Wayne County Employees' Retirement System Defined Benefit Plan

Transcription

1 Wayne County Employees' Retirement System Defined Benefit Plan Year Ended September 30, 2012 and 2011 Financial Statements

2 Table of Contents Page Independent Auditors' Report 1 Management's Discussion and Analysis 4 Financial Statements Statement of Plan Net Assets 9 Statement of Changes in Plan Net Assets 10 Notes to Financial Statements 12 Required Supplementary Information Schedule of Funding Progress 26 Schedule of Employer Contributions 26

3 Rehmann Robson INDEPENDENT AUDITORS' REPORT 675 Robinson Rd. Jackson, MI Ph: Fx: To the Wayne County Board of Commissioners and the Wayne County Retirement Commission Detroit, Michigan January 23, 2013 We have audited the accompanying statement of plan net assets of the Wayne County Employees Retirement System Defined Benefit Plan (the Plan ), a pension trust fund of the County of Wayne, Michigan, as of September 30, 2012 and 2011, and the related statement of changes in plan net assets for the years then ended. These financial statements are the responsibility of the Plan s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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. As discussed in Note 1, the financial statements present only the Plan and do not purport to, and do not, present the financial position of the County of Wayne, Michigan as of September 30, 2012 and 2011, and the changes in its financial position for the years then ended, in conformity with accounting principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the plan net assets of the Plan as of September 30, 2012 and 2011, and the changes in its plan net assets for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Accounting principles generally accepted in the United States of America require that the management s discussion and analysis and the schedules of funding progress and employer contributions as listed in the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. 1

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5 MANAGEMENT'S DISCUSSION AND ANALYSIS 3

6 Management's Discussion and Analysis This section of the annual report of the Wayne County Employees Retirement System Defined Benefit Plan (the Plan ) presents management s discussion and analysis of the Plan s financial performance during the plan years that ended on September 30, 2012, 2011 and Please read it in conjunction with the Plan s financial statements, which follow this section. Financial Highlights The Plan s total net assets increased during fiscal 2012 by $32.7 million (nearly 5%); the prior year decrease was $113.2 million (about 14%). Net assets are held in trust to meet future benefit payments. The Plan s benefits are funded by contributions from Wayne County and active members, as well as by the investment income earned on the Plan s assets. As of September 30, 2010 and 2011, the funded ratios for the Plan were 60% and 50%, respectively, for pension benefits, based on the most recent actuarial valuations (i.e., a valuation has not yet been completed for the year September 30, 2012, as explained in the accompanying required supplementary information). Total additions to net assets, excluding appreciation (depreciation) in the fair value of investments, increased by $46.1 million from $45.3 million for the year ended September 30, 2011 to $91.4 million for the year ended September 30, The increase is primarily attributable to the amount actually contributed to the plan. County contributions actually paid into the plan were reduced by $26 million in 2011 by the County by using an offset (as further described in Note 5 to the financial statements), while contributions paid into the plan were only reduced $6 million in 2012 related to the offset. The County's actuarially determined contribution rate also increased from 30.26% for 2011 to 39.68% for 2012, which increased employer contributions. During the current year the County allowed some employees to purchase service credits and to transfer to the Wayne County Hybrid Retirement Plan Option #5 and Wayne County Hybrid Retirement Plan Option #6, which increased employee contributions. The Airport Authority offered a retirement incentive that allowed some employees to purchase service credits and to transfer to the Wayne County Hybrid Retirement Plan Option #5. The Airport Authority also contributed an additional $2.0 million in employer contributions to the Plan to fund this incentive. The change in the fair value of investments increased by $101.4 million, going from a net depreciation of $22.9 million for 2011 to a net appreciation of $78.5 million for The net appreciation in the fair value of investments for the current year is attributable to the improving financial markets and the Plan recovering the losses of the prior plan year. There was a net gain of $34.2 million for fiscal Total deductions from net plan assets increased by $1.6 million, increasing from $135.6 million for fiscal 2011 to $137.2 million for The change was due to an increase in the cost of pension benefits for the current year. Overview of the Financial Statements This annual report contains the Plan s financial statements, which consist of the statements of plan net assets and statements of changes in plan net assets. These financial statements report information about the Plan as a whole using accounting methods similar to those used by private-sector pension plans. The statements of plan net assets include all of the Plan s assets and liabilities. All of the current year s increases and decreases in the Plan s net assets are accounted for in the statements of changes in plan net assets, regardless of when cash is received or paid. 4

7 Management's Discussion and Analysis These financial statements report the Plan s net assets and how they have changed. Net assets represent the difference between the Plan s assets and liabilities, and they represent one way to measure the Plan s financial health, or position. Over time, increases or decreases in the Plan s net assets are an indicator of whether its financial health is improving or deteriorating. The notes to the financial statements, as listed in the table of contents, explain some of the information in the financial statements and provide more detailed data. Additional six-year historical trend information, designed to provide information about the Plan s progress in accumulating sufficient assets to pay benefits when due, is presented in the required supplementary information. Financial Analysis of the Plan as a Whole Below are the condensed statements of plan net assets as of September 30, 2012, 2011, and 2010: Net Assets (in millions) Assets Investments $ $ $ Other assets Total assets Liabilities Net assets held in trust for pension benefits $ $ $ The Plan s total assets as of September 30, 2012 were $731.2 million and were mostly comprised of cash and investments. Total assets increased by $32.5 million, or 4.6%, from the prior year. Total assets for the fiscal years ending September 30, 2011 and 2010 were $698.7 million and $816.6 million. This increase was attributable to the improving financial markets and the County paying more of the required employer contributions into the Plan for the current year. The overall rate of return on investments for the year ended September 30, 2012 was a gain of 16.75%, compared to a loss of 1.41% for 2011 and a gain of 6.53% for Other assets include $2.3 million and $2.1 million that were due from the Plan s broker for securities sold as of September 30, 2012 and 2011, respectively, and liabilities include $1.3 million and $1.8 million that were due to the Plan s broker for securities purchased as of September 30, 2012 and 2011, respectively. The amounts due to and from the broker are a result of security purchase and sale transactions initiated before September 30 of each year, but not completed until after October 1 of each year. Other assets as of September 30, 2012 also include $14.8 million of equity in Wayne County pooled cash. The Plan s equity in Wayne County pooled cash as of September 30, 2011 and 2010 was $1.7 million and $9.9 million, respectively. Total net assets held in trust for benefits at September 30, 2012 increased by $32.7 million from 2011, primarily due to the improving financial markets and the higher contributions into the Plan from the employer and employees for the year. In 2011, total net assets held in trust decreased by $113.2 million from 2010, primarily due to the volatile financial markets that decreased significantly at the end of the fiscal year and the lower contributions into the Plan from the employer and employees for the year. 5

8 Management's Discussion and Analysis Below are the condensed statements of changes in plan net assets for the years ended September 30, 2012, 2011, and 2010: Change in Net Assets (in millions) Additions Contributions $ 72.0 $ 29.3 $ 64.9 Investment income: Net appreciation (depreciation) in fair value of investments 78.5 (22.9) 34.2 Other investment income Total additions Deductions Benefit payments and distributions Administrative expenses Total deductions Change in net assets 32.7 (113.2) (14.8) Net assets held in trust for pension benefits: Beginning of year End of year $ $ $ The reserves needed to finance pension benefits are accumulated through the collection of employee and employer contributions and through earnings on investments. Contributions and net investment income, excluding appreciation/depreciation, for the year ended September 30, 2012 totaled $91.4 million. Contributions and net investment income, excluding appreciation/depreciation, totaled $45.3 and $85.7 million for the years ended September 30, 2011 and 2010, respectively. The investment return exceeded our assumed rate of return of 7.75%, and these results will have a positive effect on the actuarial valuation of the Plan. Total contributions for 2012 increased by $42.7 million compared to the prior year. Employer contributions were made at the actual rate of 31.97, 9.42 and percent of covered payroll during the years ended September 30, 2012, 2011 and Employer contributions were $47.7 million, $13.4 million and $35.4 million for the years ended September 30, 2012, 2011 and 2010, respectively. Other investment income (including securities lending income) was $2.3 million and consistent with the prior year. Other investment income was $2.6 million and $5.0 million for the years ending September 30, 2011 and Investment expenses were $3.1 million for the year ending September 30, 2012, compared to $4.6 million and $4.2 million for the years ending September 30, 2011 and WCERS worked with some investment managers to reduce the rate charged by the managers for fees and changed some of the managers that had high fees, which resulted in $1.5 million in savings for the current year. 6

9 Management's Discussion and Analysis Net Appreciation (Depreciation) Net appreciation in the fair value of investments was $78.5 million for the year ended September 30, 2012, compared to net depreciation of $22.9 million and net appreciation of $34.2 million for the years ended September 30, 2011 and The net appreciation or depreciation in the fair value of investments is added to or deducted from plan net assets. The net appreciation in the fair value of investments for the current year is attributable to the improving financial markets and the Plan recovering the losses of the prior plan year. Deductions from Plan Net Assets The deductions of the Plan include the payment of pension benefits to members and beneficiaries and the costs of administering the Plan. Total deductions for the year ended September 30, 2012 were $137.2 million as compared to prior year s deductions of $135.6 million, an increase of 1.2% over the prior year. The change was due to an increase in the cost of pension benefits for the current year. Total deductions were $134.7 million for the year ended September 30, Economic Factors The financial markets have been volatile over the last several years. The current year saw improving financial markets and the Plan recovering the losses of the prior plan year during the current plan year. Management believes that the Plan is in a financial position to meet its pension benefit obligations. It is anticipated that the financial position can improve with a prudent investment strategy and return to more stable market conditions. Financial Contact This financial report is designed to present its users with a general overview of the Plan s finances and to demonstrate the Plan s accountability for the funds it holds. If you have any questions about this report or need additional financial information, contact the Wayne County Employees Retirement System, 28 West Adams, Suite 1900, Detroit, Michigan

10 BASIC FINANCIAL STATEMENTS 8

11 Statements of Plan Net Assets September 30, 2012 and Assets Investments, at fair value (Note 3): Equity securities and mutual funds $ 427,986,598 $ 389,875,268 Debt securities and mutual funds 99,005, ,799,770 Money market funds 21,492,551 17,409,568 Other investments 162,224, ,540,164 Total investments 710,709, ,624,770 Equity in Wayne County pooled cash (Note 3) 14,793,461 1,726,401 Due from other Wayne County component units and funds 1,970,149 12,800 Accounts receivable 156, ,903 Due from broker for securities sold 2,284,546 2,065,629 Accrued interest and dividends 1,214,817 1,035,717 Prepaid expense 21,686 16,320 Depreciable capital assets, net (Note 4) 9,774 14,576 Total assets 731,160, ,741,116 Liabilities Accounts and contracts payable 649, ,927 Due to broker for securities purchased 1,343,480 1,789,713 Accrued wages and benefits 226, ,867 Obligation for unfunded other postemployment benefits 855, ,930 Total liabilities 3,075,357 3,295,437 Net assets held in trust for pension benefits $ 728,084,796 $ 695,445,679 The accompanying notes are an integral part of these financial statements. 9

12 Statements of Changes in Plan Net Assets For the Years Ended September 30, 2012 and Additions Contributions: Employer $ 47,676,230 $ 13,427,952 Members 24,308,321 15,874,203 Total contributions 71,984,551 29,302,155 Investment income: Net appreciation (depreciation) in fair value of investments 78,451,874 (22,851,967) Interest 12,650,510 12,154,878 Dividends 7,533,194 5,896,180 Securities lending income 452, ,825 Other investment income 1,896,733 2,075,107 Total investment income (loss) 100,984,836 (2,194,977) Investment expenses (3,091,235) (4,639,798) Net investment income (loss) 97,893,601 (6,834,775) Total additions 169,878,152 22,467,380 Deductions Participant benefit payments and distributions 134,184, ,438,324 Administrative expenses 3,054,571 3,183,680 Total deductions 137,239, ,622,004 Change in net assets 32,639,117 (113,154,624) Net assets held in trust for pension benefits Beginning of year 695,445, ,600,303 End of year $ 728,084,796 $ 695,445,679 The accompanying notes are an integral part of these financial statements. 10

13 NOTES TO FINANCIAL STATEMENTS 11

14 Notes to Financial Statements 1. PLAN DESCRIPTION General. The Wayne County Employees Retirement System Defined Benefit Plan (the Plan ) is a contributory single-employer defined benefit public employee retirement plan governed by the Wayne County Employees Retirement System ( WCERS ) and created under Enrolled Ordinance No (November 20, 1986), as amended (the Pension Ordinance ), of the County of Wayne (the County ). WCERS was established by the County to provide retirement, survivor, and disability benefits to the County s employees, which includes the employees of the primary government (i.e., the general county) as well as those of the discretely presented component units, including but not limited to the Wayne County Airport Authority and Wayne County Circuit Courts. WCERS is considered part of the County financial reporting entity and is included in the County s comprehensive annual financial report as a collection of fiduciary pension trust funds. The administration, management and responsibility for the proper operation of the Plan, and for interpreting and making effective the provisions of the Plan, is vested in the trustees of the Wayne County Retirement Commission (the Retirement Commission ). The Plan is exempt from the requirements of Title 1 of the Employee Retirement Income Security Act of 1974, as amended ( ERISA ), and, as such, is not subject to the reporting and disclosure requirements of ERISA. Effective October 1, 2001, WCERS established the Wayne County Hybrid Retirement Plan #5 ( Plan Option 5 ), which contains both a defined benefit component and a defined contribution component. Participants in the plan options previously in existence (Plan Options 1, 2, 3 and 4) could elect to transfer their account balances to Plan Option 5 if authorized during specific time periods noted within collective bargaining agreements. Effective October 1, 2008, WCERS established another hybrid defined benefit plan option ( Plan Option 6 ), which contains both a defined benefit component and a defined contribution component. Participants in Plan Option 5 could elect to transfer their account balances to Plan Option 6, if authorized, during specific time periods noted within collective bargaining agreements. Effective October 1, 2001, only Plan Option 5 is available to new employees except for new executives, who may continue to elect participation in Plan Option 4; Plan Options 1, 2 and 3 are closed to new hires. Because there is no legal requirement to segregate the assets relating to Plan Options 1, 2, 3, 5 or 6 in paying benefits, the accompanying financial statements include the net assets and changes in net assets relating to Plan Options 1, 2 and 3, as well as the defined benefit component of Plan Options 5 and 6. The defined contribution portion of Plan Options 5 and 6 are included in the financial statements of the WCERS Defined Contribution Plan. Contributions. The Plan s basic benefits, as described in the Pension Ordinance and various collective bargaining agreements, are funded by contributions from the County and active members, as specified by the plan option selected, and by the investment income earned on the Plan s assets. Member contribution percentages under the various plan options are as follows: Plan Option 1 Sheriff Command Officers and Sheriff Deputies: Five percent of annual compensation. Others: Contributions are based on credited service, depending on the bargaining unit in which the member participates, as follows: 12

15 Notes to Financial Statements Credited Service Contribution Rates 0-8 years 6.00 or 6.58 percent of compensation 9-12 years 4.00 or 4.58 percent of compensation years 3.00 or 3.58 percent of compensation 17 or more years 2.00 or 2.58 percent of compensation Plan Option 2 - No member contributions. Plan Option 3 - Three percent of annual compensation. Plan Option 5 - Employees make either contributions equal to one or five percent of annual compensation or no contributions at all, depending on each employee s coverage group. Plan Option 6 - Four percent of annual compensation. Pension Benefits. In general, employees who have eight or more years of credited service and have attained the age specified by the specific plan option chosen are entitled to an annual pension. The service requirements for receiving a pension under the various plan options are based on the Pension Ordinance and collective bargaining agreements and are as follows: Plan Option 1 Any age with 30 years of service, age 50 with 25 years of service, or age 60 with five years of service for employees other than Sheriff Command Officers and Sheriff Deputies. Any age with 25 years of service for Sheriff Command Officers and Sheriff Deputies. Plan Option 2 - Age 55 with 25 years of service, or age 60 with 20 years of service, or age 65 with eight years of service. Plan Option 3 Age 55 with 25 years of service, or age 60 with 20 years of service, or age 65 with five years of service for employees other than Sheriff Command Officers. Any age with 25 years of service for Sheriff Command Officers. Plan Option 5 - Any age with 30 or more years of service, or age 55 with 25 years of service, or age 60 with 20 years of service, or age 65 with eight years of service. Plan Option 6 - Any age with 30 or more years of service, or age 55 with 25 years of service, or age 60 with 20 years of service, or age 65 with eight years of service. Amount of Pension Benefits. Benefits are paid monthly over the member or survivor's lifetime based on the following percentages of average final compensation for each year of credited service: 13

16 Notes to Financial Statements Plan Option 1 - Depending on the applicable collective bargaining agreement, either: (a) 2.65 percent for each year; (b) 2.5 percent for each year; or (c) 2.0 percent for each year up to 20 years and 2.5 percent for each year over 20 years. The maximum County financed portion is 75 percent of average final compensation. The minimum pension is $5 per month, multiplied by the number of years of service. Plan Option percent for each year up to 20 years, and 1.25 percent for each year over 20 years. The maximum County financed portion is 75 percent of average final compensation. Plan Option 3 - Depending on the applicable collective bargaining agreement, either: (a) 2.0 percent for each year up to 20 years, 2.5 percent for each year between 20 and 25 years, and 3.0 percent for each year over 25 years; (b) 1.5 percent for each year up to 20 years, 2.0 percent for each year between 20 and 25 years, and 2.5 percent for each year over 25 years; or (c) 2.5 percent for all years of service contingent upon payment of $500 per year for each year of credited service up to 20 years. The maximum County financed portion is 75 percent of average final compensation. Plan Option 5 - Depending on the applicable collective bargaining agreement, either (a) 2.0 percent for each year of credited service, or (b) 1.25 percent for each year up to 20 years, and 1.5 percent for each year over 20 years. The maximum County financed portion is 75 percent of average final compensation. Plan Option percent for each year of service. The maximum County financed portion is 75 percent of average final compensation. Death and Disability Benefits. The Plan also provides non-duty death and disability benefits to members after 10 years of credited service for Plan Options 1, 2, 5 and 6, along with non-duty death benefits for Plan Option 3. The 10-year service provision is waived for duty disability and death benefits. Eligibility. Effective August 15, 1983, the County closed Plan Option 1 to new hires. Plan Option 2 was available to all persons hired after August 15, 1983 and before October 1, 2001, and was also available to Plan Options 1 and 3 members who wished to transfer to this plan before October 1, Plan Option 3 was available to all persons last hired prior to June 30, Plan Option 5 is available to all persons hired after September 30, The number of plan participants as of September 30 is as follows: Active participants: Vested 1,349 1,324 Nonvested ,296 2,282 Terminated vested Retired and receiving benefits 5,553 5,627 7,967 8,023 14

17 Notes to Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting. The Plan s financial statements are prepared on the accrual basis of accounting using the economic resources measurement focus. Member contributions are recognized in the period in which the contributions are due. Employer contributions are recognized when due and the employer has made a formal commitment to provide the contributions. Benefits and refunds are recognized when due and payable in accordance with the terms of the Pension Ordinance. Administrative expenses are financed through investment earnings. Net Assets Held in Trust for Pension Benefits. Net assets held in trust for pension benefits consist of the following reserves: Reserve for Member Contributions. Members contribute at rates as stated in the Pension Ordinance or collective bargaining agreements for the applicable option. Interest is credited at least annually to the reserve for member contributions. The balance represents active members contributions and interest, less amounts transferred to funds for retirement, amounts refunded to terminated members, and transferred inactive accounts. Reserve for Employer Contributions. All employer contributions are credited to the reserve for employer contributions. Interest is credited at least annually, and transfers are made to the reserve for pension payments to fund the employer s share of retirement allowances, as recommended by the Plan s actuaries and approved by the Plan s trustees. Reserve for Pension Payments. This reserve represents the reserves for payment of future retirement benefits to persons already on the retirement rolls. At retirement, a member s accumulated contributions (with interest) are transferred to the reserve for pension payments from the reserve for employer contributions and from the reserve for member contributions. Interest is credited at least annually to the reserve for pension payments. Reserve for Inflation Equity. This reserve represents the reserves for payment of supplemental pension benefits. Additions to the reserve are based on the investment results of the Plan. An annual distribution of a percentage of the balance in the reserve is made to each participant in the form of an additional benefit check (the 13th check ). The amount of the 13th check is calculated by the Plan s actuaries and approved by the Plan s trustees each year, in accordance with the distribution provisions of the Pension Ordinance. The reserve balances as of September 30 are as follows: Reserved for (deficit): Member contributions $ 132,064,494 $ 120,721,766 Employer contributions (535,131,899) (498,824,056) Pension payments 1,126,899,649 1,061,547,969 Inflation equity 4,252,552 12,000,000 $ 728,084,796 $ 695,445,679 15

18 Notes to Financial Statements Valuation of Investments and Income Recognition. Investments are stated at fair value. Short-term investments are reported at cost, which approximates fair value. Securities traded on a national or international exchange are valued at the last reported sales price at current exchange rates. Fixed debt quotations are provided by a national brokerage pricing service. Real estate values are determined on the basis of comparable yields available in the marketplace. Investments for which market quotations are not readily available are valued at their fair values as determined by the custodian under the direction of the Retirement Commission, with the assistance of a valuation service. Many of the Plan s investments in private equity and real estate investments are invested in assets which do not have exchange quotations that are readily available. Such assets are valued initially at cost, with subsequent adjustments to values that reflect meaningful third-party transactions, or to fair value as determined by the general partners or management of the investments. Factors considered in valuing these individual securities may include, but are not limited to, the purchase price, changes in the financial condition and prospects of the issuer, calculations of the total enterprise value using discounted cash flow projections, trading comparables of securities of comparable companies engaged in similar businesses, estimates of liquidation value, the existence of restrictions on transferability, prices received in recent significant placements of securities of the same issuer, and other analytical data relating to the investment. There are inherent limitations in any estimation technique. Because of the inherent uncertainty of valuations, these estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material. Dividend income is recognized based on the ex-dividend date, and interest income is recognized on the accrual basis as earned. All realized gains and losses on investments are recognized at the point of sale and are included in investment income. Purchases and sales of investments are recorded as of the trade date, which is the date when the transaction is initiated. Capital Assets. Capital assets are recorded at historical cost or, for assets acquired before October 1, 2001, at the value appraised as of October 1, Depreciation is computed using the straight-line method over the estimated useful lives (five years) of the related assets. Expenditures for maintenance and repairs are charged to expense. Renewals or betterments which extend the life or increase the value of the properties are capitalized. 16

19 Notes to Financial Statements 3. DEPOSITS AND INVESTMENTS The authority for the purchase and sale of investments rests with the Retirement Commission. Investments made are subject to statutory regulations imposed under the Michigan Public Pension Investment Act 314 of 1965, as amended (Act 55, P.A. 1982), and investment policy established by the Retirement Commission. The Investment Act incorporates the prudent person rule and requires investment fiduciaries to act solely in the interest of the Plan s participants and beneficiaries. Accordingly, the Retirement Commission has authority to invest the Plan s assets in common and preferred stock; obligations of the United States, its agencies or United States government-sponsored enterprises; obligations of any state or political subdivision of a state having the power to levy taxes; bankers acceptances; certificates of deposit; commercial paper; repurchase agreements; reverse repurchase agreements; real and personal property; mortgages; and certain other investments. The Plan s investments are summarized as follows as of September 30: Equity securities and mutual funds Common stocks $ 280,083,177 $ 263,965,042 Equity mutual funds 145,522, ,168,381 International equities 2,380,677 5,741, ,986, ,875,268 Debt securities and mutual funds Corporate bonds 36,841,353 38,377,564 Asset-backed securities 5,856,721 10,004,317 Mortgage-backed securities: Commercial 12,409,280 13,781,655 Government agencies 19,237,875 16,081,672 Government agencies bonds 821, ,978 U.S. government bonds 16,972,567 22,056,355 State and municipal bonds 1,219,723 6,056,903 Foreign debt securities 5,646,536 6,285,326 99,005, ,799,770 Money market funds 21,492,551 17,409,568 Other investments Real estate investments (private trusts) 105,297, ,831,338 Hedge funds 24,855,547 24,827,981 Structured debt 18,038,174 23,322,573 Investments in private equity, net of valuation allowance of $13,000,000 in 2012 and $1,000,000 in ,032,524 23,558, ,224, ,540,164 Total investments $ 710,709,095 $ 693,624,770 The Plan s deposits and investments are subject to various types of risk as discussed below. 17

20 Notes to Financial Statements Custodial Credit Risk Deposits. Custodial credit risk for deposits is the risk that, in the event of a bank failure, the Plan s deposits may not be returned to the Plan. State of Michigan statutes require that certificates of deposit, savings accounts, deposit accounts, and depository receipts be made with banks doing business and having a place of business in the State of Michigan that are also members of a federal or national insurance corporation. The Plan s carrying amount of deposits of $14,793,461 and $1,726,401 as of September 30, 2012 and 2011, respectively, are maintained in the County s pooled cash account maintained by the Wayne County Treasurer. In accordance with the County s investment policy and Public Act 314 of 1965, as amended, all deposits are uncollateralized and held in the County s name. The County evaluates each financial institution and assesses the level of risk of each institution; only those institutions with an acceptable estimated risk level are used as depositories. In addition, the County s investment policy places concentration limits on the total amount deposited with a single financial institution. Due to the dollar amounts of cash deposits in the County s pooled cash account and limits of FDIC insurance, Plan management believes it is impractical to obtain FDIC insurance for all bank deposits. Investments. Custodial credit risk for investments is the risk that, in the event of the failure of the counterparty, the Plan will not be able to recover the value of its investments that are in possession of an outside party. Investment securities are exposed to custodial credit risk if the securities are uninsured, are not registered in the name of the entity, and are held by either the counterparty, or the counterparty s trust department or agent, but not in the entity s name. The Plan s investment policy and Public Act 314 of 1965, as amended, require that (a) investments are held by a third-party safe-keeper in the Plan s name; (b) investments are held by a trustee in the Plan s name; or (c) investments are part of a mutual fund. The Plan s investment policy also requires that the safekeeping institution shall annually provide a copy of its most recent report on internal controls (also referred to as a SOC 1 report ). As of September 20, 2012 and 2011, none of the Plan's investments were subject to custodial credit risk as they were held in accordance to its investment policy. Credit Risk Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The Plan s investment policy places no restrictions greater than what is allowed under Public Act 314 that would further limit its investment choices. Ratings are not required for U.S. treasuries or certain money market funds. 18

21 Notes to Financial Statements The Plan s investments in debt securities were rated at September 30, 2012 as follows: Mortgage- U.S. State and Corporate Asset-backed backed Government Municipal Foreign Debt Bonds Securities Securities Agencies Bonds Securities Standard & Poor's AAA $ - $ 2,757,424 $ 19,522,776 $ 137,721 $ - $ - AA 2,146,618 1,044, , ,927 1,119,719 1,793,173 A 9,378,804-5,377, ,478,309 BBB 15,633,518-4,788, ,375,054 BB 1,575, D , Moody's Aaa - 2,016,866 1,792, Baa 107, Unrated 8,000,002 38, ,004 - $ 36,841,353 $ 5,856,721 $ 31,647,155 $ 821,648 $ 1,219,723 $ 5,646,536 The Plan s investments in debt securities were rated at September 30, 2011 as follows: Asset-backed Mortgage- U.S. State and Foreign Corporate backed backed Government Municipal Debt Bonds Securities Securities Agencies Bonds Securities Standard & Poor's AAA $ 66,311 $ 7,877,984 $ 16,304,998 $ - $ 1,049,358 $ - AA 2,555, , ,978-1,177,632 A 12,185,582-8,130, ,248,187 BBB 13,701,168-2,306, ,859,507 BB 1,367,101-35, B 501, CCC , Moody's - Aaa - 2,071,588 2,179, Unrated 8,000,250 54, ,007,545 - $ 38,377,564 $ 10,004,317 $ 29,863,327 $ 155,978 $ 6,056,903 $ 6,285,326 As of September 30, 2012 and 2011, the Plan s money market funds were rated A1+ by Standard & Poor s with weighted average maturities of 43 and 41 days, respectively. 19

22 Notes to Financial Statements Interest Rate Risk Interest rate risk is the risk that the value of fixed income and debt security investments will vary unfavorably as a result of a change in interest rates. The Plan s investment policy does not limit investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. However, it is the practice of the Plan to manage this risk by purchasing a mix of short and long-term investments. Maturities of the Plan s debt securities as of September 30 were as follows: Investment Maturities (fair value by years) Less than More than 10 Totals 2012 Corporate bonds $ 811,386 $ 8,681,192 $ 15,925,333 $ 11,423,442 $ 36,841,353 Asset-back securities - 3,643, ,782 1,725,872 5,856,721 Mortgage-backed securities: Commercial ,346 12,392,934 12,409,280 Government agencies 32, ,722 1,229,062 17,388,652 19,237,875 Government agencies bonds 137, , ,648 U.S. government bonds - 7,777,251 3,271,488 5,923,828 16,972,567 State and municipal bonds 150, ,069,498 1,219,723 Foreign debt securities - 2,673,043 2,611, ,763 5,646,536 $ 1,131,771 $ 23,362,275 $ 23,541,741 $ 50,969,916 $ 99,005, Corporate bonds $ 2,327,826 $ 6,862,912 $ 17,201,919 $ 11,984,907 $ 38,377,564 Asset-back securities 9,186 7,439,431 1,481,480 1,074,220 10,004,317 Mortgage-backed securities: Commercial ,178 13,744,477 13,781,655 Government agencies - 346,797 2,427,553 13,307,322 16,081,672 Government agencies bonds , ,978 U.S. government bonds 6,975,507 1,116,329 8,393,961 5,570,558 22,056,355 State and municipal bonds 4,907,546 99,999-1,049,358 6,056,903 Foreign debt securities 70,648 4,015,431 1,192,949 1,006,298 6,285,326 $ 14,290,713 $ 19,880,899 $ 30,735,040 $ 47,893,118 $ 112,799,770 20

23 Notes to Financial Statements Foreign Currency Risk Foreign currency risk is the risk that significant fluctuation in exchange rates may adversely affect the fair value of an investment. The System s exposure to foreign currency risk is summarized as follows: Fair Value (in U.S. dollars) Investment/Country Currency Foreign debt securities Australia Australian dollar $ 946,892 $ 984,184 Belgium European euro 289,802 - Brazil Brazilian real 333, ,480 Canada Canadian dollar 1,088, ,245 France European euro 429, ,175 Italy European euro 396, ,089 Luxembourg European euro - 447,337 Mexico Mexican peso - 391,635 Netherlands European euro 75,618 69,506 Norway Norwegian krone 115, ,054 Spain European euro 421, ,479 Switzerland Swiss franc - 421,133 United Kingdom British pound 1,477,521 1,894,520 Venezuela Venezuelan bolivar 71,083 67,489 5,646,536 6,285,326 International equities Australia Australian dollar - 63,360 Canada Canadian dollar 1,518,799 3,015,991 Cayman Islands Cayman Islands dollar 37,030 2,177,674 Netherlands European euro 522, ,422 Norway Norwegian krone 301, ,398 2,380,677 5,741,845 Total $ 8,027,213 $ 12,027,171 21

24 Notes to Financial Statements Concentration of Credit Risk Concentration of credit risk is the risk of loss attributable to the magnitude of an entity s investments with a single issuer. Other than obligations issued, assumed, or guaranteed by the United States, its agencies, or United States government-sponsored enterprises, the Plan is prohibited by Public Act 314 of 1965, as amended, from investing in more than five percent of the outstanding obligations of any one issuer or investing more than five percent of the Plan s assets in the obligations of any one issuer. The Plan places no limit on the amount it may invest in any one issuer. As of September 30, 2012 and 2011, there were no investments that exceeded five percent or more of the Plan s total investments, other than investments in mutual funds, similar pooled investments, or investments issued, assumed, or guaranteed by the United States, its agencies, or United States government-sponsored enterprises. Securities Lending A contract approved by the System s Board, permits the System to lend its securities to broker-dealers and banks (borrowers) for collateral that will be returned for the same securities in the future. The System s custodial bank manages the securities lending program and receives predominantly cash as collateral. The collateral securities cannot be pledged or sold by the System unless the borrower defaults. Collateral cash is initially pledged at 102 percent of the fair value of the securities lent for domestic securities and 105 percent for international securities, and may not fall below 100 percent during the term of the loan. There are no restrictions on the amount of securities that can be loaned. Securities on loan at year-end are summarized as follows: Common stocks $ 95,695,213 $ 112,066,645 Corporate bonds 4,707,324 8,422,993 Government agencies bonds 146,209 - U.S. government bonds 15,014,877 20,789,508 $ 115,563,623 $ 141,279,146 At year-end, the System has no credit risk exposure to borrowers as the amounts the System owes the borrowers exceed the amounts the borrowers owe the System. The contract with the System s custodian requires it to indemnify the System if the borrowers fail to return the securities (and if the collateral is inadequate to replace the securities lent) or fail to pay the System for income distributions by the securities issuers while the securities are on loan. Commitments The Plan has commitments to invest $27.3 million in private equities, structured debt and private real estate investments as of September 30, 2012, of which management believes $15.8 million is unlikely to be called. The Plan has credit enhancement agreements totaling $44.0 million as of September 30, 2012 for which it receives fees from the companies in exchange for the credit enhancements. 22

25 Notes to Financial Statements 4. CAPITAL ASSETS Capital assets consist of equipment, furniture, and fixtures. Depreciable capital asset activity for the year ended September 30 is as follows: Beginning Ending Balance Additions Reductions Balance 2012 Furniture and equipment $ 431,434 $ - $ - $ 431,434 Accumulated depreciation 416,858 4, ,660 $ 14,576 $ (4,802) $ - $ 9, Furniture and equipment $ 422,394 $ 9,040 $ - $ 431,434 Accumulated depreciation 413,411 3, , ANNUAL REQUIRED CONTRIBUTION $ 8,983 $ 5,593 $ - $ 14,576 Depreciation expense is included in administrative expenses in the accompanying statements of changes in plan net assets. Based upon an ordinance enacted by the Wayne County Board of Commissioners ( WCBC ) on September 30, 2010, the County s actual contribution for fiscal 2012 was partially offset by using assets from the Plan s Reserve for Inflation Equity. Accordingly, for the year ended September 30, 2012, $6.0 million of the total ARC of $51.7 million was reduced through the offset and only $47.7 million was actually paid into the Plan. The Airport Authority paid $2.0 million above their ARC to help fund a retirement incentive they offered during the current year. For the year ended September 30, 2011, $26.2 million of the total ARC of $39.6 million was reduced through the offset and only $13.4 million was actually paid into the Plan. The WCERS filed a lawsuit against the WCBC and County challenging the legality of Ordinance , and seeking an order requiring the WCBC to repeal the Ordinance and the County to contribute the full amount of the ARC. The County filed a counter-claim asserting the Ordinance was legal as written and claiming the Retirement Commission breached its fiduciary duties and committed unlawful acts in administering the Reserve for Inflation Equity. In September 2011, the Court ruled in favor of the County, declaring the ordinance to be legal as written. In December 2011, the Court dismissed the County s counter-claim against the WCERS. Both rulings are being appealed by the respective parties. 23

26 Notes to Financial Statements 6. FUNDED STATUS AND FUNDING PROGRESS As of September 30, 2011, the most recent actuarial valuation date, the actuarial accrued liability using the entry age actuarial cost method was $1,595 million; compared to the actuarial value of assets of $795 million, the Plan had an unfunded actuarial accrued liability of $800 million for a funding ratio of 50 percent. The unfunded actuarial accrued liability was 294 percent of covered payroll of $272 million. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment and mortality. Actuarially determined amounts are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multi-year trend information about whether the actuarial value of the Plan s assets are increasing or decreasing over time relative to the actuarial accrued liability for benefits. The schedule of employer contributions, presented as required supplementary information following the notes to the financial statements, presents trend information about the amounts contributed to the Plan in comparison to the ARC (annual required contribution), an amount that is actuarially determined in accordance with the parameters of GASB Statement 25. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost for each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed 30 years. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. Additional information as of the latest actuarial valuation includes: Actuarial valuation date September 30, 2011 Actuarial cost method Entry age normal Amortization method contributions Level percent-of-payroll Remaining amortization period 28 years (closed) Asset valuation method 4-year smoothed market Actuarial assumptions: Investment rate of return 7.75% (includes inflation at 3.5%) Projected salary increases % (includes inflation at 3.5%) Cost -of-living adjustments Not applicable 24

27 REQUIRED SUPPLEMENTARY INFORMATION 25

28 Required Supplementary Information Schedule of Funding Progress (amounts in millions) Actuarial Actuarial Actuarial UAAL as a Valuation Value of Accrued Unfunded Funded Covered % of Covered Date - Assets Liability AAL (UAAL) Ratio Payroll Payroll September 30 (A) (B) (B-A) (A/B) (C) ((B-A)/C) 2006 $ 895 $ 1,000 $ % $ % , % % , % % , % % , % % , % % Note: Consistent with previous years, the System expects that its actuarial valuation for the current year (in this instance, as of and for the year ended September 30, 2012) will be completed in August of the following year (August 2013, in this case). Schedule of Employer Contributions (amounts in thousands) Annual Contributions Year Ended Percentage September 30 Required Actual Contributed 2007 $ 15,398 $ 15, % ,420 18, % ,559 32, % ,401 35, % ,666 13,428 34% ,662 47,676 92% 26