KENTUCKY JUDICIAL FORM RETIREMENT SYSTEM FINANCIAL STATEMENTS

Transcription

1 KENTUCKY JUDICIAL FORM RETIREMENT SYSTEM FINANCIAL STATEMENTS

2 TABLE OF CONTENTS Page Report of Independent Auditors... 1 Management s Discussion and Analysis... 3 Financial Statements Statement of Plan Net Assets... 7 Statement of Changes in Plan Net Assets... 8 Notes to Financial Statements... 9 Required Supplementary Information Schedules of Funding Progress Pension Schedules of Funding Progress Medical Insurance Schedules of Employer Contributions Pension Schedules of Employer Contributions Medical Insurance Independent Auditors Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed In Accordance with Government Auditing Standards Schedule of Findings and Responses... 27

3 REPORT OF INDEPENDENT AUDITORS To the Board of Trustees Kentucky Judicial Form Retirement System Frankfort, Kentucky We have audited the accompanying financial statements of the Kentucky Judicial Form Retirement System (the System), a component unit of the Commonwealth of Kentucky, as of and for the year ended June 30, 2012, which collectively comprise the System s financial statements as listed in the table of contents. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government 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, assessing the accounting principles used, and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the plan net assets of the Kentucky Judicial Form Retirement System, as of June 30, 2012, and the changes in plan net assets for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated as of the date of this report on our consideration of the System s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. 1

4 Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 3 through 6, and the schedules of funding progress employer contributions on pages 20 through 24, 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 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. November 14,

5 MANAGEMENT S DISCUSSION AND ANALYSIS As management of the Kentucky Judicial Form Retirement System (the System), a component unit of the Commonwealth of Kentucky, we offer the readers of the System s financial statements this narrative overview and analysis of the financial performance of the System for the fiscal year ended June 30, The two retirement plans within the System are the Kentucky Judicial Retirement Plan and the Kentucky Legislators Retirement Plan. We encourage readers to read it in conjunction with the System s financial statements and the accompanying notes. USING THIS FINANCIAL REPORT Because of the long-term nature of a defined benefit pension plan, financial statements alone cannot provide sufficient information to properly reflect a plan s ongoing plan perspective. The Statement of Plan Net Assets and Statement of Changes in Plan Net Assets (on pages 7 and 8) provide information about the activities of the Plans as a whole. The Kentucky Judicial Retirement Plan is the fiduciary of funds held in trust for its members, and the Kentucky Legislators Retirement Plan is the fiduciary of funds held in trust for its members. The Schedules of Funding Progress (on pages 20 through 22) include historical trend information about the actuarially funded status of each plan from a long-term, ongoing plan perspective and the progress made in accumulating sufficient assets to pay benefits and insurance premiums when due. The Schedules of Employer Contributions (on pages 23 and 24) present historical trend information about the annual statutorily required appropriations. These schedules provide information that contributes to understanding the changes over time in the funded status of the plans. Medical Insurance For purposes of disclosures required by Governmental Accounting Standards Board Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, assets have been allocated between pension and retiree medical liabilities on the basis of accrued liability as of July 1, This amount has then been brought forward from that date based on actual cash flows and a prorated allocation of investment return. FINANCIAL HIGHLIGHTS Judicial Retirement Plan In the fiscal year ended June 30, 2012, the Judicial Retirement Plan experienced: An increase in plan net assets of approximately $7.9 million, from $229.3 million to $237.1 million. The increase is primarily due to earnings on investments. A $678,000 increase in employer contributions from approximately $5.1 million in fiscal year 2011, to approximately $5.8 million for fiscal year

6 MANAGEMENT S DISCUSSION AND ANALYSIS A $13.1 million decrease in net investment income from approximately $36.6 million in fiscal year 2011, to approximately $23.5 million in fiscal year The decrease is due primarily to a decrease in appreciation of investments held. A $112,000 increase in benefit payments from approximately $21.6 million in fiscal year 2011 to $21.7 million in fiscal year Retirees as of January 1, 2012 received an increase of 1.5% to their retirement allowances. June 30, Change Amount Percentage Summary of Plan Net Assets Cash and investments $ 236,218,636 $ 228,353,957 $ 7,864, % Receivables 922, ,478 19, % Plan net assets $ 237,141,467 $ 229,257,435 $ 7,884, % Change Amount Percentage Summary of Changes in Plan Net Assets Additions: Employer contributions $ 5,784,103 $ 5,106,139 $ 677, % Member contributions 2,022,379 1,947,779 74, % Net investment income 23,540,599 36,628,868 (13,088,269) % Appropriations for administrative expense 479, ,200 (100) -0.02% Litigation proceeds 2,810 14,185 (11,375) % Total additions (losses) 31,828,991 44,176,171 (12,347,180) % Deductions: Benefit payments 21,703,780 21,591, , % Insurance premiums 1,988,267 1,998,728 (10,461) -0.52% Refund of member contributions -0-24,955 (24,955) % Administrative expenses 252, ,224 (312) -0.12% Total deductions 23,944,959 23,868,228 76, % Change in net assets $ 7,884,032 $ 20,307,943 $ (12,423,911) % Legislators Retirement Plan In the fiscal year ended June 30, 2012, the Legislators Retirement Plan experienced: An increase in plan net assets of approximately $3.6 million, from $64.1 million to $67.7 million. The increase is primarily due to earnings on investments. A $28,000 increase in employer contributions from approximately $999,000 in fiscal year 2011, to approximately $1.0 million for fiscal year A $4.2 million decrease in net investment income from approximately $10.3 million in fiscal year 2011, to approximately $6.1 million in fiscal year The decrease is due primarily to a decrease in appreciation of investments held. 4

7 MANAGEMENT S DISCUSSION AND ANALYSIS A $284,000 increase in benefit payments from approximately $3.0 million in fiscal year 2011 to $3.3 million in fiscal year Retirees as of January 1, 2012 received an increase of 1.5% to their retirement allowances. June 30, Change Amount Percentage Summary of Plan Net Assets Cash and investments $ 67,495,090 $ 63,911,145 $ 3,583, % Receivables 231, ,554 (2,902) -1.24% Plan net assets $ 67,726,742 $ 64,145,699 $ 3,581, % Change Amount Percentage Summary of Changes in Plan Assets Additions: Employer contributions $ 1,027,200 $ 999,343 $ 27, % Member contributions 384, ,259 6, % Net investment income 6,141,383 10,344,218 (4,202,835) % Appropriations for administrative expense 164, ,300 3, % Litigation proceeds 888 3,629 (2,741) % Total additions (losses) 7,718,063 11,886,749 (4,168,686) % Deductions: Benefit payments 3,329,016 3,045, , % Insurance premiums 654, ,315 30, % Refund of member contributions -0-16,063 (16,063) % Administrative expenses 153, ,270 (3,960) -2.52% Total deductions 4,137,020 3,843, , % Change in net assets $ 3,581,043 $ 8,043,587 $ (4,462,544) % DISCUSSION OF CURRENTLY KNOWN FACTS, DECISIONS, OR CONDITIONS Accounting standards require that the statement of plan net assets state asset value at fair value and include only benefits and refunds due to plan members and beneficiaries and accrued investment and administrative expenses as of the reporting date. Information regarding the actuarial funding status of the defined benefit and medical insurance plans is provided in the Schedules of Funding Progress. The actuarial accrued liability is calculated using the projected unit credit cost method. In the past, the plans have experienced improvement year to year in funding position with more than adequate assets to meet pension and medical insurance obligations. 5

8 MANAGEMENT S DISCUSSION AND ANALYSIS Annual contributions of the Commonwealth are set by the Kentucky Revised Statutes. During the year ended June 30, 2011, the Legislature suspended the statute so that the contributions could be reduced. Therefore, the annual contributions by the Commonwealth were only 48% of the amount required by statute. The Schedules of Employer Contributions (on pages 23 and 24) indicate the contributions that have been made while the statute is suspended. CONTACTING THE SYSTEM This financial report is designed to provide a general overview of the System s finances. If you have any questions concerning the information provided, contact the Kentucky Judicial Form Retirement System at 305 Ann Street; Frankfort, KY

9 STATEMENT OF PLAN NET ASSETS Kentucky Judicial Retirement Plan Kentucky Legislators Retirement Plan Medical Medical Pension Insurance Total Pension Insurance Total System Total Cash and cash equivalents $ 68,565 $ 16,860 $ 85,425 $ 166,699 $ 103,355 $ 270,054 $ 355,479 Receivables: Accrued interest receivable 627, , , ,309 82, , ,253 Members' contribution receivable 113,107 27, ,920 10,685 6,625 17, ,230 Total receivables 740, , , ,994 88, ,652 1,154,483 Investments at fair value: Investments held by State Treasury 66,373 16,321 82, , , , ,016 Governmental securities 19,808,480 4,870,848 24,679,328 3,350,998 2,077,641 5,428,639 30,107,967 Foreign governmental securities 1,824, ,651 2,273, , , ,300 2,841,500 Corporate notes 33,361,538 8,203,506 41,565,044 6,715,507 4,163,659 10,879,166 52,444,210 Common stock 134,467,732 33,065, ,532,945 30,824,323 19,111,286 49,935, ,468,554 Total investments 189,528,672 46,604, ,133,211 41,496,765 25,728,271 67,225, ,358,247 Plan net assets held in trust for pension and post-employment healthcare benefits $ 190,337,932 $ 46,803,535 $ 237,141,467 $ 41,806,458 $ 25,920,284 $ 67,726,742 $ 304,868,209 See accompanying notes to financial statements. 7

10 STATEMENT OF CHANGES IN PLAN NET ASSETS YEAR ENDED Kentucky Judicial Retirement Plan Kentucky Legislators Retirement Plan Medical Medical Pension Insurance Total Pension Insurance Total System Total Additions Contributions: Employer $ 4,843,094 $ 941,009 $ 5,784,103 $ 708,942 $ 318,258 $ 1,027,200 $ 6,811,303 Member 1,693, ,018 2,022, , , ,292 2,406,671 Total contributions 6,536,455 1,270,027 7,806, , ,323 1,411,492 9,217,974 Appropriations for administrative expense 401,156 77, , ,395 50, , ,400 Litigation proceeds 2, , ,698 Investments: Net appreciation (realized and unrealized) 14,761,974 2,868,240 17,630,214 3,100,219 1,391,748 4,491,967 22,122,181 Interest 2,348, ,230 2,804, , , ,751 3,489,060 Dividends 2,790, ,123 3,332, , , ,665 4,296,932 Total investment income 19,900,197 3,866,593 23,766,790 4,238,596 1,902,787 6,141,383 29,908,173 Less investment expenses 189,392 36, , ,191 Net investment income 19,710,805 3,829,794 23,540,599 4,238,596 1,902,787 6,141,383 29,681,982 Total additions 26,650,769 5,178,222 31,828,991 5,326,773 2,391,290 7,718,063 39,547,054 Deductions Benefit payments 21,703, ,703,780 3,329, ,329,016 25,032,796 Insurance premiums -0-1,988,267 1,988, , ,694 2,642,961 Administrative expense 211,769 41, , ,807 47, , ,222 Total deductions 21,915,549 2,029,410 23,944,959 3,434, ,197 4,137,020 28,081,979 Net increase in plan net assets 4,735,220 3,148,812 7,884,032 1,891,950 1,689,093 3,581,043 11,465,075 Plan net assets held in trust, beginning of year 185,602,712 43,654, ,257,435 39,914,508 24,231,191 64,145, ,403,134 Plan net assets held in trust, end of year $ 190,337,932 $ 46,803,535 $ 237,141,467 41,806,458 $ 25,920,284 $ 67,726,742 $ 304,868,209 See accompanying notes to financial statements. 8

11 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial Reporting Entity Under the provisions of the Kentucky Revised Statutes, the Kentucky Judicial Retirement Plan and the Kentucky Legislators Retirement Plan (collectively, the Plans) have the same Board of Trustees and are coordinated administratively as the Kentucky Judicial Form Retirement System (the System ). Although the Plans share a common Board of Trustees, each Plan maintains its own investments and pays benefits to its members only from its own assets. The System is a component unit of the Commonwealth of Kentucky (Commonwealth). The Plan net assets and the changes in Plan net assets are included in the Commonwealth s Comprehensive Annual Financial Report as a pension trust fund in the fiduciary funds financial statement. Financial statements of the Commonwealth and its component units that form the Commonwealth reporting entity have been issued separately and are audited by the elected Auditor of Public Accounts. Basis of Accounting The financial statements are prepared on the accrual basis of accounting. The System follows accounting standards established by the Governmental Accounting Standards Board (GASB), including applicable statements and interpretations of the Financial Accounting Standards Board (FASB) issued on or before November 30, 1989, unless they conflict with GASB pronouncements. The System has elected not to apply FASB pronouncements issued after November 30, Management s Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents This amount represents cash on deposit and investments with original maturities of less than three months, held in the name of the System with the Treasurer of the Commonwealth, and used for payment of administrative expenses. Member Contributions Member contributions to the plan are recognized when due and the employer has made a formal commitment to provide the contributions. 9

12 Benefit Payments and Refunds NOTES TO FINANCIAL STATEMENTS Benefit payments and refunds are recognized when due and payable in accordance with the terms of the Plans. Valuation of Investments The Plans investments are stated at fair value. Quoted market prices are used to value investments. 2. PLAN DESCRIPTION AND CONTRIBUTION INFORMATION Kentucky Judicial Retirement Plan Membership Total membership in the Kentucky Judicial Retirement Plan (the Judicial Plan) consisted of the following at July 1, 2012, the date of the last actuarial valuation: Retirees and beneficiaries receiving benefits 306 Terminated plan members - vested 22 Active plan members 273 Total 601 Number of participating employers 1 Plan Description The Judicial Plan is a single-employer defined benefit plan that provides retirement benefits and medical insurance premium supplements, and covers the District, Circuit, Court of Appeals, and Supreme Court judges. The Judicial Plan provides retirement, disability, and death benefits to plan members and their beneficiaries. Prior to June 30, 2009, cost-of-living adjustments (COLA), keyed to the Consumer Price Index, were provided on July 1 of each year. Commencing in 2009, the COLA on July 1 of each year is 1.50%. Additionally, legislation provides that a pension benefit shall be increased, if necessary, so that it equals an amount calculated by using a % benefit rate and the current 60-month average earnings of the position held by the member at the time of retirement, subject to a 4.0% COLA annually. 10

13 NOTES TO FINANCIAL STATEMENTS As an additional retirement benefit, the Judicial Plan will pay a percentage, based on years of service, of the members hospital and medical insurance coverage for the retirees and their qualified dependents. Contributions Members entering membership or renewing former membership on or after September 1, 2008 must contribute 6% of their official salary, as defined. Members who first participated on or after July 1, 1978 and prior to September 1, 2008 contribute at a rate of 5% of their official salary. Once a member has earned sufficient service credit to have accrued a benefit of 100% of final average compensation, then employee contributions shall cease. The Commonwealth made a normal contribution at the actuarially-determined rate calculated by utilizing the projected unit credit method of funding, and a past service contribution equal to 1% of the unfunded past service liability and contributed interest on the unfunded past service liabilities at the actuariallyassumed interest rate of 7.0%, in an amount equal to 48% of the amount required by Kentucky Revised Statutes (KRS) Additionally, the Commonwealth made an appropriation to cover administrative expenses of the Judicial Plan. Member and employer contributions can also be transferred into the Judicial Plan from other state funded retirement plans. Kentucky Legislators Retirement Plan Membership Total membership in the Kentucky Legislators Retirement Plan (the Legislators Plan ) consisted of the following at July 1, 2012, the date of the last actuarial valuation: Retirees and beneficiaries receiving benefits 175 Terminated plan members - vested 46 Active plan members 124 Total 345 Number of participating employers 1 Plan Description The Legislators Plan is a single-employer defined benefit plan that provides retirement benefits and medical insurance premium supplements, and covers the members of the Kentucky Legislature. The Plan provides retirement, disability, and death benefits to plan members and their beneficiaries. Prior to June 30, 2009, cost-of-living adjustments (COLA), keyed to the 11

14 NOTES TO FINANCIAL STATEMENTS Consumer Price Index, were provided on July 1 of each year. Commencing in 2009, the COLA on July 1 of each year is 1.50%. Additionally, legislation provides that a pension benefit shall be increased, if necessary, so that it equals an amount calculated by using a % benefit rate and the current 60-month average earnings of the position held by the member at the time of retirement, subject to a 4.0% COLA annually. As an additional retirement benefit, the Legislators Plan will pay a percentage, based on years of service, of the members hospital and medical insurance coverage for the retirees and their qualified dependents. Contributions Members entering membership or renewing former membership on or after September 1, 2008 must contribute 6% of their creditable compensation, as defined. Members who first participate on or after July 1, 1978 and prior to September 1, 2008 contribute at a rate of 5% of their creditable compensation. Once a member has earned sufficient service credit to have accrued a benefit of 100% of final average compensation, employee contributions shall cease. The Commonwealth made a normal contribution at the actuarially determined rate calculated by utilizing the projected unit credit method of funding, and a past service contribution equal to 1% of the unfunded past service liability and contributed interest on the unfunded past service liabilities at the actuarially assumed interest rate of 7.0%, in an amount equal to 48% of the amount required by KRS Additionally, the Commonwealth made an appropriation to cover administrative expenses of the Legislators Plan. Member and Commonwealth contributions can also be transferred into the Legislators Plan from other state funded retirement plans. 3. INVESTMENTS Each of the Plans has its own investment committee. The committee governing the Judicial Plan consists of the three judicial appointees and the two gubernatorial appointees to the System s Board of Trustees. The committee governing the Legislators Plan consists of the three legislative appointees and the two gubernatorial appointees to the system s Board of Trustees. All investment decisions conform to the parameters established by KRS 386 and the System s Investment Policy Statement as follows: a. Equities (including all convertible securities) may be represented in the portfolio of the Judicial Retirement Fund up to 65% of the Fund s market value (with a fluctuation tolerance of up to 68%) and in the portfolio of the Legislators Retirement Fund up to 70% (with a fluctuation tolerance of up to 73%) of the Fund s market value. These thresholds were suspended in March 2012 in an action by each Plan s investment committee. 12

15 NOTES TO FINANCIAL STATEMENTS b. Fixed Income Securities (including preferred stock) may be represented in the portfolio of each Fund up to 60% of the Fund s market value. c. Cash equivalents (including all senior debt securities with under one year to maturity) of each Fund may be held to a maximum 20% of the Fund s market value. d. Investment in common stocks will be limited to companies that have paid a continuous dividend for at least five years, except that not more than 50% of the total equity portfolio of each Fund may be invested in common stocks with a shorter history of dividend payments provided those stocks meet statutory standards for investment of trust funds. e. Investment in an individual equity security shall not exceed 5% of the Fund s then current market value. At a time when the security s value reaches 8% of the Fund s market value, the Manager shall immediately notify the applicable Investment Committee so that the Investment Committee may determine a course of action. f. Equity investment in a particular industry shall not exceed 25% of the Fund s market value. g. No issues (with the exception of those of the U.S. Government and its Agencies) may be purchased with more than 15 years duration. h. Investments in securities of the U.S. Government and its Agencies may be purchased with a maturity of up to 30 years, but the average maturity of those securities in each Fund shall not exceed ten years. i. Investments in debt securities of a single issuer (with the exception of U.S. Government and its Agencies) of each Fund must not exceed 5% of the Fund s market value. j. Only corporate debt issues that meet or exceed a credit rating of BBB from Standard & Poor s and/or a BAA rating from Moody s may be purchased. k. Preferred stocks must be rated A or better by Moody s and/or Standard & Poor s at the time of purchase. l. Investment in bonds will be limited to those eligible for purchase by national banks. 13

16 NOTES TO FINANCIAL STATEMENTS m. Bond maturities will be reasonably spaced with due consideration given to call provisions. n. The manager is prohibited from investing in private placements, from speculating in fixed income or interest rate futures, and from arbitrage or any other specialized investments. Credit Risk Credit risk is the risk that an issuer of an investment will not fulfill its obligations to the holder of the investment. More specifically, custodial credit risk is the risk that, in the event of the failure of the counterparty, the System will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. All investments held by the System are insured or registered and held by the System or by its agent in the System s name. The credit risk disclosures for the municipal securities, foreign governmental securities and corporate notes within the Judicial Plan are as follows at June 30, 2012: S&P Quality Rating Municipal securities AA+ $ 2,720,075 A+ 2,066,400 4,786,475 Foreign governmental securities AA- $ 2,273,200 Corporate notes AA+ 4,095,300 AA- 6,943,737 A+ 4,418,440 A 9,346,063 A- 14,764,449 BBB 1,997,055 $ 41,565,044 14

17 NOTES TO FINANCIAL STATEMENTS The credit risk disclosures for the municipal securities, foreign governmental securities, and corporate notes within the Legislators Plan are as follows at June 30, 2012: S&P Quality Rating Municipal securities AA+ $ 435,212 Foreign governmental securities AA- $ 568,300 Corporate notes AA+ 1,046,885 AA- 2,024,275 A+ 1,628,583 A 2,360,172 A- 3,160,429 BBB 658,822 $ 10,879,166 Concentration of Credit Risk At June 30, 2012, the Legislators Plan had an investment in a Standard & Poor s depository receipt (SPDR) exchange-traded fund managed by State Street Global Advisors in the amount of $8,959,191. No other investments held by either Plan exceeded more than 5% of Plan net assets at June 30, Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. The System manages its exposure to declines in fair value by purchasing a diverse combination of equity securities and debt securities with varying maturities. The debt securities, and related maturities, within the Judicial Plan are as follows at June 30, 2012: Less than Amount One Year 1-5 Years 6-10 Years Governmental securities $ 24,679,328 $ 7,683,558 $ 14,275,695 $ 2,720,075 Foreign governmental securities 2,273, ,273,200 Corporate notes 41,565,044 2,036,060 23,474,262 16,054,722 $ 68,517,572 $ 9,719,618 $ 37,749,957 $ 21,047,997 15

18 NOTES TO FINANCIAL STATEMENTS The debt securities, and related maturities, within the Legislators Plan are as follows at June 30, 2012: Less than Amount One Year 1-5 Years 6-10 Years Governmental securities $ 5,428,639 $ 1,193,798 $ 3,799,629 $ 435,212 Foreign governmental securities 568, ,300 Corporate notes 10,879,166 2,226,303 4,278,630 4,374,233 $ 16,876,105 $ 3,420,101 $ 8,078,259 $ 5,377,745 Foreign Currency Risk Foreign currency risk is defined as the risk that changes in exchange rates will adversely affect the fair value of an investment or a deposit. Investments held by the Judicial Plan at June 30, 2012 include the following corporate notes and governmental securities subject to foreign currency risk: Currency Coca-Cola HBC Finance B.V. note Euro $ 1,997,055 HSBC Holdings, PLC subordinated note British Pound 2,036,060 Ontario Province Canada bond Canadian Dollar 2,273,200 $ 6,306,315 Investments held by the Legislators Plan at June 30, 2012 include the following corporate notes and governmental securities subject to foreign currency risk: Currency Coca-Cola HBC Finance B.V. note Euro $ 658,822 HSBC Holdings, PLC subordinated note British Pound 509,015 Ontario Province Canada bond Canadian Dollar 568,300 $ 1,736,137 The Plans invest in various investment securities. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, it is at least reasonably possible that changes in risks in the near term would materially affect amounts reported in the Statement of Plan Net Assets and the Statement of Changes in Net Assets. 16

19 NOTES TO FINANCIAL STATEMENTS Cash and Investments Held by State Treasury At June 30, 2012, the System s share of deposits in the Commonwealth s general depository (State investment pool) totaled $851,495. The Commonwealth s Comprehensive Annual Financial Report (CAFR) for the year ended June 30, 2012 should be referred to for required disclosures. 4. FUNDED STATUS AND FUNDING PROGRESS The funded status of the Judicial Plan s pension and insurance benefits as of June 30, 2012, the most recent actuarial valuation date, is as follows: Actuarial Value of Assets (a) Actuarial Accrued Liability (AAL) (b) Unfunded AAL (UAAL) (b-a) Funded Ratio (a/b) Covered Payroll (c) UAAL as a Percentage of Covered Payroll ((b-a)/c) Pension $ 176,765,849 $ 317,403,640 $ 140,637, % $ 33,175, % Medical $ 43,466,197 $ 45,474,043 $ 2,007, % $ 33,175, % The funded status of the Legislators Plan s pension and insurance benefits as of June 30, 2012, the most recent actuarial valuation date, is as follows: UAAL as a Actuarial Actuarial Percentage of Value of Accrued Unfunded Funded Covered Covered Assets Liability (AAL) AAL Ratio Payroll Payroll (a) (b) (b-a) (a/b) (c) ((b-a)/c) Pension $ 39,093,742 $ 68,318,427 $ 29,224, % $ 5,192, % Medical $ 24,238,386 $ 21,582,890 $ (2,655,496) 112.3% $ 5,192, % 17

20 NOTES TO FINANCIAL STATEMENTS The following are the actuarial methods and assumptions used to develop the above liabilities: Valuation date: Actuarial cost method: Amortization method: Asset valuation method: Investment return: Projected salary increases: Projected medical premium increases: July 1, 2012 Year 1 11% Year 2 10% Year 3 9% Year 4 8% Year 5 7% Year 6 6% Year 7+ 5% Split of medical coverage among retirees: Projected Unit Credit Method Interest + 1% Unfunded Past Liability Market Value 7.00% 1% for 2012 and 3.5% thereafter Percent of reitrees Percent with Judicial Legislators Spouse Coverage Pre-Medicare Family 20% 15% N/A Single 40% 50% N/A Parent Plus 10% 10% N/A Member and spouse 30% 25% N/A Medicare coverage High option 95% 95% Regular option 5% 5% 75% 75% The Schedule of Funding Progress, presented as required supplementary information following the notes to the financial statements, present multi-year trend information about whether the actuarial values of plan assets are increasing or decreasing over time relative to the AALs for benefits. The projection of benefits for financial reporting purposes does not explicitly incorporate the potential effects of legal or contractual funding limitations. 18

21 5. RISK MANAGEMENT KENTUCKY JUDICIAL FORM RETIREMENT SYSTEM NOTES TO FINANCIAL STATEMENTS Claims against the Board of Trustees of the System, or any of its staff, as a result of actual or alleged breach of fiduciary duty are insured with a commercial insurance policy. Coverage provided is limited to $10,000,000. Claims for job-related illnesses or injuries are insured by the Commonwealth s selfinsured workers compensation program. Payments approved by the program are not subject to maximum limitations. 6. INCOME TAX STATUS The Judicial Plan and Legislative Plan each received from the Internal Revenue Service favorable determination letters dated July 9, 2009, which state that the Plans constitute qualified plans under Section 401(a) of the Internal Revenue Code. The System believes that the Plans are currently designed and being operated in compliance with the applicable requirements of the Internal Revenue Code. Any compensation deferred under either Plan, as well as income attributable to the deferrals, is not includable in federal and state taxable income until actually paid or otherwise made available to the participant or their named beneficiary. 7. RELATED PARTY TRANSACTION Effective August 2011, State Street Bank and Trust Company became custodian of the Plans investments. As discussed in Note 3, at June 30, 2012, the Legislators Plan had an investment in a SPDR fund managed by State Street Global Advisors, which is an affiliate of the Plans custodian. 19

22 REQUIRED SUPPLEMENTARY INFORMATION

23 SCHEDULES OF FUNDING PROGRESS PENSION YEAR ENDED Kentucky Judicial Retirement Plan Actuarial Valuation Date Actuarial Actuarial Valuation of Accrued Liability Unfunded AAL Assets (AAL) (UAAL) (a) (b) (b a) Funded Ratio (a/b) Covered Payroll (c) UAAL as a Percentage of Covered Payroll ((b a)/c) 7/1/2001 $ 280,506,852 $ 172,720,874 $ (107,785,978) 162.4% $ 25,520,504 7/1/2002 7/1/2003 prior asset method 265,693, ,306, ,310, ,838,112 (80,382,512) (51,468,322) 143.4% 125.4% 26,208,973 26,159,412 revised asset method 7/1/2004 7/1/2005 7/1/2006 7/1/2007* 7/1/2008 7/1/2009 7/1/2010 7/1/2011 7/1/ ,298, ,838, ,388, ,117, ,167, ,031, ,913, ,901, ,247, ,358, ,865, ,108, ,793, ,940, ,860, ,521, ,679, ,765, ,449, ,403,640 (31,460,516) (29,271,374) (18,135,631) (10,011,932) 6,111,447 28,243,145 79,067, ,580, ,769, ,637, % 113.4% 107.5% 103.9% 97.4% 88.9% 72.8% 65.8% 57.0% 55.7% 26,159,412 25,905,022 28,483,104 26,976,964 31,941,180 31,224,444 29,886,624 29,886,624 33,175,215 33,175, % 306.7% 196.7% 120.3% 113.0% 63.7% 37.1% 19.1% 90.5% 264.6% 336.5% 403.2% 423.9% *Effective July 1, 2007, medical insurance liabilities and allocated assets have been excluded, in accordance with GASB 43. See accompanying Report of Independent Auditors. 20

24 SCHEDULES OF FUNDING PROGRESS PENSION YEAR ENDED Kentucky Legislators Retirement Plan Actuarial Valuation Date Actuarial Actuarial UAAL as a Valuation of Accrued Liability Unfunded AAL Funded Covered Percentage of Assets (AAL) (UAAL) Ratio Payroll Covered Payroll (a) (b) (b a) (a/b) (c) ((b a)/c) 7/1/2001 $ 70,853,489 $ 47,068,104 $ (23,785,385) 150.5% $ 5,075, % 7/1/2002 7/1/2003 prior asset method 67,892,070 63,909,258 51,095,992 49,168,446 (16,796,078) (14,740,812) 132.9% 130.0% 4,879,301 2,695, % 547.0% revised asset method 7/1/2004 7/1/2005 7/1/2006 7/1/2007* 7/1/2008 7/1/2009 7/1/2010 7/1/2011 7/1/ ,379,470 49,168,446 (10,211,024) 120.8% 2,695, % 62,786,767 50,213,770 (12,572,997) 125.0% 2,585, % 65,537,351 62,619,568 (2,917,783) 104.7% 3,545, % 67,029,901 59,829,316 (7,200,585) 112.0% 4,426, % 45,533,879 42,160,213 (3,373,666) 108.0% 4,763, % 45,567,209 43,760,180 (1,807,029) 104.1% 4,755, % 42,929,075 60,163,091 17,234, % 4,916, % 40,231,811 62,774,038 22,542, % 4,916, % 38,442,211 65,836,618 27,394, % 5,192, % 39,093,742 68,318,427 29,224, % 5,192, % *Effective July 1, 2007, medical insurance liabilities and allocated assets have been excluded, in accordance with GASB 43. See accompanying Report of Independent Auditors. 21

25 SCHEDULES OF FUNDING PROGRESS MEDICAL INSURANCE YEAR ENDED Kentucky Judicial Retirement Plan Actuarial Valuation Date Actuarial Actuarial Valuation of Accrued Liability Unfunded AAL Funded Covered Assets (AAL) (UAAL) Ratio Payroll (a) (b) (b a) (a/b) (c) UAAL as a Percentage of Covered Payroll ((b a)/c) 7/1/2007 $ 42,990,926 $ 44,137,011 $ 1,146, % $ 31,941, % 7/1/ ,347,577 47,851,882 3,504, % 31,224, % 7/1/ ,816,525 39,816,215 (4,000,310) 110.0% 29,886, % 7/1/ ,186,642 41,831,779 (1,354,863) 103.2% 29,886, % 7/1/ ,791,088 43,643,278 1,852, % 33,175, % 7/1/ ,466,197 45,474,043 2,007, % 33,175, % Kentucky Legislators Retirement Plan Actuarial Valuation Date Actuarial Actuarial UAAL as a Valuation of Accrued Liability Unfunded AAL Funded Covered Percentage of Assets (AAL) (UAAL) Ratio Payroll Covered Payroll (a) (b) (b a) (a/b) (c) ((b a)/c) 7/1/2007 $ 24,289,368 $ 22,489,737 $ (1,799,631) 108.0% $ 4,763, % 7/1/ ,117,103 23,668,943 (1,448,160) 106.1% 4,755, % 7/1/ ,413,467 18,481,365 (5,932,102) 132.1% 4,916, % 7/1/ ,908,481 19,434,535 (4,473,946) 123.0% 4,916, % 7/1/ ,337,392 20,533,088 (2,804,304) 113.7% 5,192, % 7/1/ ,238,386 21,582,890 (2,655,496) 112.3% 5,192, % Prior to July 1, 2007, medical insurance liabilities and allocated assets were combined with pension liabilities and allocated assets and shown in the Schedules of Funding Progress Pension. See accompanying Report of Independent Auditors. 22

26 SCHEDULES OF EMPLOYER CONTRIBUTIONS PENSION YEAR ENDED Kentucky Judicial Retirement Plan Annual Required Annual Percentage Year Ended Contributions Contribution Contributed June 30, 2002 $ 3,877,959 $ 3,878, % June 30, ,133,888 2,133, % June 30, ,133,888 2,133, % June 30, ,912,476 1,912, % June 30, ,912,476 1,854, % June 30, ,835,242 2,788, % June 30, 2008* 2,374,894 2,374, % June 30, ,511,980 4,469, % June 30, ,511,980 4,469, % June 30, ,302,430 4,533, % June 30, ,302,430 4,945, % Kentucky Legislators Retirement Plan Annual Required Annual Percentage Year Ended Contributions Contribution Contributed June 30, 2002 $ 692,022 $ 693, % June 30, , , % June 30, , , % June 30, June 30, June 30, , , % June 30, 2008* 428, , % June 30, , , % June 30, , , % June 30, ,140, , % June 30, ,140,019 1,027, % The annual required contributions shown above are based on full actuarial reports. The annual required contribution amount shown is for basic valuation without any future COLA reflected. *Note: Effective for the year ended June 30, 2008, medical insurance employer contributions have been segregated from defined benefit contributions. See accompanying Report of Independent Auditors. 23

27 SCHEDULES OF EMPLOYER CONTRIBUTIONS MEDICAL INSURANCE YEAR ENDED Kentucky Judicial Retirement Plan Annual Required Annual Percentage Year Ended Contributions Contribution Contributed June 30, 2008* $ 460,348 $ 460, % June 30, , , % June 30, , , % June 30, , , % June 30, , , % Kentucky Legislators Retirement Plan Annual Required Annual Percentage Year Ended Contributions Contribution Contributed June 30, 2008* $ 285,476 $ 285, % June 30, ,759 59, % June 30, ,759 59, % June 30, June 30, The annual required contributions shown above are based on full actuarial reports. The annual required contribution amount shown is for basic valuation without any future COLA reflected. *Note: Effective for the year ended June 30, 2008, medical insurance employer contributions have been segregated from defined benefit contributions. See accompanying Report of Independent Auditors. 24

28 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Trustees Kentucky Judicial Form Retirement System Frankfort, Kentucky We have audited the financial statements of the Kentucky Judicial Form Retirement System (the System) as of and for the year ended June 30, 2012, and have issued our report thereon dated as of the date of this report. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control over Financial Reporting In planning and performing our audit, we considered the System s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the System s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the System s internal control over financial reporting. Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over financial reporting that might be significant deficiencies or material weaknesses and therefore, there can be no assurance that all deficiencies, significant deficiencies or material weaknesses have been identified. However, as described in the accompanying schedule of findings and responses, we have identified a certain deficiency in internal control over financial reporting that we consider to be a material weakness. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. We 25

29 consider the deficiency described in Finding of the accompanying schedule of findings and responses to be a material weakness. Compliance and Other Matters As part of obtaining reasonable assurance about whether the System s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. The System s response to the finding identified in our audit is described in the accompanying schedule of findings and responses. We did not audit the System s response, and accordingly, we express no opinion on it. This report is intended solely for the information and use of the Board of Trustees, management, and the Auditor of Public Accounts of the Commonwealth of Kentucky, and is not intended to be and should not be used by anyone other than these specified parties. However, this report is a matter of public record and its distribution is not limited. November 14,

30 Summary of Auditor s Results SCHEDULE OF FINDINGS AND RESPONSES YEAR ENDED 1. We have issued an unqualified opinion, dated November 14, 2012, on the financial statements of the System as of and for the year ended June 30, No instances of noncompliance material to the financial statements of the System were disclosed during the audit. 3. Our audit identified a material weakness in internal control over financial reporting required to be reported in accordance with Government Auditing Standards. Summary of Audit Findings MATERIAL WEAKNESS Reporting of Actuarial Information Condition: The initial actuarial valuations of assets (AAL), which were calculated by the System s actuary and are required disclosures in the financial statement footnotes, were based on the original cost of investments at June 30, Criteria: Paragraph 138 of Governmental Accounting Standards Board Statement No. 25, Financial Reporting for Defined Benefit Plans and Note Disclosures for Defined Contribution Plans, requires the AAL to be market related. Cause: In prior years, the actuary firm utilized the cost value of assets in calculating the AAL s, but because the original cost value was not significantly different from the market value, there was not a significant impact on the AAL. While the inputs used by the actuary firm in this year s original reports did represent the correct original cost values of assets at June 30, 2012, the difference between market value and original cost at that date was more significant than in prior years, and resulted in material changes to the AAL. 27

31 SCHEDULE OF FINDINGS AND RESPONSES YEAR ENDED Effect: The AAL calculations by the actuary firm had to be regenerated in order to properly reflect the market value of assets at June 30, The revised calculation resulted in changes to the AAL disclosed and presented as required supplementary information. The adjustments increased the AAL of the Judicial Retirement Plan and the Legislators Retirement Plan at June 30, 2012 by $21,738,000 and $5,283,000, respectively. Recommendation: We recommend management s review of the actuary s report include a step to verify the use of the June 30 th market value of assets in the calculation of the AAL. Follow-up on any inaccuracies or inconsistencies should be performed to ensure that the data in the final reports is accurate. Management s Response: Management is in agreement with the audit s findings. Although System Management had provided the actuary firm with the proper fair market value data for use in the AAL calculation, we concur with the recommendation to include a step in the review of the actuary s report to verify the use of the June 30 th market value of assets in the calculation of the AAL, which will ensure the accuracy of the financial statement disclosures and schedules. We will implement the above recommendation going forward. SUMMARY OF PRIOR YEAR FINDINGS The prior year s audit disclosed no findings that are required to be reported in accordance with Government Auditing Standards. 28