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1 FINANCIAL SECTION

2 This page is intentionally blank. 32 New Jersey Division of Pensions and Benefits

3 INDEX Independent Auditors Report Management s Discussion and Analysis (Unaudited) Basic Financial Statements: Statement of Fiduciary Net Position Fiduciary Funds Combining Statement of Fiduciary Net Position Fiduciary Funds Pension Trust and State Health Benefit Program Funds Statement of Changes in Fiduciary Net Position Fiduciary Funds Combining Statement of Changes in Fiduciary Net Position Fiduciary Funds Pension Trust and State Health Benefit Program Funds Notes to Financial Statements Schedules 1 Required Supplementary Information (Unaudited) Schedule of Funding Progress Required Supplementary Information (Unaudited) Schedule of Employer Contributions Schedule of Administrative Expenses Schedule of Investment Expense Schedule of Expenses for Consultants Schedule of Fiduciary Net Position Fiduciary Funds Schedule of Changes in Fiduciary Net Position Fiduciary Funds Combining Schedule of Balance Sheet Information Fiduciary Funds Agency Funds Combining Schedule of Changes in Fiduciary Net Position Information Fiduciary Funds Agency Funds Combining Schedule of Fiduciary Net Position Information State Health Benefit Program Fund State Combining Schedule of Changes in Fiduciary Net Position Information State Health Benefit Program Fund State Combining Schedule of Fiduciary Net Position Information State Health Benefit Program Fund Local Combining Schedule of Changes in Fiduciary Net Position Information State Health Benefit Program Fund Local Combining Schedule of Fiduciary Net Position Information State Health Benefit Program Fund Education Combining Schedule of Changes in Fiduciary Net Position Information State Health Benefit Program Fund Education Combining Schedule of Balance Sheet Information Agency Fund Dental Expense Program Combining Schedule of Changes in Fiduciary Net Position Information Agency Fund Dental Expense Program New Jersey Division of Pensions and Benefits 33

4 INDEX 18 Schedule of Changes in Position and Liabilities Information Agency Fund Alternate Benefit Program Fund Schedule of Changes in Position and Liabilities Information Agency Fund Pension Adjustment Fund Schedule of Changes in Position and Liabilities Information Agency Fund Dental Expense Program Total Schedule of Changes in Position and Liabilities Information Agency Fund Dental Expense Program State Schedule of Changes in Position and Liabilities Information Agency Fund Dental Expense Program Local Combining Schedule of Fiduciary Net Position Information Fiduciary Funds Select Pension Trust Funds Combining Schedule of Changes in Fiduciary Net Position Information Fiduciary Funds Select Pension Trust Funds Common Pension Funds Portfolio of Investments Equities Common Pension Funds Portfolio of Investments Fixed Income Common Pension Funds Portfolio of Investments Alternative Investments and Global Diversified Credit Funds Common Pension Funds Portfolio of Investments Derivatives New Jersey Division of Pensions and Benefits

5 INDEPENDENT AUDITORS REPORT The Treasurer State of New Jersey: Report on the Financial Statements We have audited the accompanying financial statements of the State of New Jersey, Division of Pensions and Benefits (the Division), as of and for the year ended, and the related notes to the financial statements, which collectively comprise the Division s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the plan net position of the State of New Jersey, Division of Pensions and Benefits, as of, and the respective changes in plan net position thereof for the year then ended in accordance with U.S. generally accepted accounting principles. New Jersey Division of Pensions and Benefits 35

6 Emphasis of Matter As discussed in note 2, the financial statements referred to above are intended to present the fiduciary net position and the changes in fiduciary net position of the benefit funds administered by the Division. As a result, these financial statements do not purport to, and do not, present fairly the financial position of the State of New Jersey as of and the changes in its financial position, or, where applicable, its cash flows thereof for the year ended in conformity with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information U.S. generally accepted accounting principles require that the management s discussion and analysis and schedules of funding progress and employer contributions on pages and 87-89, respectively, be presented to supplement the basis 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. Supplementary Information Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Division s basic financial statements. The supplementary information included in schedule 3 through 28 as listed in the table of contents (the Schedules) are presented for purposes of additional analysis and are not a required part of the basic financial statements. The Schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the Schedules are fairly stated, in all material respects, in relation to the basic financial statements as a whole. Short Hills, New Jersey November 20, New Jersey Division of Pensions and Benefits

7 Management s Discussion and Analysis Our discussion and analysis of the financial performance of the fiduciary funds (the Funds) administered by the Division of Pensions and Benefits (the Division) provides an overview of the Funds financial activities for the fiscal year ended. Please read it in conjunction with the basic financial statements and financial statement footnotes, which follow this discussion. FINANCIAL HIGHLIGHTS Fiduciary Funds Pension Trust and State Health Benefit Program Funds Fiduciary net position increased by $4.0 billion as a result of this year s operations from $77.9 billion to $81.9 billion. Additions for the year are $18.7 billion, which are comprised of member and employer pension contributions of $10.4 billion and investment income of $8.3 billion. Deductions for the year are $14.7 billion, which are comprised of benefit and refund payments of $14.6 billion and administrative expenses of $49.5 million. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the basic financial statements. The basic financial statements are comprised of two components: 1) fiduciary fund financial statements and 2) notes to the financial statements. This report also contains required and other supplementary information in addition to the basic financial statements. FUND FINANCIAL STATEMENTS A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The Division uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Fiduciary Funds Fiduciary funds are used to account for the assets that the Division holds on behalf of others as their agent. Fiduciary funds are custodial in nature and do not involve measurement of results of operations. The Division administers eighteen fiduciary funds: twelve pension trust funds, three health benefit program funds, and three agency funds. The basic fiduciary fund financial statements of the pensions trust and State health benefit program funds consist of the statement of fiduciary net position and the statement of changes in fiduciary net position. The basic fiduciary fund financial statement of the agency fund is the statement of fiduciary net position. NOTES TO THE FINANCIAL STATEMENTS The notes to the financial statements provide additional information that is essential to a full understanding of the data provided in the basic financial statements and includes a description of the fiduciary funds. OTHER INFORMATION In addition to the basic financial statements and accompanying notes, this report also presents certain required supplementary information, which includes information regarding the funding status and employer contributions to the pension trust and State health benefit program funds. New Jersey Division of Pensions and Benefits 37

8 Management s Discussion and Analysis, Continued FINANCIAL ANALYSIS SUMMARY OF FIDUCIARY NET POSITION PENSION TRUST AND STATE HEALTH BENEFIT PROGRAM FUNDS Increase Assets $ 85,002,257,252 80,497,592,498 4,504,664,754 Liabilities 3,073,589,745 2,613,602, ,987,287 Net position $ 81,928,667,507 77,883,990,040 4,044,677,467 Assets of the pension trust and state health benefit program funds consist of cash and cash equivalents, investments, securities lending collateral, contributions due from members and participating employers, accrued interest and dividends on investments, members loans and other receivables. Between fiscal years 2012 and 2013, total assets increased by $4.5 billion or 5.6%. This is due to an increase of $4.8 billion in investment holdings that were utilized to pay benefits of the funds, an increase in the securities lending collateral of $0.3 billion, offset by a net decrease in cash and cash equivalents and receivables of $0.6 billion. Liabilities of the pension trust and state health benefit program funds consist of retirement benefits payable to retirees and beneficiaries, contributory and noncontributory group life insurance (NCGI) premiums payable to the Funds insurance provider, securities lending collateral and rebates payable and, classified under accounts payable and accrued expenses, outstanding medical claims payable to the medical providers under the State Health Benefits Program (SHBP). Also included with accounts payable and accrued expense are liabilities of the pension trust funds for unclaimed member accounts and checks issued to members that have not been negotiated by the members but remain due and payable. Total liabilities increased by $0.5 billion or 17.6%. This is due to an increase in the securities lending collateral and rebates payable of $0.4 billion and an increase in retirement benefits payable and others of $0.1 billion. Net position of the pension trust and state health benefit program funds increased by $4.0 billion or 5.2%. SUMMARY OF FIDUCIARY NET POSITION AGENCY FUNDS Increase Assets $ 66,414,176 60,038,707 6,375,469 Liabilities 66,414,176 60,038,707 6,375,469 Net position $ Assets of the agency funds consist of cash and cash equivalents, investments and contributions due from the State and local employers. Between fiscal years 2012 and 2013, total assets increased by $6.4 million or 10.6%. This is attributable to the increased amount invested in the Cash Management Fund (CMF) of $4.7 million, a net increase in cash and cash equivalents and receivables of $1.7 million. 38 New Jersey Division of Pensions and Benefits

9 Management s Discussion and Analysis, Continued Liabilities in the agency funds vary according to plan. In the Alternate Benefit Program (ABP), they include reimbursements to state and county colleges, reimbursement to the State of New Jersey general fund of any unused appropriations and noncontributory group life insurance benefits payable. In the Dental Expense Program (DEP), they include claims payable, and in the Pension Adjustment Fund (PAF), they include liabilities for payroll and amounts due to the State of New Jersey general fund and other pension funds. Between fiscal years 2012 and 2013, total liabilities increased by $6.4 million or 10.6%. This is comprised of a $0.3 million increase in liabilities in the PAF, a $5.9 million increase in liabilities in DEP, and a $0.2 million increase in ABP liabilities. SUMMARY OF CHANGES TO FIDUCIARY NET POSITION PENSION TRUST AND STATE HEALTH BENEFIT PROGRAM FUNDS Increase Additions: Member contributions $ 2,474,368,350 2,309,269, ,098,395 Employer contributions and other 7,950,263,650 6,912,323,830 1,037,939,820 Net investment income 8,297,254,619 1,722,074,598 6,575,180,021 Total additions 18,721,886,619 10,943,668,383 7,778,218,236 Deductions: Benefits 14,455,603,860 13,923,519, ,084,448 Refunds of contributions 172,134, ,270,934 14,863,416 Administrative expenses 49,470,942 46,498,279 2,972,663 Total deductions 14,677,209,152 14,127,288, ,920,527 Changes in net position $ 4,044,677,467 (3,183,620,242) 7,228,297,709 Additions of the pension trust and state health benefit program funds consist of member and employer contributions and earnings from investment activities. There is an increase of $7.8 billion or 71.1% in total additions, attributable to an increase in net investment income of $6.6 billion and an increase of $1.2 billion in member and employer contributions in fiscal year 2013 as compared to fiscal year Member contributions increased by $165.1 million overall, of which $60.2 million increase is attributable to the state health benefit program funds and a $104.9 million increase is attributable to the pension trust funds. In the SHBP State, the member contributions increased by $50.7 million or 33.3%, in SHBP Local the member contributions increased by $6.9 million or 16.1%, and in SHBP Education, the member contributions increased by $2.6 million or 5.2%. Active employee contribution increased as a result of Chapter 78, P.L premium share requirements. In plan year 2013, the active employee group rate for SHBP State increased by 6.9%, in SHBP Local the increase was 7.9% and in SHBP Education the increase was 14.7%. SHBP membership increases between plan years 2012 and 2013 also contributed to the higher member contributions. For the pension trust funds, the increase in member contributions is attributable to the higher member contribution rate for the various pension plans as required in Chapter 78, P.L Chapter 1, P.L. 2010, effective May 21, 2010, required the State to resume making actuarially recommended contributions to the pension plans on a phased-in basis over a seven-year period begining in fiscal year For fiscal year 2013, the State s minimum required contribution was 2/7th of the full recommended New Jersey Division of Pensions and Benefits 39

10 Management s Discussion and Analysis, Continued amounts determined on the basis of the July 1, 2011 actuarial valuation. Based on that, the State made pension contributions totaling $1,029.3 million as follows: $614.6 million to the Teachers Pension and Annuity Fund (TPAF), $264.1 million to Public Employees Retirement System (PERS), $112.5 million to Police and Firemen s Retirement System (PFRS), $0.9 million to Consolidated Police and Firemen s Pension Fund (CPFPF), $11.6 million to Judicial Retirement System (JRS), and $25.6 million to the State Police Retirement System (SPRS). State noncontributory group life insurance contributions for fiscal year totaling $79.5 million were as follows: $33.3 million for TPAF, $36.9 million for PERS, $6.4 million for PFRS, $0.7 million for JRS, and $2.2 million for SPRS. Between fiscal years 2012 and 2013, the State s contribution toward noncontributory group life insurance increased by $12.1 million due to higher claims activity. State noncontributory life insurance benefits are funded on a pay-as-you-go basis. The local contributions for PERS and PFRS are included in the annual billings to local employers. The annual local employer pension appropriation billings increased per the actuarial valuation as of July 1, For PERS, the amount accrued in fiscal year 2012 for normal contribution, accrued liability, and NCGI was $784.7 milllion and was due on April 1, For fiscal year 2013, the total amount accrued was $834.6 million and is due April 1, For PFRS, the total amount accrued in fiscal year 2012 for normal contributions, accrued liability, and NCGI was $781.2 million and was due April 1, For fiscal year 2013, the total amount accrued was $777.0 million and is due April 1, The SHBP State employer contributions decreased by $57.3 million. For the SHBP Local, employer contributions increased by $155.7 million. For the SHBP Education, employer contributions increased by $228.1 million. These increases are attributable to rate increases effective January 1, 2012 and 2013, as well as an increase in the number of covered members. The total investment return for the pension trust funds was 11.78% compared to 2.52% in the prior year. Net investment income increased by $6.6 billion or 381.3% due to realized and unrealized gains on U.S. equities, developed market non-u.s. equities, and high yield fixed income securities caused by improving economic conditions and accommodative monetary policies globally. Deductions of the pension trust and state health benefit program funds are mainly comprised of pension benefit payments to retirees and beneficiaries, refunds of contributions to former members, and administrative costs incurred by the Funds to operate the pension plans. Also included are claim charges for the self-insured health and prescription drug benefit programs. Between fiscal years 2012 and 2013, benefit payments increased by $532.1 million or 3.8% due to an increase in the number of retirees receiving retirement and other benefits. The number of refunds processed increased by $14.9 million or 9.5% compared to last year. Administrative expenses increased by $3.0 million or 6.4%. The increase in net position of $4.0 billion was mainly attributable to the increase in investment income when comparing fiscal year 2013 to fiscal year New Jersey Division of Pensions and Benefits

11 Management s Discussion and Analysis, Continued INVESTMENT PERFORMANCE The rates of return (i.e. investment performance, which includes income and changes in the fair value of investments) for the Common Pension Funds, the Cash Management Fund, and various market indices are as follows: YEAR ENDED JUNE Total Rate of Return (%): All Pension Trust Funds (1) 11.78% 2.52% Common Pension Fund A (Domestic equity) Common Pension Fund B (Fixed income) Common Pension Fund D (International equity) (16.53) Common Pension Fund E (Alternative investments) Cash Management Fund (2) Returns of Various Market Indices (%): S&P Composite 1500 Index S&P 500 Index Dow Jones Industrial Average Barclays U.S. Government/Credit Index (0.62) 8.78 Barclays Long Government/Credit (4.69) MSCI EAFE - Net (Developed Non-U.S.) (13.83) MSCI Emerging Market Free - Net 2.87 (15.95) HFRI Fund of Funds Index 7.27 (5.40) NCREIF Property Index Cambridge Private Equity Index (3) month Treasury bills (1) Excludes returns on Police and Fire Mortgage Program. (2) Rate of return for State of New Jersey participants which includes the Pension Trust Funds. (3) Reported with a one quarter lag. OVERALL FINANCIAL CONDITION OF THE FUNDS For the defined benefit pension trust funds, the combined funded ratio is 64.5% based on the current actuarial valuation dated July 1, 2012, with an unfunded actuarial accrued liability (UAAL) of $47.2 billion on an actuarial basis per Governmental Accounting Standards Board (GASB) Statement No. 25, Financial Reporting for Defined Benefit Plans and Note Disclosures for Defined Contribution Plans as compared to 67.5% based on the prior year valuation with UAAL of $41.7 billion. The increase in the unfunded pension liability and the decrease in the overall funded ratio is mainly attributable to the State making phased-in contributions to the pension plans beginning in fiscal year 2012 under Chapter 1, P.L For fiscal year 2013, the State contributed $1.029 billion or approximately 2/7th of the full recommended contribution of $3.600 billion determined on the basis of the July 1, 2011 actuarial valuation. For the SHBP Education, total revenues recognized exceeded total expenses incurred by $41.3 million, increasing the surplus at the beginning of the year from $183.9 million to $225.2 million at year end. This increase is attributable to a gain on the active member side. The contribution rates for active members for calendar year 2012 and 2013 included a 2% margin in order to produce a gain to raise the Claim Stabilization Reserve (CSR). The target CSR is equivalent to 2 months of plan costs, and as of June 30, 2013, the CSR is approximately 1.5 months of plan costs. For the SHBP State, total expenses incurred exceeded total revenues recognized by $53.0 million, increasing the balance from a deficit at the beginning New Jersey Division of Pensions and Benefits 41

12 Management s Discussion and Analysis, Continued of the year of $100.1 million to a deficit of $153.2 million at year end. This increase in the deficit balance is due to the State contributing less than the full required premium contributions in order to utilize available cash reserves to meet incurred claim charges. For SHBP Local, total revenues recognized exceeded total expenses incurred by $75.6 million, increasing the surplus at the beginning of the year from $147.9 million to $223.5 million at year end. The increase in the surplus is due to margin being added to the calendar year 2012 and 2013 premium rates in order to raise reserve levels. For the state health benefit program funds for fiscal year 2013, based on the current actuarial valuation dated July 1, 2012, the State had a $19.3 billion unfunded actuarial accrued liability for other post-employment benefits (OPEB) under GASB Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, for the SHBP State active and retired members and $32.2 billion for the SHBP Education employees and retirees that become the obligation of the State of New Jersey upon retirement. In comparison, based on the prior year actuarial valuation, the State had a $18.1 billion unfunded actuarial accrued liability for the SHBP - State active and retired members and $30.9 billion for the SHBP - Education employees and retirees. This increase in the post-retirement medical UAAL is attributable to the State funding post-retirement medical benefits on a pay-as-you-go basis as opposed to funding on an actuarial reserve basis. The SHBP Local fiscal year 2013 unfunded actuarial accrued liability for OPEB based on the same actuarial valuation was $12.4 billion and, for the prior year actuarial valuation, the liability was $11.1 billion. During the year, the ABP and the PAF received sufficient funding to meet their benefit obligations. For the State Employees Deferred Compensation Plan and the Supplemental Annuity Collective Trust, members are 100% vested in the present value of their contributions, and the funds have sufficient assets to meet future benefit obligations. CONTACTING SYSTEM FINANCIAL MANAGEMENT This financial report is designed to provide our members, beneficiaries, investors, and other interested parties with a general overview of the Funds finances and to show the Funds accountability for the money it receives. This report is available on the Division of Pensions and Benefits website at If you have any questions about this report or need additional financial information, contact the Division of Pensions and Benefits, P.O. Box 295, Trenton, NJ New Jersey Division of Pensions and Benefits

13 Statement of Fiduciary Net Position Fiduciary Funds PENSION TRUST AND STATE HEALTH BENEFIT PROGRAM FUNDS AGENCY FUNDS Assets: Cash and cash equivalents $ 6,879,644 1,572,900 Securities lending collateral 1,556,965,543 Investments, at fair value: Cash Management Fund 2,254,597,761 32,917,968 Common Pension Fund A 20,964,307,768 Common Pension Fund B 17,034,005,939 Common Pension Fund D 14,689,068,951 Common Pension Fund E 20,015,522,984 Common stocks 177,323,777 Mortgages 835,483,242 U.S. Government obligations 399,045,275 Domestic equities 1,308,850,841 International equities 269,977,576 Other fixed income securities 909,186,823 Total investments 78,857,370,937 32,917,968 Receivables: Contributions: Members 204,779, ,277 Employers 3,247,848,178 Accrued interest and dividends 4,655,008 Members loans 1,057,464,740 Securities sold in transit 45,498,972 Other 20,794,698 31,295,031 Total receivables 4,581,041,128 31,923,308 Total assets 85,002,257,252 66,414,176 Liabilities: Accounts payable and accrued expenses 753,021,603 63,024,395 Retirement benefits payable 749,773,762 Cash Overdraft 639,342 Noncontributory group life insurance premiums payable 14,113,195 Assets held for local contributing employers 2,861,776 Pension adjustment payroll payable 252,882 Due to State of New Jersey 250,629 Due to other funds 24,494 Securities lending collateral and rebates payable 1,556,041,843 Total liabilities 3,073,589,745 66,414,176 Net Position: Held in trust for pension and health benefits $ 81,928,667,507 See schedule of funding progress on pages See accompanying notes to financial statements. New Jersey Division of Pensions and Benefits 43

14 Combining Statement of Fiduciary Net Position Fiduciary Funds Pension Trust and State Health Benefit Program Funds Assets: ALTERNATE CONSOLIDATED STATE HEALTH STATE HEALTH STATE HEALTH BENEFIT POLICE AND DEFINED POLICE AND PRISON PUBLIC STATE SUPPLEMENTAL TEACHERS BENEFIT BENEFIT BENEFIT LONG-TERM CENTRAL FIREMEN S DEFERRED CONTRIBUTION JUDICIAL FIREMEN S OFFICERS EMPLOYEES POLICE ANNUITY PENSION AND PROGRAM PROGRAM PROGRAM DISABILITY PENSION PENSION COMPENSATION RETIREMENT RETIREMENT RETIREMENT PENSION RETIREMENT RETIREMENT COLLECTIVE ANNUITY FUND FUND FUND FUND FUND FUND PLAN PLAN SYSTEM SYSTEM FUND SYSTEM SYSTEM TRUST FUND STATE LOCAL EDUCATION TOTAL Cash and cash equivalents $ 21,588 84,580 16,598 51,720 1,992, , , , ,328 1,365, , , ,507 6,879,644 Securities lending collateral 4,786, ,286, ,645,247 37,999, ,247,510 1,556,965,543 Investments, at fair value: Cash Management Fund 109, ,354,730 54,634, ,016 6,800, ,011,329 8,033, ,473,519 27,300,704 2,338, ,121,173 58,829, ,062, ,574,077 2,254,597,761 Common Pension Fund A 66,578,189 5,760,867,621 7,190,554, ,114,573 7,426,192,820 20,964,307,768 Common Pension Fund B 51,397,224 4,870,208,286 5,894,378, ,838,281 5,821,184,095 17,034,005,939 Common Pension Fund D 44,584,609 4,019,607,827 5,010,785, ,088,374 5,256,002,253 14,689,068,951 Common Pension Fund E 59,034,849 5,617,716,153 6,812,680, ,122,321 7,042,968,698 20,015,522,984 Common Stocks 177,323, ,323,777 Mortgages 835,483, ,483,242 U.S. government obligations 399,045, ,045,275 Domestic equities 1,308,850,841 1,308,850,841 International equities 269,977, ,977,576 Other fixed income securities 909,186, ,186,823 Receivables: Liabilities: Total investments 109, ,354,730 2,941,694, , ,395,417 21,293,894,458 8,033,501 25,595,872,988 1,785,464, ,662,512 26,052,469,039 58,829, ,062, ,574,077 78,857,370,937 Contributions: Members 252,827 51,395,322 71,020,892 1,074, ,555 78,322, , , , ,779,532 Employers 67, ,876,818 2,072,511,300 71,469,595 6,227,807 74,989,837 57,704,981 3,247,848,178 Accrued interest and dividends ,095, ,319, , ,818 2,440 4,655,008 Members loans 965, ,953, ,935,995 17,394, ,215,999 1,057,464,740 Securities sold in transit 45,498,972 45,498,972 Other 1,537, , ,076 6,135,472 70,738 7,514,477 22,381 2,215, , ,594 1,136,306 20,794,698 Total receivables 1,537, ,144 1,095,540 1,447,252 1,380,178,695 70,748 2,658,984,681 18,490, , ,226,615 7,683,484 76,709,676 59,633,824 4,581,041,128 Total assets 1,646,696 22,023 4,668,454 2,942,790, , ,681,070 23,104,351,943 8,318,421 28,788,159,403 1,842,483, ,708,213 26,981,308,676 67,328, ,223, ,596,408 85,002,257,252 Accounts payable and accrued expenses 969 2,718 1,258,014 (307) 3,893,232 1,239 73,859, , ,938 57,025, ,496, ,671, ,413, ,021,603 Retirement benefits payable 21, ,920 3,998, ,573, , ,882,489 15,523,488 2,330, ,986, ,773,462 Cash overdraft 639, ,342 Non-contributory group insurance premiums payable 67,840 3,914,928 7,051,884 73,714 3,004,829 14,113,195 Securities lending collateral and rebates payable 4,783, ,032, ,329,180 37,976, ,919,327 1,556,041,843 Total liabilities 22, ,638 1,897,356 8,850, ,414, , ,123,229 53,858,046 2,446, ,935, ,496, ,671, ,413,612 3,073,589,745 Net position held in trust for pension and health benefits $ 1,646,696 4,353,816 2,940,893, , ,830,817 22,504,937,545 8,171,919 27,920,036,174 1,788,625, ,262,014 26,059,372,741 (153,167,314) 223,551, ,182,796 81,928,667,507 See accompanying notes to financial statements. New Jersey Division of Pensions and Benefits 44

15 PENSION TRUST AND STATE HEALTH BENEFIT PROGRAM FUNDS Additions: Contributions: Members $ 2,474,368,350 Employers 7,946,873,907 Other 3,389,743 Total contributions 10,424,632,000 Investment income: Net appreciation in fair value of investments 6,329,233,230 Interest 1,503,398,736 Dividends 479,409,930 8,312,041,896 Less investment expense 14,787,277 Net investment income 8,297,254,619 Total additions 18,721,886,619 Deductions: Benefits 14,455,603,860 Refunds of contributions 172,134,350 Administrative and miscellaneous expenses 49,470,942 Total deductions 14,677,209,152 Change in net position 4,044,677,467 Net position held in trust for pension and health benefits: Beginning of year 77,883,990,040 End of year $ 81,928,667,507 See accompanying notes to financial statements. Statement of Changes in Fiduciary Net Position Fiduciary Funds Year ended New Jersey Division of Pensions and Benefits 45

16 Combining Statement of Changes in Fiduciary Net Position Fiduciary Funds Pension Trust and State Health Benefit Program Funds Year ended Additions: Contributions: ALTERNATE CONSOLIDATED STATE HEALTH STATE HEALTH STATE HEALTH BENEFIT POLICE AND DEFINED POLICE AND PRISON PUBLIC STATE SUPPLEMENTAL TEACHERS BENEFIT BENEFIT BENEFIT LONG-TERM CENTRAL FIREMEN S DEFERRED CONTRIBUTION JUDICIAL FIREMEN S OFFICERS EMPLOYEES POLICE ANNUITY PENSION AND PROGRAM PROGRAM PROGRAM DISABILITY PENSION PENSION COMPENSATION RETIREMENT RETIREMENT RETIREMENT PENSION RETIREMENT RETIREMENT COLLECTIVE ANNUITY FUND FUND FUND FUND FUND FUND PLAN PLAN SYSTEM SYSTEM FUND SYSTEM SYSTEM TRUST FUND STATE LOCAL EDUCATION TOTAL Members $ 177,296,365 3,402, ,775, ,999,525 21,875,233 6,635, ,523, ,711,158 50,048,889 52,100,031 2,474,368,350 Employers 3,037, , ,150 1,482,976 12,308, ,531,390 1,184,446,277 27,781, ,428,958 1,749,261,868 1,088,415,378 2,325,090,481 7,946,873,907 Other 22,214 2,477, ,542 3,389,743 Total contributions 3,037, ,214 3,389, ,296,365 1,482,976 15,711,226 1,286,306, ,542 2,030,445,802 49,657,127 6,635,320 1,381,962,796 1,951,973,026 1,138,464,267 2,377,190,512 10,424,632,000 Investment income: Net appreciation (depreciation) in fair value of investments (26) ,569, ,375,064 1,614,143, ,017,407, ,528,030 27,063,319 2,212,137,760 1,735 3,131 3,349 6,329,233,230 Interest 2, ,443 2,444,034 1,747 4,094, ,072,019 11, ,799,577 32,889,692 2, ,704, , , ,427 1,503,398,736 Dividends 9,308,591 1,480, ,102, ,894,593 11,565,660 3,923, ,134, ,409,930 2, , ,322,229 1,761 25,950,370 2,193,318,613 11,599 2,696,101, ,983,382 30,989,256 2,869,976, , , ,776 8,312,041,896 Less: investment expense 4, ,745 18,343 1,538,058 2,529 8,275, ,128 4,586,052 14,787,277 Deductions: Net investment income 2, ,069,484 1,761 25,932,027 2,191,780,555 9,070 2,687,826, ,873,254 30,989,256 2,865,390, , , ,776 8,297,254,619 Total additions 3,039, ,312 3,389, ,365,849 1,484,737 41,643,253 3,478,087, ,612 4,718,272, ,530,381 37,624,576 4,247,353,712 1,952,306,776 1,138,871,264 2,377,828,288 18,721,886,619 Benefits 2,949, ,540 3,882, ,062,368 1,207,760 47,684,869 1,969,468,736 1,763,964 3,040,874, ,418,714 12,238,930 3,673,109,659 2,001,820,015 1,061,533,307 2,332,399,659 14,455,603,860 Refunds of contributions 772 6,883, ,985,236 38,884 47,225, ,134,350 Administrative and miscellaneous expenses 11, , ,232 3,881,457 6,965 22,814, ,886 12,482,060 3,510,600 1,713,172 4,137,828 49,470,942 Total deductions 2,949, ,312 3,894, ,516,718 1,207,760 47,848,101 1,980,234,149 1,770,929 3,181,674, ,752,484 12,238,930 3,732,817,221 2,005,330,615 1,063,246,479 2,336,537,487 14,677,209,152 Net increase (decrease) 90,631 (505,044) 354,849, ,977 (6,204,848) 1,497,852,980 (872,317) 1,536,598,176 58,777,897 25,385, ,536,491 (53,023,839) 75,624,785 41,290,801 4,044,677,467 Net position held in trust for pension and health benefits: Beginning of year 1,556,065 4,858,860 2,586,043, , ,035,665 21,007,084,565 9,044,236 26,383,437,998 1,729,847, ,876,368 25,544,836,250 (100,143,475) 147,927, ,891,995 77,883,990,040 End of year $ 1,646,696 4,353,816 2,940,893, , ,830,817 22,504,937,545 8,171,919 27,920,036,174 1,788,625, ,262,014 26,059,372,741 (153,167,314) 223,551, ,182,796 81,928,667,507 See accompanying notes to financial statements. New Jersey Division of Pensions and Benefits 46

17 Notes to Financial Statements (1) DESCRIPTION OF THE FUNDS The State of New Jersey (the State) sponsors and administers the following benefit funds which have been included in the basic financial statements of the State of New Jersey Division of Pensions and Benefits (the Division), collectively referred to as the Funds, Systems, and Trust or the pension funds: Fiduciary Funds PENSION TRUST AND STATE HEALTH BENEFIT PROGRAM FUNDS Judicial Retirement System (JRS) Consolidated Police and Firemen s Pension Fund (CPFPF) Police and Firemen s Retirement System (PFRS) Prison Officers Pension Fund (POPF) Public Employees Retirement System (PERS) State Police Retirement System (SPRS) Teachers Pension and Annuity Fund (TPAF) Supplemental Annuity Collective Trust (SACT) Central Pension Fund (CPF) New Jersey State Employees Deferred Compensation Plan (NJSEDCP) Defined Contribution Retirement Program (DCRP) Alternate Benefit Long-Term Disability Fund (ABPLTD) State Health Benefit Program Fund (SHBP) - State State Health Benefit Program Fund (SHBP) - Local State Health Benefit Program Fund (SHBP) - Education AGENCY FUNDS Pension Adjustment Fund (PAF) Alternate Benefit Program Fund (ABP) Dental Expense Program Fund (DEP) Stand alone financial reports for Agency Funds, SHBP, NJSEDCP, and SACT have been prepared. These financial reports, which can be obtained from the Division or on its website at provide a description of the nature and purpose of each of these funds. Descriptions of the contribution requirements and benefit provisions for these funds are provided in notes 5 and 6, respectively. The pension trust funds are single-employer defined benefit pension plans, except for PERS and PFRS, which are cost-sharing multiple-employer defined benefit plans, TPAF and CPFPF, which are cost-sharing defined benefit plans with a special funding situation, and SACT, NJSEDCP, DCRP, and ABPLTD which are single-employer defined contribution plans. The Prescription Drug Program (PDP) of each respective SHBP are combined and reported as a trust fund with the respective SHBP State, SHBP Local and SHBP Education plans. The SHBP State is classified as a single-employer plan. The SHBP Local and SHBP Education are classified as cost-sharing multiple-employer plans. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the Division have been prepared in conformity with accounting principles generally accepted in the United States of America as applied to governmental entities. Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. New Jersey Division of Pensions and Benefits 47

18 Notes to Financial Statements, Continued (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued Reporting Entity The financial statements include all funds which are administered by the Division over which operating controls are with the individual funds, systems, or trust governing Boards and/or the State of New Jersey. The financial statements of the Funds, Systems, and Trust are included in the financial statements of the State of New Jersey; however, the accompanying financial statements are intended to present solely the funds listed above which are administered by the Division and not the State of New Jersey as a whole. Fund Accounting The accounts of the Division are maintained in accordance with the principles of fund accounting to ensure observance of limitations and restrictions on the resources available. The principles of fund accounting require that the resources be classified for accounting and reporting purposes into funds in accordance with activities or objectives specified for the resources. Each fund is a separate accounting entity with a self-balancing set of accounts. Fiduciary Funds Pension trust and State health benefit program funds Account for monies received for, expenses incurred by and the net position available for plan benefits of the various public employee retirement systems and health benefit programs. Agency funds Agency funds are used to account for the assets that the Division holds on behalf of others as their agent. Agency funds are custodial in nature and do not involve measurement of results of operations. Measurement Focus and Basis of Accounting The accounting and financial reporting treatment applied to a fund is determined by its measurement focus. All funds are accounted for using an economic resources measurement focus. The accrual basis of accounting is used for measuring financial position and changes in net position of the pension trust and health benefit program funds. Under this method, revenues are recorded in the accounting period in which they are earned, and deductions are recorded at the time the liabilities are incurred. The financial statements of the pension trust funds conform to the provisions of GASB Statement No. 25, Financial Reporting for Defined Benefit Plans and Note Disclosures for Defined Contributions Plans (GASB Statement No. 25). The financial statements of the health benefit program funds conform to the provisions of the GASB Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans (GASB Statement No. 43). Employer contributions are recognized when payable to the Funds. Benefits and refunds are recognized when due and payable in accordance with the terms of the Funds. Capital Assets Capital assets utilized by the Division include equipment which is owned by the State of New Jersey. 48 New Jersey Division of Pensions and Benefits

19 Notes to Financial Statements, Continued (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued Membership and Contributing Employers Membership and contributing employers of the pension trust funds consisted of the following at July 1, 2012, the date of the most recent actuarial valuations. Membership of the health benefit program funds for OPEB is based on the valuation dated July 1, 2012, and its participating employer count is from the Division s data base as of. Member counts of SACT, CPF, NJSEDCP, and ABPLTD are based on the Division s data base as of : JRS CPFPF PFRS POPF PERS SPRS Retiree members: Retirees and beneficiaries receiving benefits currently , ,593 3,030 Terminated employees entitled to benefits but not yet receiving them ,032 Total retiree members , ,625 3,030 Active members: Vested , ,547 1,675 Non-vested , ,611 1,046 Total active members , ,158 2,721 Total , ,783 5,751 Contributing Employers ,712 1 SHBP TPAF SACT CPF NJSEDCP ABPLTD (OPEB) Retiree members: Retirees and beneficiaries receiving benefits currently 89, , ,744 Terminated employees entitled to benefits but not yet receiving them 392 Total retiree members 89, , ,744 Active members: Vested 85,670 3,022 40, ,994 Non-vested 64,530 Total active members 150,200 3,022 40, ,994 Total 239,900 3, , ,738 Contributing Employers 27 # # In addition to the State, who is the sole payer of regular employer contributions to the fund, TPAF s contributing employers include boards of education who elected to participate in the Early Retirement Incentive Programs and continue to pay towards their incurrued liability. New Jersey Division of Pensions and Benefits 49

20 Notes to Financial Statements, Continued (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued Membership in the agency funds administered by the Division consisted of the following as of : STATE LOCAL TOTAL Dental Expense Program Fund* 118,224 58, ,512 Alternate Benefit Program Fund** 20,070 3,095 23,165 Pension Adjustment Fund 117, , ,712 * Active and retired participants ** Including those receiving long-term disability benefits Investments The Division of Investment, Department of the Treasury, State of New Jersey (Division of Investment) manages and invests certain assets of seven of the defined benefit plans (PERS, TPAF, JRS, PFRS, CPFPF, SPRS and POPF) and two defined contribution plans (SACT and NJSEDCP). The Division of Investment accounts included in the Division of Pensions and Benefits report are: Common Pension Fund A, Common Pension Fund B, Common Pension Fund D, Common Pension Fund E (collectively known as the Common Pension Funds), Police and Firemen s Mortgage Program accounts, and other investments owned directly by the seven defined benefit pension plans. Common Pension Fund A invests primarily in domestic equity securities. Common Pension Fund B invests primarily in fixed income securities. Common Pension Fund D invests primarily in international equity securities. Common Pension Fund E invests primarily in alternative investments, which includes private equity, real estate, real asset, and absolute return strategy funds. The Police and Firemen s Retirement System includes a mortgage loan program administered by the New Jersey Housing and Mortgage Finance Agency that provides participants with mortgages from the program at rates which are fixed by formula. The law establishing the program provides that the pension fund may not sell the mortgages, and no independent market exists for them. Prudential Retirement is the third party administrator for the NJSEDCP. Prudential Retirement provides recordkeeping, administration services and access to 22 investments through a combination of their separate account product offerings and retail branded mutual funds. The four state-managed investments options (DCP Bond Fund, DCP Equity Fund, DCP Small Cap Equity Fund and DCP Money Market Fund) are closed to new investments. The Division of Investment is the fiduciary for the investments of the Plan. The Division of Pensions and Benefits maintains its administrative oversight functions for the Plan. Investments are reported at fair value as follows: U.S. Government and Agency, Sovereign and Corporate obligations prices quoted by a major dealer in such securities. Police and Firemen s mortgages estimated market prices obtained from an independent broker. Domestic and Foreign Equity Securities, Exchanged Traded Funds, Forward Foreign Exchange Contracts closing prices as reported on the primary market or exchange on which they trade. Money Market Instruments amortized cost which approximates fair value. Cash Management Fund closing net position on the last day of trading during the period as determined by the Transfer Agent. Alternative investments (private equity, real estate, real asset, and absolute return strategy funds) Fair values for the individual funds are based upon the net asset values for the funds at the closest available reporting date, adjusted for subsequent contributions, distributions, management fees and reserves. The valuation techniques vary based upon investment type and involve a certain degree of expert judgment. The most significant input into the net asset value of an entity is the 50 New Jersey Division of Pensions and Benefits