,125,35 RECEIVABLES Accrued Interest and Dividend Income $ 55,95,32 $ -- $ 8,225,1 $ -- $ 64,13,33 Contributions , ,312 Due from Old Pension and New Pension System -- 29,91, ,91,618 Due from Safety Members Pension Plan ,862,511 23,862,511 Due from Brokers 79,868, ,361, ,229,887 TOTAL RECEIVABLES $ 135,773,748 $ 29,91,618 $ 13,885,754 $ 23,862,511 $ 671,423,631 INVESTMENTS AT FAIR VALUE Temporary $ 581,943,13 $ -- $ 91,161,37 $ -- $ 673,14,14 U.S. Government Obligations 663,611, ,832, ,443,858 Municipal Bonds Domestic Corporate Bonds 1,644,, ,39, ,925,391,195 International Bonds 117,99, ,896, ,995,473 Domestic Stocks 5,38,82, ,263, ,246,346,398 International Stocks 2,3,293, ,482, ,147,775,58 Real Estate 161,746, ,16, ,763,649 Alternative Investments 266,7, ,581, ,652,555 TOTAL INVESTMENTS $ 1,844,848,53 $ -- $ 2,224,624,723 $ -- $ 13,69,472,776 SECURITIES LENDING COLLATERAL $ 1,91,546,695 $ -- $ 174,478,97 $ -- $ 1,266,25,62 TOTAL ASSETS $ 12,73,52,112 $ 29,91,618 $ 2,414,781,73 $ 23,862,511 $ 15,1,47,314 LIABILITIES Accounts Payable and Accrued Expenses $ 7,443,642 $ -- $ 3,17 $ -- $ 7,743,749 Benefits in Process of Payment 294, , ,311 Due to Brokers 93,91, ,49, ,31,84 Mortgage Payable 15,629, ,257, ,886,8 Due to Health Plan Subsidy 29,91, ,862, ,764,129 Securities Lending Collateral 1,266,25, ,266,25,62 TOTAL LIABILITIES $ 1,674,196,177 $ -- $ 312,27,254 $ -- $ 1,986,43,431 NET ASSETS HELD IN TRUST FOR PENSION BENEFITS AND POST EMPLOYMENT HEALTHCARE BENEFITS (A schedule of funding progress is presented on pages 3 and 31) TOTAL PLAN NET ASSETS $ 1,399,35,935 $ 29,91,618 $ 2,12,573,819 $ 23,862,511 $ 13,23,643,883 Department of Pensions 2 Annual Report -19- Fire and Police Pension Systems

21 EXHIBIT "A" June Old Pension and New Pension System Old Pension and New Pension Post Employment Health Plan Subsidy Safety Members Pension Plan Safety Members Post Employment Health Plan Subsidy Total $ 1,595,929 $ -- $ 215,156 $ -- $ 1,811,85 $ 53,84,328 $ -- $ 7,68,933 $ -- $ 61,449, , ,587, ,49, ,968, ,968, ,928, ,928,739 62,152, ,979, ,132,31 $ 116,454,56 $ 252,968,619 $ 15,176,37 $ 192,928,739 $ 577,527,91 $ 521,886,165 $ -- $ 221,632,595 $ -- $ 743,518,76 73,479, ,994, ,474,796 28,436, ,274, -- 35,71,64 1,637,26, ,994, ,86,255,156 41,217, ,256, ,474,496 4,958,397, ,29, ,714,427,273 1,463,184, ,265, ,474,45,16 143,968, ,537, ,56,14 153,258, ,877, ,135,226 $ 9,651,89,574 $ -- $ 1,841,862,947 $ -- $ 11,492,952,521 $ 863,928,858 $ -- $ 124,23,646 $ -- $ 988,159,54 $ 1,633,68,867 $ 252,968,619 $ 1,981,484,786 $ 192,928,739 $ 13,6,451,11 $ 9,39,935 $ -- $ 848,145 $ -- $ 1,158,8 187, , ,143 54,698, ,553, ,252, ,244, ,244,41 252,968, ,928, ,897, ,928, ,23, ,159,54 $ 1,181,93,41 $ -- $ 373,84,11 $ -- $ 1,554,933,511 $ 9,451,975,457 $ 252,968,619 $ 1,67,644,685 $ 192,928,739 $ 11,55,517,5 Department of Fire and Police Pensions 2 Annual Report -2 Fire and Police Pension Systems

22 ADDITIONS CITY OF LOS ANGELES FIRE AND POLICE PENSION SYSTEM STATEMENT OF CHANGES IN PLAN NET ASSETS Old Pension and New Pension System June 3, 2 Old Pension and New Pension Post Employment Health Plan Subsidy Safety Members Pension Plan Safety Members Post Employment Health Plan Subsidy Total Contributions: City Contributions $ 14,592,612 $ 16,915,233 $ 58,788,231 $ 1,541,87 $ 19,837,163 Member Contributions 14,249, ,318, ,568,489 TOTAL CONTRIBUTIONS $ 118,842,153 $ 16,915,233 $ 12,17,179 $ 1,541,87 $ 248,45,652 Miscellaneous 547,38 -- $ 52,17 -- $ 599,55 $ 119,389,191 $ 16,915,233 $ 12,159,196 $ 1,541,87 $ 249,4,77 INVESTMENT INCOME Net Appreciation in Fair Value of Plan Investments, Including Gain on Sales $ 957,632,97 $ 3,13,248 $ 324,192,125 $ 24,148,39 $ 1,336,76,319 Interest 23,641,384 8,176,157 37,915,493 1,522, ,255,333 Dividends 96,344,69 3,868,215 6,883, ,381 17,372,944 Net Real Estate Income 1,161,849 47,996 35,778,568 1,436,52 47,784,915 Securities Lending Income 3,563, ,72 296,813 11,917 4,15,263 Other Income 1,644,196 66, ,71,325 SUBTOTAL $ 1,272,988,46 $ 42,764,72 $ 45,66,849 $ 27,395,142 $ 1,748,215,99 Less: Investment Manager Expense (25,129,798) -- (1,341,137) -- (26,47,935) Net Investment Income $ 1,247,858,68 $ 42,764,72 $ 43,725,712 $ 27,395,142 $ 1,721,744,164 TOTAL ADDITIONS $ 1,367,247,799 $ 59,679,935 $ 55,884,98 $ 37,936,229 $ 1,97,748,871 DEDUCTIONS Pension Benefits $ 414,642,9 $ -- $ 7,29,391 $ -- $ 421,932,4 Payment of Medicare Reimbursement -- 1,882, ,457 1,885,35 Payment of Health Subsidy -- 19,864, ,864,358 Refund of Contributions 29, ,665, ,875,333 Administrative Expenses 5,65, ,65,362 $ 419,917,321 $ 21,746,936 $ 1,955,774 $ 2,457 $ 452,622,488 NET INCREASE $ 947,33,478 $ 37,932,999 $ 494,929,134 $ 37,933,772 $ 1,518,126,383 NET ASSETS HELD IN TRUST FOR PENSION BENEFITS AND POST EMPLOYMENT HEALTH CARE BENEFITS Beginning of Year 9,451,975, ,968,619 1,67,644, ,928,739 11,55,517,5 End of Year $ 1,399,35,935 $ 29,91,618 $2,12,573,819 $ 23,862,511 $ 13,23,643,883 Department of Pensions 2 Annual Report -21- Fire and Police Pension Systems

23 EXHIBIT "B" JUNE 3, 1999 Old Pension and New Pension System Old Pension and New Pension Post Employment Health Plan Subsidy Safety Members Pension Plan Safety Members Post Employment Health Plan Subsidy Total $ 164,112,32 $ 16,878,68 $ 57,642,742 $ 9,754,995 $ 248,388,665 15,68, ,124, ,85,76 $ 179,792,948 $ 16,878,68 $ 97,767,19 $ 9,754,995 $ 34,193, , , ,79 $ 18,462,586 $ 16,878,68 $ 97,822,631 $ 9,754,995 $ 34,918,82 $ 1,153,28,656 $ 16,436,314 $ 12,75,719 $ 1,118,961 $ 1,192,586,65 177,812,123 14,23,347 39,321,128 3,146, ,51,477 74,866,717 5,991,61 6,83, ,874 87,428,817 18,635,572 1,491,49 27,37,526 2,185,428 49,619,935 6,485,83 519,63 355,485 28,45 7,388,828 5,357,43 428,725 65,22 5,22 5,856,28 $ 1,436,437,941 $ 39,97,459 $ 85,883,73 $ 15,971,812 $ 1,577,39,915 (26,45,55) -- (563,838) -- (26,69,343) $ 1,41,392,436 $ 39,97,459 $ 85,319,865 $ 15,971,812 $ 1,55,781,572 $ 1,59,855,22 $ 55,976,67 $ 183,142,496 $ 25,726,87 $ 1,855,7,392 $ 392,673,293 $ -- $ 5,841,6 $ -- $ 398,514, ,866, ,143 1,868, ,96, ,95 16,963, , ,43, ,274,672 $ 4,829, $ 4,829,885 $ 397,734,445 $ 18,826,753 $ 9,885,5 $ 5,48 $ 426,451,251 $ 1,193,12,577 $ 37,149,314 $ 173,257,491 $ 25,721,759 $ 1,429,249,141 8,258,854,88 215,819,35 1,434,387, ,26,98 1,76,268,359 $ 9,451,975,457 $ 252,968,619 $1,67,644,685 $ 192,928,739 $ 11,55,517,5 Department of Pensions 2 Annual Report -22- Fire and Police Pension Systems

24 City of Los Angeles Fire and Police Pension System Notes to Financial Statements June 3, 2 and 1999 Note 1 -- Description of Plans The City of Los Angeles Department of Fire and Police Pensions operates under provisions of the City Charter of the City of Los Angeles, which provides that the funding requirements of the City of Los Angeles Fire and Police Pension System (the System or the Plan), based on the results of actuarial valuation, will be satisfied by the City of Los Angeles. In addition, the City of Los Angeles is required to fund the administrative expenses of the System. Pension System In general, the System is a defined benefit single-employer pension plan covering all firefighters and police officers of the City of Los Angeles. Benefits are based on members' final compensation and terms of service. In addition, the Plan provides for disability benefits under certain conditions and benefits to eligible survivors. The System is composed of three groups. Those members hired prior to January 29, 1967 participate in the first established Department of Pensions (Old System under Article XVII) unless they requested transfer to the New Pension System (New System under Article XVIII) established for members hired on or after January 28, Members hired on or after December 8, 198 participate in the Safety Members Pension Plan (under Article XXXV) which was established at that time. The plan also covers those certified paramedics and civilian ambulance employees who transferred from the City Employees' Retirement System during the year ending June 3, 1983, or have since been hired. Effective July 1, 1998, a new tier was established for Article XXXV. Active Members hired prior to July 1, 1997 could elect to join the new tier, which has eligibility for service retirement requirements similar to Article XVIII, as of July 1, Members hired after July 1, 1997 will automatically be covered under the new tier, except Members hired between July 1, 1997 and December 31, 1997 who can elect to transfer to the old tier. This valuation is based upon both tiers of Article XXXV, with costs based upon the individual Member's actual tier election. Members with 2 or more years of service in the Old System and New System are entitled to annual pension benefits equal to 4% of their final compensation, increasing for each year of service over 2 years, to a maximum of 66-2/3 % in the Old System and 7% in the New System. There is no minimum age requirement. The Plans provide for unlimited cost-ofliving adjustments in benefits. Members who terminate their employment after July 1, 1982 are entitled to a refund of contributions if they do not qualify for a pension or if they waive their pension entitlements. Members of the Safety Members Pension Plan must be age 5, with ten years of service, to be entitled to a pension. Benefits are equal to 2% of their one-year average compensation, increasing for each year of service over ten years, to a maximum of 7% for 3 years. Benefits are adjusted by the cost-of-living rate, at a maximum of 3% per year. These benefits can be adjusted by the City Council once every three years. Since the Plan includes detailed provisions for each situation, members should refer to the Plan documents for more complete information. Health Subsidy Plan Members of the System are entitled to post-retirement health subsidy benefits under sections 189, 19.5 and 536 of the City Charter, and by related ordinance. Members who retire from the System with ten years of service are eligible for health subsidy benefits. Regular benefits begin at age sixty. Temporary subsidies are available to certain groups at earlier stages. The benefit paid is a percentage of a maximum subsidy for health care based on the lesser of the amount used by the City Employees' Retirement System (CERS) and active Safety Members. The City also pays Medicare Part B premiums for any pensioner receiving a subsidy and Medicare Parts A and B coverage. Department of Pensions 2 Annual Report -23- Fire and Police Pension Systems

25 Note 1 -- Description of Plans (Continued) Health Subsidy benefits are available to Members and their spouses/domestic partners on disability and service retirement. Effective January 1, 2, surviving spouses/domestic partners are eligible for Health Subsidy benefits. The System began pre-funding the health subsidy benefits effective with the plan year. Full funding was phased in over four years. Membership The components of the System's membership were as follows at June 3, 2 and 1999: Active nonvested - Old & New Pension System Active nonvested - Safety Members Pension Plan Active vested - Old & New Pension System Active vested - Safety Members Pension Plan Pensioners and beneficiaries - Old & New Pension System Pensioners and beneficiaries - Safety Members Pension Plan ,512 2,77 3,886 11, , ,921 2,963 3,38 11, ,965 Note 2 -- Summary of Significant Accounting Policies A. Basis of Presentation The accompanying financial statements are prepared using the accrual basis of accounting. Contributions are recognized in the period in which the contributions are due. Benefits and refunds are recognized when due and payable in accordance with the terms of the System. B. Financial Reporting The financial statements have been prepared in accordance with generally accepted accounting principles, as outlined in the Governmental Accounting Standards Board (GASB). In fiscal year 1997, the System adopted the GASB Statements No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans; GASB No. 26, Financial Reporting for Postemployment Healthcare Plans Administered by Defined Benefit Pension Plans; and GASB No. 28, Accounting and Financial Reporting for Securities Lending Transactions. GASB No. 25 establishes financial reporting standards for defined benefit pension plans and requires that System investments be reported at fair value at the reporting date. GASB No. 26 establishes financial reporting standards for defined benefit pension plans in reporting healthcare assets and benefits. GASB No. 28 establishes accounting and financial reporting standards for securities lending transactions. GASB No. 25, Financial Reporting for Defined Benefit Plans and Notes Disclosures for Defined Contribution Plans, was adopted by the System on July 1, GASB 25 supercedes all previous financial reporting standards allowed for governmental defined benefit pension plans including GASB No. 5, Disclosure of Pension Information by Public Employee Retirement Systems and State and Local Governmental Employers, Accounting and Reporting by Defined Benefit Pension Plans, previously relied upon by the System. GASB No. 25 requires a statement of plan net assets, a statement of changes in plan net assets, investments be carried at fair value with unrealized gains and losses included in the statement of changes in plan net assets, and certain note disclosures regarding actuarial methods, contribution requirements and funding progress of the System. GASB No. 26 was adopted by the System on July 1, GASB No. 26 establishes financial reporting standards for postemployment healthcare plans administered by state and local governmental defined benefit pension plans. It is an interim statement pending completion of the GASB's project on accounting and financial reporting of other postemployment benefits by plans and employers. Department of Pensions 2 Annual Report -24- Fire and Police Pension Systems

26 B. Financial Reporting (Continued) In addition to the reporting standards, the statement also establishes certain requirements for plans that elect to provide historical trend information about the funded status of the postemployment health plan subsidy and the employer's required contribution to the Plan, either as supplementary information or an additional financial statement or note. GASB No. 28 was adopted on July 1, GASB No. 28 establishes accounting and financial reporting standards for securities lending transactions and requires the System to record cash and certain securities received as collateral under securities lending transactions as assets, and liabilities resulting from these transactions in the statement of plan net assets. Revenues from and costs of securities lending transactions, such as borrowing rebates and agent fees, are reported as investment income and expenditures, respectively, in the statement of changes in plan net assets. Securities lending activity had previously been disclosed in the footnotes to the financial statements. C. Cash Cash consists primarily of an undivided interest in the cash held by the Treasurer of the City of Los Angeles. These monies are pooled with the monies of other City agencies and invested by the City Treasurer's office, a subsidiary of Deutsche Bank. D. Investments The System is authorized to make temporary investments in instruments rated A-1 by Standard & Poor's Corporation and P-1 by Moody's Commercial Paper Record or the equivalent as determined by the Custodian, Bankers Trust Company, a subsidiary of Deutsche Bank.. Short-term investments, consisting primarily of bankers' acceptances, commercial paper, certificates of deposit, pooled temporary investments, Treasury bills and repurchase agreements along with bonds, stocks and alternative investments are reported at fair value in accordance with GASB No. 25. Pooled temporary investments represent funds invested in a Custodian-managed discretionary short term investment fund. This fund invests in a variety of U.S. and foreign securities rated A-1 or P-1, or equivalent quality as determined by the Custodian. Investments denominated in foreign currencies are translated to the U.S. dollar at the rate of exchange in effect at the System's year end. Resulting gains or losses are included in the combined pension plan and postemployment health subsidy statement of changes in plan net assets, if material. The stated market value of securities investments is generally based on published market prices or quotations from major investment dealers. Real estate market values are taken from recent appraisals, when available, and from the reports of investment advisors. Market values reflected by reports of advisors are based on recent purchase prices, appraisals and on advisor estimates. Real estate investments are recorded in the financial statements under the equity method and are carried at lower of cost or market value. The fair values of real estate investment funds are provided by the individual real estate fund managers and are evaluated by the System's real estate consultant. Investment transactions are accounted for on the date the securities are purchased or sold (trade date). Unsettled investment trades as of fiscal year-end are reported in the financial statements on the accrual basis. The corresponding proceeds due from sales are reported on the statement of plan net assets as receivables and labeled due from brokers, and amounts payable for purchases are reported as liabilities and labeled due to brokers. Dividend income is recorded on ex-dividend date, and interest income is accrued as earned. The fair values of venture capital and alternative investments are estimated based on audited financial statements provided by the individual fund managers. E. Income from Investments The Charter of the City of Los Angeles provides that the rate of return from investments, exclusive of gains and losses, shall be credited to member contribution accounts. Department of Pensions 2 Annual Report -25- Fire and Police Pension Systems

27 F. Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting years. Actual results could differ from those estimates. Note 3 -- Funding Policy As a condition of participation, members are required to contribute a percentage of their salaries to the System. The System's actuaries, in their reports as of June 3, 2 and 1999, recommended that New System members contribute 1% in addition to the 6% rate provided in the City Charter, for a total of 7% of salary. Old System members are required by the City Charter to contribute 6% of salary. Safety Members Pension Plan members are required to contribute 8% of salary. The Charter of the City of Los Angeles specifies that the City will make the following contributions each year: A. An amount equal to the City's share of defined entry-age normal costs. B. For New System members and Old System members, a dollar amount or percentage necessary to amortize the "unfunded liability" of the System over a 7-year period, beginning with the fiscal year commencing July 1, Under the Safety Members Pension Plan, any "unfunded liability" of that System shall be amortized over a 3-year period, and actuarial experience gains and losses shall be amortized over a 15-year period. C. An amount to provide for health plan subsidies for retired members. D. An amount to provide for administrative expenses. Accordingly, the actuary for the System has determined the contributions for items A, B, and C above, for the year ended June 3, 2 to be as follows: Percentage of Member's Salaries Old System (Article XVII) New System (Article XVIII) Safety Members Pension Plan (Article XXXV) Entry-Age Normal Cost Contribution 2.33% 21.77% 14.28% Amortization of Unfunded Liability $3.3M $78.6M $61.5M Health Plan Subsidy $.5M* $17.1M* $11.M* *Stated as required dollar amount. The actuarially determined unfunded (surplus) liability of the System was ($1,19,665,14) and ($21,545,583) at June 3, 2 and 1999, respectively, (which takes into account the present values of future normal cost contributions by both the members and the City). In accordance with the City Charter, the amount at June 3, 2 is to be amortized over the next 37 years** through contributions to be made by the City. **Amortization to be completed by year 237. Contributions totaling $248,45,652 ($19,837,163 City and $57,568,489 member) were made during the year ending June 3, 2 with respect to the pension plan and health plan subsidy, in accordance with actuarially determined contribution requirements determined through an actuarial valuation performed at June 3, 2. These contributions consisted of approximately $185,1, normal cost and $34,5, amortization of the unfunded actuarial accrued liability for the aggregate pension plans. For the health plan subsidy, they consisted of approximately $19,6, normal cost and $9,, amortization of the unfunded actuarial accrued liability. Department of Pensions 2 Annual Report -26- Fire and Police Pension Systems

28 Note 4 -- Securities Lending The System has entered into various short-term arrangements with its custodian, whereby investments are loaned to various brokers, as selected by the Custodian. The lending arrangements are collateralized by cash, letters of credit and marketable securities, held on the System's behalf by the Custodian. These agreements provide for the return of the investments and for a payment of: a) a fee when the collateral is marketable securities or letters of credit, or b) interest earned when the collateral is cash on deposit. The City Charter permits the System to use investments of the System to enter into securities lending transactions - loans of securities to broker-dealers and other entities for collateral with a simultaneous agreement to return the collateral for the same securities in the future. Upon direction of the Board, the Custodian may loan securities to brokers or dealers or other borrowers upon such terms and conditions as it deems advisable. Collateral for the securities on loan will be maintained at a level of at least 12 percent of their market value plus any accrued interest for U.S. securities lending and 15 percent of the market value plus any accrued interest for non U.S. securities lending. At year end, the System had no credit risk exposure to borrowers because the amounts the System owes the borrowers exceeded the amounts the borrowers owed the System. The borrower has all incidents of ownership with respect to borrowed securities and collateral including the right to vote and transfer or loan borrowed securities to others. The System is entitled to receive all distributions, which are made by the issuer of the borrowed securities, directly from the borrower. Under the agreement, the custodian will indemnify the System as a result of the custodian's failure to: (1) make a reasoned determination of the creditworthiness of a potential borrower before lending and, during the term of the loan or loans, the borrower files a petition of bankruptcy or similar action, (2) demand adequate collateral, or (3) otherwise maintain the securities lending program in compliance with the Federal Financial Institutions Examinations Council Supervisory Policy on Securities Lending. These agreements provide the return of the securities and revenue determined by the type of collateral received (from which the custodian's fee is deducted). The securities on loan to brokers are shown at their market value on the Systems' plan net assets. The System adopted the provisions of Statement No. 28 of the Governmental Accounting Standards Board, Accounting and Financial Reporting for Securities Lending Transactions, in fiscal This Statement requires that cash received as collateral on securities lending transactions be reported as assets, and that liabilities from these transactions be reported in the statement of plan net assets. Additionally, the costs of securities lending transactions, such as borrower rebates and fees are netted against securities lending income. The market value of total securities lent was $1,222,861,713 and $953,482,842 as of June 3, 2 and 1999, respectively. The collateralized value of cash and securities was $1,266,25,62 and $988,159,54 as of June 3, 2 and 1999, respectively. Note 5 -- Contingencies A. Termination Rights All members who were active on or after July 1, 1982 have a vested right to their past contributions and accrued interest in the event of their termination prior to retirement. The dollar amount of contributions and interest subject to this right was $811,781,737 and $787,499,626 as of June 3, 2 and 1999, respectively. B. Investment Commitment The System has commitments to contribute capital for real estate and venture capital investments in the aggregate amount of approximately $354,925,427 at June 3, 2. Note 6 -- Governmental Accounting Standards Board (GASB) Investment Categories The System's investments in securities, which are held by Bankers Trust Company, the Custodian, are categorized below, in accordance with categories established by the GASB, to give an indication of relative custodial credit risk assumed at Department of Pensions 2 Annual Report -27- Fire and Police Pension Systems