2004 ANNUAL REPORT INTRODUCTORY SECTION TABLE OF CONTENTS INTRODUCTORY SECTION Boards of Trustees 2 Letter of Transmittal 3 Legislation 4 ACTUARIAL SECTION Employees' Retirement System 5 Public School Employees Retirement System 8 Legislative Retirement System 11 Georgia Judicial Retirement System 14 Group Term Life Insurance 17 Georgia Military Pension Fund 20 INVESTMENT SECTION Pooled Investment Fund/Structural Analysis 23 Temporary Investments/Bonds 24 Equity Holdings 25 Mortgage/Real Estate Investment 26 FINANCIAL SECTION Independent Auditors' Report 27 Management's Discussion and Analysis (Unaudited) 28 Basic Financial Statements: Combined Statements of Net Assets as of June 30, 2004 and 2003 33 Combined Statements of Changes in Net Assets for the years ended June 30, 2004 and 2003 34 Combining Statement of Net Assets as of June 30, 2004 35 Superior Court Judges and District Attorneys Retirement Funds 36 Combining Statement of Net Assets as of June 30, 2004 Combining Statement of Changes in Net Assets for the year ended June 30, 2004 37 Superior Court Judges and District Attorneys Retirement Funds 38 Combining Statement of Changes in Net Assets for the year ended June 30, 2004 Combining Statement of Net Assets as of June 30, 2003 39 Superior Court Judges and District Attorneys Retirement Funds 40 Combining Statement of Net Assets as of June 30, 2003 Combining Statement of Changes in Net Assets for the year ended June 30, 2003 41 Superior Court Judges and District Attorneys Retirement Funds 42 Combining Statement of Changes in Net Assets for the year ended June 30, 2003 Notes to Basic Financial Statements 43 Required Supplementary Schedules (Unaudited): Schedules of Funding Progress 55 Schedules of Employer Contributions 56 Notes to Required Supplementary Schedules 57 Additional Information: Administrative Expenses Schedule 59 Contributions and Expenses for the years ended June 30, 2004 and 2003 2004 Employees' Retirement System of Georgia INTRODUCTORY SECTION BOARDS OF TRUSTEES Michael D. Kennedy Chairman Korn/Ferry International Employees' Retirement System Public School Employees Retirement System Legislative Retirement System Georgia Judicial Retirement System Georgia Defined Contribution Plan Georgia Military Pension Fund State Employees' Assurance Department State Social Security Trust Fund Russell W. Hinton, ex-officio Vice-Chairman State Auditor Employees' Retirement System Public School Employees Retirement System Legislative Retirement System Georgia Judicial Retirement System Georgia Defined Contribution Plan Georgia Military Pension Fund State Employees' Assurance Department State Social Security Trust Fund Dan Ebersole, ex-officio Director Office of Treasury and Fiscal Services Employees' Retirement System Public School Employees Retirement System Legislative Retirement System Georgia Judicial Retirement System Georgia Defined Contribution Plan Georgia Military Pension Fund State Employees' Assurance Department State Social Security Trust Fund Marjorie Young, ex-officio Commissioner State Merit System Employees' Retirement System Public School Employees Retirement System Legislative Retirement System Georgia Judicial Retirement System Georgia Defined Contribution Plan Georgia Military Pension Fund State Employees' Assurance Department State Social Security Trust Fund Ned J. Winsor Assistant Treasurer United Parcel Service Employees' Retirement System Public School Employees Retirement System Legislative Retirement System Georgia Judicial Retirement System Georgia Defined Contribution Plan Georgia Military Pension Fund State Social Security Trust Fund Celeste Osborn Deputy Chief Financial Officer Office of the Governor Employees' Retirement System Public School Employees Retirement System Legislative Retirement System Georgia Judicial Retirement System Georgia Defined Contribution Plan Georgia Military Pension Fund State Social Security Trust Fund Marsha H. Moore Commissioner Department of Early Care and Learning Employees' Retirement System Public School Employees Retirement System Legislative Retirement System Georgia Judicial Retirement System Georgia Defined Contribution Plan Georgia Military Pension Fund State Social Security Trust Fund Robert E. Keller District Attorney Clayton Judicial Circuit Georgia Judicial Retirement System Kelly D. Turner State Court Judge Lowndes County Georgia Judicial Retirement System Cynthia D. Wright Superior Court Judge Superior Court of Fulton County Georgia Judicial Retirement System Michael Thurmond, ex-officio Commissioner of Labor State Employees' Assurance Department Bonny T. Wright Attorney-at-Law State Employees' Assurance Department 2004 Employees' Retirement System of Georgia INTRODUCTORY SECTION LETTER OF TRANSMITTAL TWO NORTHSIDE 75 SUITE 300 ATLANTA, GEORGIA 30318-7778 TEL 404-350-6300 FAX 404-350-6310 MICHAEL J. NEHF DIRECTOR The Boards of Trustees and staff are pleased to present the 2004 Annual Report of the retirement systems and programs administered by the Employees' Retirement System of Georgia (ERS). ERS administers separate and distinct cost-sharing, multiple employer defined benefit pension plans for various employer agencies of the State of Georgia, as well as a defined contribution plan, a life insurance plan and a Social Security trust fund, as follows: Defined Benefit Plans Employees' Retirement System of Georgia Public School Employees Retirement System Legislative Retirement System Georgia Judicial Retirement System Georgia Military Pension Fund Superior Court Judges Retirement Fund District Attorneys Retirement Fund Defined Contribution Plan Georgia Defined Contribution Plan Life Insurance Plan State Employees' Assurance Department Other State Social Security Trust Fund Categories of information provided in this annual report include: Legislation Actuary's reports Investment information Auditors' report Financial information During fiscal year 2004, the net assets of the System increased by $818 million, or 6.1%, to $14.3 billion by June 30, 2004. This improvement was primarily due to the increase in the fair value of the equity investments. Net investment income of $1.3 billion was an improvement over the net investment income of the previous year of $564 million. This increase was primarily due to the improved equity market in 2004. The mission of ERS is to be the guardian of the plans for the ultimate benefit of the members, retirees and beneficiaries of the plans. In so doing, the ERS core responsibilities include pension administration; the collection, reconciliation and disbursement of contributions for the welfare of the members, retirees and beneficiaries of the plans; and the sound and secure investment of the retirement funds. We believe that the information found within this report properly reflects the dedication of the Boards of Trustees, staff and consultants in carrying out ERS' mission. We express our sincere thanks to the Boards of Trustees for their leadership and support. Many thanks are extended to the offices of the Governor, Lieutenant Governor, members of the House and Senate Retirement Committees and their staff, members of the House of Representatives and Senate, and the department officials whose support and assistance have helped ERS accomplish its mission over the years. With continued support along with the dedication of our staff, we represent to our members, retirees, beneficiaries and the general public ERS' continuing efforts to properly administer the responsibilities of the retirement systems. Michael Nehf, Executive Director 2004 Employees' Retirement System of Georgia INTRODUCTORY SECTION LEGISLATION EMPLOYEES' RETIREMENT SYSTEM Act No. 538 (House Bill 480) Adds 47-2-100 to allow a member to purchase up to three additional years of creditable service by paying the full actuarial cost. Application and payment must be made in conjunction with and simultaneously with the member's application for retirement. Creditable service shall not be used to obtain 10 years of service for vesting purposes or to qualify for a benefit at age 60. Act No. 542 (House Bill 609) Amends 47-1-9(b)(1) to allow a retired member who was unmarried at the time of retirement to revoke the selection of children for a survivor's option at time of retirement and substitute a current or new spouse. Act No. 546 (House Bill 878) Amends 47-2-262 by adding paragraph (c) to allow assistant district attorneys and employees of the Prosecuting Attorneys' Council, who were required to be members of ERS but failed to do so due to an administrative error, to be deemed members from the obligated date. Service shall be granted upon payment of employee and employer contributions which should have been made, plus regular interest thereon. Such payment shall be credited to the member's annuity account. Act No. 547 (House Bill 914) Amends 47-2-121 by adding paragraph (e.4) which allows a reduced retirement benefit together with a partial lump sum distribution under option five in addition to electing another optional allowance. The amount of the lump sum may not exceed the sum of 36 months of the monthly retirement allowance that would have been received if the lump sum option had not been elected. Members retiring pursuant to 47-2-123 and 47-2-120(e) are excluded. Also adds 47-2-121(i)(1) and (2) to allow the balance of member's accumulated contributions to be payable to designated beneficiary or estate if total retirement benefits paid do not equal accumulated contributions. Act No. 553 (House Bill 1137) Amends 47-2-323 to change the designation of the Georgia Indigent Defense Council to the Georgia Public Defender Standards Council. Act No. 478 (House Bill 1246) Code corrections. GEORGIA JUDICIAL RETIREMENT SYSTEM Act No. 537 (House Bill 441) Amends 47-23-50 to require any person who becomes a judge of the State Court of Fulton County on or after July 1, 2004 shall become a member and shall not be a member of any other public retirement system. Any person serving as a judge in the State Court of Fulton County on June 30, 2004 may make an irrevocable election to become a member of this system by December 31, 2004. All employer and employee contributions, with regular interest, will be transferred from the local retirement system to GJRS. No service can be credited that will create any accrued unfunded liability on this system. Other Legislation of Interest: Act No. 452 (House Bill 1568) Amends 37-2-6.1 to prohibit a Community Service Board (CSB) from employing any person receiving a retirement benefit from the Employees' Retirement System except in compliance with the provisions of 47-2-110(c). Any such person who is employed as of July 1, 2004 may continue to be employed. 2004 Employees' Retirement System of Georgia ACTUARIAL SECTION ACTUARY'S CERTIFICATION LETTER Employees' Retirement System June 17, 2004 Board of Trustees Employees' Retirement System of Georgia Two Northside 75, Suite 300 Atlanta, GA 30318 Human Resources & Investor Solutions Suite 1900 200 Galleria Parkway, N.W. Atlanta, GA 30339-5945 (770) 955-2488 Office (770) 933-8336 Fax www.mellon.com Attention: Mr. Jim Larche, Interim Executive Director Members of the Board: Section 47-2-26 of the law governing the operation of the Employees' Retirement System of Georgia provides that the actuary shall make periodic valuations of the contingent assets and liabilities of the Retirement System on the basis of regular interest and the tables last adopted by the Board of Trustees. We have submitted the report giving the results of the actuarial valuation of the System prepared as of June 30, 2003. The report indicates that annual employer contributions at the rate of 5.66% of active payroll for Old Plan members and 10.41% of active payroll for New Plan members for the fiscal year ending June 30, 2005 are sufficient to support the benefits of the System. In addition, these contribution rates will be payable for the fiscal year ending June 30, 2006, due to a Board decision that changes the contribution period to which the valuation applies to the fiscal year which begins 24 months after the valuation date. The June 30, 2004 valuation will determine the contribution rates for the fiscal year ending June 30, 2007. In preparing the valuation, the actuary relied on data provided by the System. While not verifying data at the source, the actuary performed tests for consistency and reasonableness. Our firm, as actuary, is responsible for all of the actuarial trend data in the financial section of the annual report and the supporting schedules in the actuarial section of the annual report. In our opinion, the valuation is complete and accurate, and the methodology and assumptions used are reasonable as a basis for the valuation. Since the previous valuation, the assumed interest rate has been increased from 7.00% to 7.25%, with a corresponding increase of 0.25% in the assumed salary scale at all ages. The valuation takes into account the effect of all amendments to the System enacted through the 2003 session of the General Assembly as well as the 1.5% Ad Hoc COLAs effective July 1, 2003 and January 1, 2004. The System is funded on an actuarial reserve basis. The actuarial assumptions recommended by the actuary and adopted by the Board are in the aggregate reasonably related to the experience under the System and to reasonable expectations of anticipated experience under the System. The assumptions and methods used for funding purposes meet the parameters set for the disclosures presented in the financial section by Governmental Accounting Standards Board (GASB) Statement Nos. 25 and 27. The funding objective of the plan is that contribution rates over time will remain level as a percent of payroll. The valuation method used is the entry age normal cost method. The normal contribution rate to cover current cost has been determined as a level percent of payroll. Gains and losses are reflected in the unfunded accrued liability which is negative and being amortized as a level percent of payroll within a 10-year period. The Retirement System is being funded in conformity with the minimum funding standard set forth in Code Section 47-20-10 of the Public Retirement Systems Standards Law. In our opinion the System is operating on an actuarially sound basis. Assuming that contributions to the System are made by the employer from year to year in the future at the rates recommended on the basis of the successive actuarial valuations, the continued sufficiency of the retirement fund to provide the benefits called for under the System may be safely anticipated. This is to certify that the independent consulting actuary is a member of the American Academy of Actuaries and has experience in performing valuations for public retirement systems, that the valuation was prepared in accordance with principles of practice prescribed by the Actuarial Standards Board, and that the actuarial calculations were performed by qualified actuaries in accordance with accepted actuarial procedures, based on the current provisions of the retirement system and on actuarial assumptions that are internally consistent and reasonably based on the actual experience of the System. Sincerely, Edward A. Macdonald Principal, Consulting Actuary EAM:sr 2004 Employees' Retirement System of Georgia ACTUARIAL SECTION VALUATION BALANCE SHEET Employees' Retirement System as of June 30, 2003 DOLLAR AMOUNTS IN THOUSANDS ACTUARIAL LIABILITIES (1) Present value of prospective benefits payable on account of present retired members, beneficiaries of deceased members, and members entitled to deferred vested benefits - Service and disability benefits - Death and survivor benefits - Deferred vested benefits Total (2) Present value of prospective benefits payable on account of present active members - Retirement and survivor allowances - Refunds of members' contributions Total (3) TOTAL ACTUARIAL LIABILITIES PRESENT AND PROSPECTIVE ASSETS (4) Actuarial value of assets (5) Present value of total future contributions = (3)-(4) (6) Present value of future member contributions and employer paid member contributions (7) Present value of future employer contributions = (5)-(6) (8) Employer normal contribution rate (9) Present value of future payroll (1%) (10) Prospective normal contributions = (8) x (9) (11) Prospective unfunded accrued liability contributions = (7)-(10) (12) TOTAL PRESENT AND PROSPECTIVE ASSETS $ 5,732,106 453,239 56,000 $ 6,241,345 $ 8,991,369 59,847 9,051,216 $ 15,292,561 $ 12,428,736 $ 2,863,825 1,444,405 $ 1,419,420 5.94 % $ 248,753 1,477,593 (58,173) $ 15,292,561 2004 Employees' Retirement System of Georgia ACTUARIAL SECTION SUMMARY OF PRINCIPAL RESULTS Employees' Retirement System as of June 30, 2003 DOLLAR AMOUNTS IN THOUSANDS Valuation Date Active members: Number Annual compensation Retired members and beneficiaries: Number Annual allowances Assets: Market Value Actuarial Value Unfunded actuarial accrued liability Amortization period For Fiscal Year Ending Annual required employer contribution rates (ARC): Old Plan Normal Accrued Liability Total New Plan Normal Employer Pick-Up Contribution Accrued Liability Total June 30, 2003 73,251 $ 2,489,490 28,570 $ 655,872 June 30, 2002 71,790 $ 2,408,306 27,229 $ 598,493 $ 11,697,607 $ 11,558,373 12,428,736 12,124,414 $ (58,173) $ (129,564) 10 years 13 years June 30, 2005* June 30, 2004 5.94 % (0.28) 5.66 % 5.94 % 4.75 (0.28) 10.41 % 6.21 % (0.55) 5.66 % 6.21 % 4.75 (0.55) 10.41 % * The ARC will also be payable for the fiscal year ending June 30, 2006, due to a Board decision that changes the contribution period to which the valuation applies to the fiscal year which begins 24 months after the valuation date. 2004 Employees' Retirement System of Georgia ACTUARIAL SECTION ACTUARY'S CERTIFICATION LETTER Public School Employees' Retirement System June 17, 2004 Board of Trustees Georgia Public School Employees' Retirement System Two Northside 75, Suite 300 Atlanta, GA 30318 Human Resources & Investor Solutions Suite 1900 200 Galleria Parkway, N.W. Atlanta, GA 30339-5945 (770) 955-2488 Office (770) 933-8336 Fax www.mellon.com Attention: Mr. Jim Larche, Interim Executive Director Members of the Board: Section 47-4-60 of the law governing the operation of the Georgia Public School Employees' Retirement System provides that the employer contributions shall be actuarially determined and approved by the Board. We have submitted the report giving the results of the actuarial valuation of the System prepared as of June 30, 2003. The report indicates that annual employer contributions of $833,196, or $23.35 per active member, for the fiscal year ending June 30, 2005 are sufficient to support the benefits of the System. In addition, these contributions will be in effect for the fiscal year ending June 30, 2006, due to a Board decision that changes the contribution period to which the valuation applies to the fiscal year which begins 24 months after the valuation date. The June 30, 2004 valuation will determine the contributions for the fiscal year ending June 30, 2007. In preparing the valuation, the actuary relied on data provided by the System. While not verifying data at the source, the actuary performed tests for consistency and reasonableness. Our firm, as actuary, is responsible for all of the actuarial trend data in the financial section of the annual report and the supporting schedules in the actuarial section of the annual report. In our opinion, the valuation is complete and accurate, and the methodology and assumptions used are reasonable as a basis for the valuation. Since the previous valuation, the assumed interest rate has been increased from 7.00% to 7.25%. The valuation takes into account the effect of amendments to the System enacted through the 2003 session of the General Assembly. The System is funded on an actuarial reserve basis. The actuarial assumptions recommended by the actuary and adopted by the Board are in the aggregate reasonably related to the experience under the System and to reasonable expectations of anticipated experience under the System. The assumptions and methods used for funding purposes meet the parameters set for the disclosures presented in the financial section by Governmental Accounting Standards Board (GASB) Statement Nos. 25 and 27. The funding objective of the plan is that contribution rates over time will remain level as a dollar per active member. The valuation method used is the entry age normal cost method. The normal contribution rate to cover current cost has been determined as a dollar per active member. Gains and losses are reflected in the unfunded accrued liability which is negative and being amortized as a level dollar per member within an 11-year period. The Retirement System is being funded in conformity with the minimum funding standard set forth in Code Section 47-20-10 of the Public Retirement Systems Standards Law. In our opinion the System is operating on an actuarially sound basis. Assuming that contributions to the System are made by the employer from year to year in the future at the rates recommended on the basis of the successive actuarial valuations, the continued sufficiency of the retirement fund to provide the benefits called for under the System may be safely anticipated. This is to certify that the independent consulting actuary is a member of the American Academy of Actuaries and has experience is performing valuations for public retirement systems, that the valuation was prepared in accordance with principles of practice prescribed by the Actuarial Standards Board, and that the actuarial calculations were performed by qualified actuaries in accordance with accepted actuarial procedures, based on the current provisions of the retirement system and on actuarial assumptions that are internally consistent and reasonably based on the actual experience of the System. Sincerely, Edward A. Macdonald Principal, Consulting Actuary EAM:sh 2004 Employees' Retirement System of Georgia ACTUARIAL SECTION VALUATION BALANCE SHEET Public School Employees' Retirement System as of June 30, 2003 ACTUARIAL LIABILITIES (1) Present value of prospective benefits payable on account of present retired members, beneficiaries of deceased members, and terminated members entitled to deferred benefits $ 400,163,936 (2) Present value of prospective benefits payable on account of present active members: Service retirement allowances Disability retirement allowances Refunds of members' contributions Total $ 301,929,340 15,818,680 5,071,222 $ 322,819,242 (3) TOTAL ACTUARIAL LIABILITIES $ 722,983,178 PRESENT AND PROSPECTIVE ASSETS (4) Actuarial value of assets (5) Present value of total future contributions = (3) - (4) (6) Present value of future member contributions to the Members' Contributions Fund (7) Present value of future employer contributions to the Pension Accumulation Fund = (5) - (6) (8) Employer normal contribution rate (9) Present value of future membership service (10)Prospective normal contributions = (8) x (9) (11) Prospective unfunded accrued liability contributions = (7) - (10) (12)TOTAL PRESENT AND PROSPECTIVE ASSETS $ 734,879,000 (11,895,822) 6,393,384 $ (18,289,206) $ 294.96 177,594 52,383,126 (70,672,332) $ 722,983,178 2004 Employees' Retirement System of Georgia ACTUARIAL SECTION SUMMARY OF PRINCIPAL RESULTS Public School Employees' Retirement System as of June 30, 2003 Valuation Date Number of active members Retired members and beneficiaries: Number Annual allowances Assets: Market Value Actuarial Value Unfunded actuarial accrued liability Amortization Period Fiscal Year Ending Employer contribution rate per active member: Normal Accrued liability Total Annual required employer contributions (ARC):4 Normal Accrued liability Total June 30, 2003 35,681 12,017 $ 37,571,156 1 June 30, 2002 34,207 11,784 $ 35,113,773 2 $ 694,709,000 734,879,000 $ (70,672,332) 11 years $ 697,461,000 727,529,000 $ (97,233,635) 20 years June 30, 20053 $ 294.96 (271.61) 23.35 $ 10,524,468 (9,691,272) $ 833,196 June 30, 2004 $ 292.67 (268.31) $ 24.36 $ 10,011,363 (9,178,167) $ 833,196 1 Does not include increase in benefit accrual rate effective July 1, 2003. The results of the valuation have been adjusted to include this increase. 2 Does not include increase in benefit accrual rate effective July 1, 2002. The results of the valuation have been adjusted to include this increase. 3 The ARC will also be payable for the fiscal year ending June 30, 2006, due to a Board decision that changes the contribution period to which the valuation applies to the fiscal year which begins 24 months after the valuation date. 4 The ARC is in addition to any administrative expense allotments that are contributed to the System. 10 2004 Employees' Retirement System of Georgia ACTUARIAL SECTION ACTUARY'S CERTIFICATION LETTER Legislative Retirement System June 17, 2004 Board of Trustees Legislative Retirement System of Georgia Two Northside 75, Suite 300 Atlanta, GA 30318 Human Resources & Investor Solutions Suite 1900 200 Galleria Parkway, N.W. Atlanta, GA 30339-5945 (770) 955-2488 Office (770) 933-8336 Fax www.mellon.com Attention: Mr. Jim Larche, Interim Executive Director Members of the Board: Section 47-6-22 of the law governing the operation of the Georgia Legislative Retirement System provides that the actuary shall make periodic valuations of the contingent assets and liabilities of the Retirement System on the basis of regular interest and the tables last adopted by the Board of Trustees. We have submitted the report giving the results of the valuation of the System prepared as of June 30, 2003. The report indicates that no annual employer contributions for the fiscal year ending June 30, 2005 are required to support the benefits of the System. In addition, no contribution will be required for the fiscal year ending June 30, 2006, due to a Board decision that changes the contribution period to which the valuation applies to the fiscal year which begins 24 months after the valuation date. The June 30, 2004 valuation will determine the contributions for the fiscal year ending June 30, 2007. In preparing the valuation, the actuary relied on data provided by the System. While not verifying data at the source, the actuary performed tests for consistency and reasonableness. Our firm, as actuary, is responsible for all of the actuarial trend data in the financial section of the annual report and the supporting schedules in the actuarial section of the annual report. In our opinion the valuation is complete and accurate, and the methodology and assumptions used are reasonable as a basis for the valuation. Since the previous valuation, the assumed interest rate has been increased from 7.00% to 7.25%. The valuation takes into account that effect of amendments to the System enacted through the 2003 session of the General Assembly. The System is funded on an actuarial reserve basis. The actuarial assumptions recommended by the actuary and adopted by the Board are in the aggregate reasonably related to the experience under the System and to reasonable expectations of anticipated experience under the System. The assumptions and methods used for funding purposes meet the parameters set for the disclosures presented in the financial section by Governmental Accounting Standards Board (GASB) Statement Nos. 25 and 27. The funding objective of the plan is that contribution rates over time will remain level as a dollar per active member. The valuation method used is the unit credit cost method. The normal contribution rate to cover current cost has been determined as a dollar per active member. Gains and losses are reflected in the unfunded accrued liability which is negative and being amortized as a level dollar per active member. The Retirement System is being funded in conformity with the minimum funding standard set forth in Code Section 47-20-10 of the Public Retirement Systems Standards Law. In our opinion the System is operating on an actuarially sound basis. Assuming that contributions to the System are made by the employer from year to year in the future at the rates recommended on the basis of the successive actuarial valuations, the continued sufficiency of the retirement fund to provide the benefits called for under the System may be safely anticipated. This is to certify that the independent consulting actuary is a member of the American Academy of Actuaries and has experience is performing valuations for public retirement systems, that the valuation was prepared in accordance with principles of practice prescribed by the Actuarial Standards Board, and that the actuarial calculations were performed by qualified actuaries in accordance with accepted actuarial procedures, based on the current provisions of the retirement system and on actuarial assumptions that are internally consistent and reasonably based on the actual experience of the System. Sincerely, Edward A. Macdonald Principal, Consulting Actuary EAM:sh 2004 Employees' Retirement System of Georgia11 ACTUARIAL SECTION VALUATION BALANCE SHEET Legislative Retirement System as of June 30, 2003 Actuarial Liabilities Present value of prospective benefits payable on account of: (1) Present retired members and beneficiaries of deceased members and members entitled to deferred vested benefits (2) Present active members: Service retirement allowances Disability retirement allowances Survivor allowances Refunds of members' contributions Total (3) Total Actuarial Liabilities $ 16,512,299 $ 7,138,909 491,697 264,589 360,297 $ 8,255,492 $ 24,767,791 Present and Prospective Assets (4) Actuarial Value of Assets (5) Present value of total future contributions = (3) - (4) (6) Present value of future member contributions (7) Present value of future employer contributions = (5) - (6) (8) Prospective normal contributions (9) Prospective unfunded actuarial accrued liability contributions = (7) - (8) (10) Total Present and Prospective Assets $ 27,157,000 $ (2,389,209) $ (4,000,468) 1,611,259 1,258,289 (5,258,757) $ 24,767,791 12 2004 Employees' Retirement System of Georgia ACTUARIAL SECTION SUMMARY OF PRINCIPAL RESULTS Legislative Retirement System as of June 30, 2003 Valuation Date Number of active members Retired members and beneficiaries: Number Annual allowances Assets: Market Value Actuarial Value Unfunded actuarial accrued liability Amortization period For Fiscal Year Ending Employer contribution rate per active member: Normal Accrued Liability Total Annual required employer contributions (ARC): Normal Accrued Liability Total June 30, 2003 212 202 $ 1,317,694 June 30, 2002 209 192 $ 1,240,266 $ 25,615,000 $ 25,467,000 27,157,000 26,637,000 $ (5,258,757) $ (4,858,127) N/A* N/A* June 30, 2005** June 30, 2004 $ 458.08 $ 502.06 (458.08) (502.06) $ 0.00 $ 0.00 $ 97,112 (97,112) $0 $ 104,930 (104,930) $0 * If the annual required employer contribution (ARC) is based on 40 year amortization of the unfunded accrued liability, the ARC is less than $0, which is not allowed under GASB 25/27. Therefore, the accrued liability contribution has been set such that the total ARC equals $0. ** The ARC will also be payable for the fiscal year ending June 30, 2006, due to a Board decision that changes the contribution period to which the valuation applies to the fiscal year which begins 24 months after the valuation date. 2004 Employees' Retirement System of Georgia13 ACTUARIAL SECTION ACTUARY'S CERTIFICATION LETTER Georgia Judicial Retirement System June 17, 2004 Board of Trustees Georgia Judicial Retirement System Two Northside 75 Atlanta, GA 30318 Human Resources & Investor Solutions Suite 1900 200 Galleria Parkway, N.W. Atlanta, GA 30339-5945 (770) 955-2488 Office (770) 933-8336 Fax www.mellon.com Attention: Mr. Jim Larche, Interim Executive Director Members of the Board: Section 47-23-21 of the law governing the operation of the Georgia Judicial Retirement System provides that the actuary shall make periodic valuations of the contingent assets and liabilities of the Retirement System on the basis of regular interest and the tables last adopted by the Board of Trustees. We have submitted the report giving the results of the actuarial valuation of the System prepared as of June 30, 2003. The report indicates that annual employer contributions at the rate of 3.85% of payroll for the fiscal year ending June 30, 2005 are required to support the benefits of the System. In addition, the 3.85% contribution rate will be in effect for the fiscal year ending June 30, 2006, due to a Board decision that changes the contribution period to which the valuation applies to the fiscal year which begins 24 months after the valuation date. The June 30, 2004 valuation will determine the contribution rate for the fiscal year ending June 30, 2007. In preparing the valuation, the actuary relied on data provided by the System. While not verifying data at the source, the actuary performed tests for consistency and reasonableness. Our firm, as actuary, is responsible for all of the actuarial trend data in the financial section of the annual report and the supporting schedules in the actuarial section of the annual report. In our opinion the valuation is complete and accurate, and the methodology and assumptions used are reasonable as a basis for the valuation. Since the previous valuation, the assumed interest rate has been increased from 7.00% to 7.25% and the assumed rates of salary increase have been changed from 5.50% to 5.75%. The valuation takes into account the effect of amendments to the System enacted through the 2003 session of the General Assembly, as well as the 1.5% Ad Hoc COLA's effective July 1, 2003 and January 1, 2004. The System is funded on an actuarial reserve basis. The actuarial assumptions recommended by the actuary and adopted by the Board are in the aggregate reasonably related to the experience under the System and to reasonable expectations of anticipated experience under the System. The assumptions and methods used for funding purposes meet the parameters set for the disclosures presented in the financial section by Governmental Accounting Standards Board (GASB) Statement Nos. 25 and 27. The funding objective of the plan is that contribution rates over time will remain level as a percent of payroll. The valuation method used is the entry age normal cost method. The normal contribution rate to cover current cost has been determined as a level percent of payroll. Gains and losses are reflected in the unfunded accrued liability which is negative and being amortized as a level percent of payroll within an 11-year period. The Retirement System is being funded in conformity with the minimum funding standard set forth in Code Section 47-20-10 of the Public Retirement Systems Standards Law. In our opinion, the system is operating on an actuarially sound basis. Assuming that contributions to the System are made by the employer from year to year in the future at the rates recommended on the basis of the successive actuarial valuations, the continued sufficiency of the retirement fund to provide the benefits called for under the System may be safely anticipated. This is to certify that the independent consulting actuary is a member of the American Academy of Actuaries and has experience is performing valuations for public retirement systems, that the valuation was prepared in accordance with principles of practice prescribed by the Actuarial Standards Board, and that the actuarial calculations were performed by qualified actuaries in accordance with accepted actuarial procedures, based on the current provisions of the retirement system and on actuarial assumptions that are internally consistent and reasonably based on the actual experience of the System. Sincerely, Edward A. Macdonald Principal, Consulting Actuary EAM:sh 14 2004 Employees' Retirement System of Georgia ACTUARIAL SECTION VALUATION BALANCE SHEET Georgia Judicial Retirement System as of June 30, 2003 Actuarial Liabilities Present value of prospective benefits payable on account of: (1) Present retired members and beneficiaries of deceased members, and mem- bers entitled to deferred vested benefits (2) Present active members (3) Total Actuarial Liabilities $ 63,798,829 213,811,005 $ 277,609,834 Present and Prospective Assets (4) Actuarial Value of Assets: (5) Present value of total future contributions = (3) (4) $ (6) Present value of future member contributions (7) Present value of future employer contributions = (5) (6) $ (8) Employer normal contribution rate (9) Present value of future payroll (1%) $ (10)Prospective normal contributions = (8) x (9) (11) Prospective unfunded actuarial accrued liability contributions = (7) (10) (12)Total Present and Prospective Assets 39,926,834 13,762,199 19.70 % 3,330,981 $ 237,683,000 26,164,635 65,620,326 (51,858,127) $ 277,609,834 2004 Employees' Retirement System of Georgia15 ACTUARIAL SECTION SUMMARY OF PRINCIPAL RESULTS Georgia Judicial Retirement System as of June 30, 2003 Valuation Date Active members: Number Annual compensation Retired members and beneficiaries: Number Annual allowances Assets: Market Value Actuarial Value Unfunded actuarial accrued liability Amortization Period June 30, 2003 June 30, 2002 425 $ 38,867,399 428 $ 38,630,312 150 $ 7,346,141 134 $ 6,166,415 $ 220,585,000 237,683,000 $ (51,858,127) 11 years $ 213,611,000 228,417,000 $ (53,262,507) 10 years For Fiscal Year Ending Annual required employer contribution rates (ARC): Normal Accrued liability Total June 30, 2005* 19.70 % (15.85) 3.85 % June 30, 2004 20.33 % (16.48) 3.85 % * The ARC will also be payable for fiscal year ending June 30, 2006, due to a Board decision that changes the contribution period to which the valuation applies to the fiscal year which begins 24 months after the valuation date. 16 2004 Employees' Retirement System of Georgia ACTUARIAL SECTION ACTUARY'S CERTIFICATION LETTER Group Term Life Insurance Plan June 17, 2004 Board of Trustees Employees' Retirement System of Georgia Two Northside 75, Suite 300 Atlanta, GA 30318 Human Resources & Investor Solutions Suite 1900 200 Galleria Parkway, N.W. Atlanta, GA 30339-5945 (770) 955-2488 Office (770) 933-8336 Fax www.mellon.com Attention: Mr. Jim Larche, Interim Executive Director Members of the Board: Chapters 47-2 and 47-19 of the Code of Georgia which govern the operation of the Georgia Employees' Group Term Life Insurance Plan provide that the actuary shall make periodic valuations of the contingent assets and liabilities of the Insurance Plan on the basis of regular interest and the tables last adopted by the Board of Trustees. We have submitted the report giving the results of the valuation of the Plan prepared as of June 30, 2003. The report indicates that employee contributions at the rate of 0.50% of active payroll for Old Plan members, and 0.25% of active payroll for New Plan members and members of the Legislative Retirement System are sufficient to support the benefits of the Plan. No employer contributions are required for the fiscal year ending June 30, 2005. In addition, no employer contributions will be required for the fiscal year ending June 30, 2006 due to a Board decision that changes the contribution period to which the valuation applies to the fiscal year which begins 24 months after the valuation date. The June 30, 2004 valuation will determine the contribution rates for the fiscal year ending June 30, 2007. Since the previous valuation, the assumed interest rate has been increased from 7.00% to 7.25%, with a corresponding increase of 0.25% in the assumed salary scale for ERS members at all ages under 60. The valuation takes into account the effect of all amendments to the System enacted through the 2003 session of the General Assembly. The Plan is funded on an actuarial reserve basis. The actuarial assumptions used are in the aggregate reasonably related to the experience under the Plan and to reasonable expectations of anticipated experience under the Plan. In our opinion, the Plan is operating on an actuarially sound basis and the sufficiency of the funds to provide the benefits called for by the Plan may be safely anticipated. Sincerely yours, Edward A. Macdonald Principal, Consulting Actuary EAM:sh 2004 Employees' Retirement System of Georgia17 ACTUARIAL SECTION VALUATION BALANCE SHEET Group Term Life Insurance Plan as of June 30, 2003 ACTUARIAL LIABILITIES (1) Present value of prospective benefits payable on account of present retired members (2) Present value of prospective benefits payable on account of present active members (3) TOTAL ACTUARIAL LIABILITIES PRESENT AND PROSPECTIVE ASSETS (4) Actuarial value of assets (5) Present value of future member premiums (6) Present value of future employer contributions (7) Total present assets and present value of future employee premiums and employer contributions (8) Actuarial Deficit (9) TOTAL PRESENT AND PROSPECTIVE ASSETS $ 287,134,486 432,042,511 $ 719,176,997 $ 831,995,000 78,043,454 5,518,069 $ 915,556,523 (196,379,526) $ 719,176,997 18 2004 Employees' Retirement System of Georgia ACTUARIAL SECTION SUMMARY OF PRINCIPAL RESULTS Group Term Life Insurance Plan as of June 30, 2003 Valuation Date Active members: Number Annual compensation Retired members: Number Insurance amount Assets: Market Value Actuarial Value Actuarial Deficit Fiscal Year Ending Contribution rates: Old Plan Members Employee Employer* Total New Plan and LRS Members Employee Employer* Total June 30, 2003 June 30, 2002 73,463 $ 2,492,924,023 $ 71,999 2,411,719,724 23,093 $ 811,281,629 $ 21,832 734,037,944 $ 782,791,000 $ 831,995,000 $ (196,379,526) $ 754,054,000 793,005,000 (183,586,919) June 30, 2005 June 30, 2004 0.50 %** 0.00 0.50 % 0.25 % 0.00 0.25 % 0.50 %** 0.00 0.50 % 0.25 % 0.00 0.25 % * Employer contribution rates also payable for the fiscal year ending June 30, 2006 due to a Board decision that changes the contribution period to which the valuation applies to the fiscal year which begins 24 months after the valuation date. ** 0.25% paid by employer. 2004 Employees' Retirement System of Georgia19 ACTUARIAL SECTION ACTUARY'S CERTIFICATION LETTER Georgia Military Pension Fund June 17, 2004 Board of Trustees Georgia Military Pension Fund Two Northside 75, Suite 300 Atlanta, GA 30318 Human Resources & Investor Solutions Suite 1900 200 Galleria Parkway, N.W. Atlanta, GA 30339-5945 (770) 955-2488 Office (770) 933-8336 Fax www.mellon.com Attention: Mr. Jim Larche, Interim Executive Director Members of the Board: Section 47-24-22 of the law governing the operation of the Georgia Military Pension Fund provides that the actuary shall make periodic valuations of the contingent assets and liabilities of the Retirement Fund on the basis of regular interest and the tables last adopted by the Board of Trustees. We have submitted the report giving the results of the actuarial valuation of the Fund prepared as of June 30, 2003. The report indicates that an annual employer contribution of $890,651 for the fiscal year ending June 30, 2005 is required to support the benefits of the Fund. In addition, this contribution will be payable for the fiscal year ending June 30, 2006 due to a Board decision that changes the contribution period to which the valuation applies to the fiscal year which begins 24 months after the valuation date. The June 30, 2004 valuation will determine the contribution for the fiscal year ending June 30, 2007. In preparing the valuation, the actuary relied on data provided by the Defense Department. While not verifying data at the source, the actuary performed tests for consistency and reasonableness. Our firm, as actuary, is responsible for all of the actuarial trend data in the financial section of the annual report and the supporting schedules in the actuarial section of the annual report. In our opinion the valuation is complete and accurate, and the methodology and assumptions used are reasonable as a basis for the valuation. Since the previous valuation, the assumed interest rate has been increased from 7.00% to 7.25%. The Fund is funded on an actuarial reserve basis. The actuarial assumptions recommended by the actuary and adopted by the Board are in the aggregate reasonably related to the experience under the Fund and to reasonable expectations of anticipated experience under the Fund. The assumptions and methods used for funding purposes meet the parameters set for the disclosures presented in the financial section by Governmental Accounting Standards Board (GASB) Statement Nos. 25 and 27. The funding objective of the plan is that contribution rates over time will remain level as a dollar per active member. The valuation method used is the entry age normal cost method. The normal contribution rate to cover current cost has been determined as a level dollar per active member. Gains and losses are reflected in the unfunded accrued liability which is being amortized as a level dollar amount within a 40-year period. The Pension Fund is being funded in conformity with the minimum funding standard set forth in Code Section 47-20-10 of the Public Retirement Systems Standards Law. In our opinion, the Fund is operating on an actuarially sound basis. Assuming that contributions to the Fund are made by the employer from year to year in the future at the rates recommended on the basis of the successive actuarial valuations, the continued sufficiency of the retirement Fund to provide the benefits called for under the Fund may be safely anticipated. This is to certify that the independent consulting actuary is a member of the American Academy of Actuaries and has experience is performing valuations for public retirement systems, that the valuation was prepared in accordance with principles of practice prescribed by the Actuarial Standards Board, and that the actuarial calculations were performed by qualified actuaries in accordance with accepted actuarial procedures, based on the current provisions of the retirement Fund and on actuarial assumptions that are internally consistent and reasonably based on the anticipated experience of the Fund. Sincerely, Edward A. Macdonald Principal, Consulting Actuary EAM:sh 20 2004 Employees' Retirement System of Georgia ACTUARIAL SECTION VALUATION BALANCE SHEET Georgia Military Pension Fund as of June 30, 2003 ACTUARIAL LIABILITIES (1) Present value of prospective benefits payable on account of present retired members (2) Present value of prospective benefits payable on account of former members entitled to deferred benefits (3) Present value of prospective benefits payable on account of present active members (4) Total actuarial liabilities PRESENT AND PROSPECTIVE ASSETS (5) Actuarial Value of assets (6) Present value of future employer contributions = (4) (5) (7) Employer normal contribution rate (8) Present value of future membership service (9) Present value of future normal contributions (7) x (8) (10) Present value of unfunded accrued liability contributions = (6) (9) (11) Total present and Prospective Assets $10,890,560 $ 8.11 49,522 $ 182,718 1,134,203 10,182,639 $ 11,499,560 $ 609,000 401,623 10,488,937 $ 11,499,560 2004 Employees' Retirement System of Georgia 21 ACTUARIAL SECTION SUMMARY OF PRINCIPAL RESULTS Georgia Military Pension Fund as of June 30, 2003 Valuation Date Number of active members included in valuation Retired members Number Annual pensions Former members entitled to deferred vested pensions Number Annual deferred pensions Assets Actuarial value Market value Unfunded accrued liability Amortization period June 30, 2003 9,986 17 $ 18,120 203 $ 189,660 $ 609,000 626,000 $ 10,488,937 40 years June 30, 2002 9,695 0 $ 0 33 $ 28,980 $ 0 0 $ 8,321,965 40 years Fiscal Year Ending Employer contribution rate per active member Normal Accrued liability Total Annual required employer contributions (ARC) Normal Accrued liability Total June 30, 2005* $ 8.11 81.08 89.19 $ 80,986 809,665 $ 890,651 June 30, 2004 $ 4.40 64.39 68.79 $ 42,658 624,261 $ 666,919 * The ARC will also be payable for the fiscal year ending June 30, 2006, due to a Board decision that changes the contribution period to which the valuation applies to the fiscal year which begins 24 months after the valuation date. 22 2004 Employees' Retirement System of Georgia INVESTMENT SECTION Pooled Investment Fund as of June 30, 2004 $ 12,366,625,000 Employees' Retirement System 843,149,000 State Employees'Assurance Department 723,394,000 Public School Employees Retirement System 27,052,000 Legislative Retirement System 1,058,000 Superior Court Judges Retirement Fund* 40,067,000 Georgia Defined Contribution Plan 239,036,000 Georgia Judicial Retirement System 1,230,000 Georgia Military Pension Fund $ 14,241,611,000 Total Pooled Investments at Fair Value * The Superior Court Judges Retirement Fund was closed on December 31, 1976. As of June 30, 2004, there were two active members remaining in the Fund with retirement payments funded through Department of Administrative Services appropriations. Structural Analysis of Investments at Fair Value Type of Investment Short-term Investments Bonds Common Stocks Mortgages and Real Estate June 30, 2004 1.3% 39.8% 58.9% Nil 100.0% 2004 Employees' Retirement System of Georgia 23 INVESTMENT SECTION Short-Term Investments - as of June 30, 2004 - Face Amount Issuer Fair Value $ 180,777,000* United States Government and Corporate Obligations (subject to repurchase agreements due 7/01/04) $ 180,777,000* *Consists of Employees' Retirement System $174,104,000 and Georgia Defined Contribution Plan $6,673,000 US Government and Corporate Bonds - as of June 30, 2004 - Par Value Issuer Interest Rate % Year of Maturity Fair Value $ 1,020,000,000US TREAS. BOND 5.375 2031 $ 1,028,608,800 860,000,000 US TREAS. NOTE 1.625 2005 852,475,000 614,000,000 US TREAS. NOTE 2.625 2008 594,812,500 390,000,000 FNMA-CALLABLE 2.710 2007 383,054,100 370,000,000US TREAS. NOTE 3.500 2006 374,739,700 276,000,000 US TREAS. NOTE 3.250 2008 272,550,000 250,000,000 FNMA-CALLABLE 2.200 2006 243,202,500 205,000,000US TREAS. NOTE 1.750 2004 205,063,550 205,000,000GENERAL ELECTRIC CAP CORP 3.500 2009 198,370,300 180,000,000US TREAS. NOTE 2.375 2006 178,480,800 176,000,000FHLMC-CALLABLE 2.750 2007 172,865,440 168,000,000 US TREAS. NOTE 4.250 2013 164,010,000 140,000,000 FHLMC 3.625 2008 138,031,600 125,000,000 GENERAL ELECTRIC CAP CORP 5.375 2007 131,126,250 130,000,000 CITIGROUP GLOBAL NOTES 3.625 2009 126,334,000 112,000,000US TREAS. BOND 6.250 2030 125,405,280 130,000,000GENERAL ELECTRIC CAP CORP 4.375 2012 124,863,700 90,000,000US TREAS. NOTE 2.000 2006 88,931,700 75,000,000 FHLMC 6.000 2011 80,531,250 80,000,000 FNMA-CALLABLE 2.830 2006 79,224,800 70,000,000FNMA 6.375 2009 76,562,500 $ 5,666,000,000ERS Fixed Income Securities $ 5,639,243,770 10,000,000 Defined Contribution Fixed Income Securities 9,951,610 $ 5,676,000,000 Total ERS and Defined Contribution Fixed Income Securities $ 5,649,195,380 24 2004 Employees' Retirement System of Georgia INVESTMENT SECTION Equity holdings - as of June 30, 2004 - Shares Company Fair Value 4,098,645 Pfizer Inc. $ 140,501,551 2,550,120 Procter & Gamble Co. 138,828,533 4,037,300 General Electric Co. 130,808,520 2,720,140 Citigroup Inc. 126,486,510 2,725,294 Exxon Mobil Corp. 121,030,307 1,658,633 American International Group 118,227,360 2,062,120 Johnson & Johnson 114,860,084 4,407,700 Cisco Systems Inc. 104,462,490 1,596,800 Schlumberger Ltd. 101,412,768 3,534,000 Microsoft 100,931,040 1,847,460 Pepsico Inc. 99,541,145 1,096,200 3m Company 98,668,962 1,942,800 Coca Cola Co. 98,072,544 2,282,344 Gillette Co. 96,771,386 945,143 Bank Of America Corp. 79,978,001 1,795,800 Boston Scientific Corp. 76,860,240 871,500 Intl Bus Machines 76,822,725 1,416,000 Wal-mart Stores Inc. 74,708,160 1,019,000 Qualcomm Inc. 74,366,620 1,046,392 Eli Lilly 73,153,265 Total - 20 Largest Holdings 2,046,492,211 Total - All Holdings $ 8,373,078,136 A complete listing is available upon written request. 2004 Employees' Retirement System of Georgia 25 INVESTMENT SECTION Borrower and Mortgaged Property West & Abbitt Bent Creek Col Apts Mortgage as of June 30, 2004 Interest Rate % Year Last Pmt. Due Balance Outstanding on Loan 9.5 2004 $525,561 Description of Property BETA BUILDING TWO NORTHSIDE 75 ATL (Constitutes one-half interest in property) Real Estate Investment as of June 30, 2004 Fair Value $ 3,744,225 Comments Presently houses the offices of Employees' and Teachers Retirement Systems. The Employees' Retirement System on 7/1/76 acquired a 50% interest in the building. 26 2004 Employees' Retirement System of Georgia FINANCIAL SECTION INDEPENDENT AUDITORS' REPORT KPMG LLP Suite 2000 303 Peachtree Street, NE Atlanta, GA 30308 Independent Auditors' Report The Board of Trustees Employees' Retirement System of Georgia: We have audited the accompanying basic financial statements of the Employees' Retirement System of Georgia (the System), a component unit of the state of Georgia, as of and for the year ended June 30, 2004, 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. The basic financial statements of the System as of and for the year ended June 30, 2003 were audited by other auditors whose report dated December 22, 2003 expressed an unqualified opinion on those financial statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and those 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. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2004 financial statements referred to above present fairly, in all material respects, the System's net assets as of June 30, 2004, and the changes in 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 December 17, 2004 on our consideration of the System's internal control over financial reporting and on 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. The management's discussion and analysis, the schedules of funding progress, and schedules of employer contributions on pages 28 through 32 and pages 55 through 58, respectively, are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information, and express no opinion on it. Our audit for the year ended June 30, 2004 was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information included in the administrative expenses schedule for the year ended June 30, 2004 is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects, in relation to the basic financial statements taken as a whole for the year ended June 30, 2004. The report of the other auditors referred to above, dated December 22, 2003, stated that the supplementary information for the year ended June 30, 2003, included in the administrative expenses schedule, was subjected to auditing procedures applied in their audit of the 2003 basic financial statements and, in their opinion, was fairly stated in all material respects in relation to the basic financial statements for the year ended June 30, 2003, taken as a whole. December 17, 2004 KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative. 2004 Employees' Retirement System of Georgia 27 FINANCIAL SECTION MANAGEMENT'S DISCUSSION AND ANALYSIS This section provides a discussion and analysis of the financial performance of the Employees' Retirement System of Georgia (the "System") for the year ended June 30, 2004. The discussion and analysis of the System's financial performance is within the context of the accompanying financial statements, notes to the financial statements, required supplementary schedules, and additional information following this section. The System is responsible for administering a cost-sharing, multiple-employer defined benefit pension plan for various employer agencies of Georgia, along with six other defined benefit pension plans, a defined contribution plan, and a life insurance plan. The defined benefit pension plans include: Employees' Retirement System ("ERS") Legislative Retirement System ("LRS") Public School Employees' Retirement System ("PSERS") Georgia Judicial Retirement System ("GJRS") Georgia Military Pension Fund ("GMPF") Superior Court Judges Retirement Fund ("SCJRF") District Attorneys Retirement Fund ("DARF") The defined contribution retirement plan is the Georgia Defined Contribution Plan ("GDCP") and the life insurance plan is the State Employees' Assurance Department ("SEAD"). Financial Highlights The following highlights are discussed in more detail later in this analysis: The net assets of the System increased by $818 million, or 6.1%, from $13.5 billion at June 30, 2003 to $14.3 billion at June 30, 2004. The improvement was primarily due to the increase in the fair value of equity investments. The net assets of the System increased by $179 million, or 1.3%, from $13.3 billion at June 30, 2002 to $13.5 billion at June 30, 2003. The improvement was primarily due to the increase in the fair value of investments. For the year ended June 30, 2004, the total additions to net assets were $1.6 billion and the total deductions were $801 million. The deductions consisted of benefit payments of $753 million, refunds of $15 million, death benefits of $23 million, and administrative expenses of $10 million. The additions consisted of employer and member contributions totaling $324 million, insurance premiums of $9 million, net investment income of $1.3 billion, and other income of $0.9 million. Net investment income of $1.3 billion (comprised of interest and dividend income and the change in fair value of investments, reduced by investment expenses) was an improvement over the net investment income of $564 million for the year ended June 30, 2003. The increase was primarily due to the improved equity market in 2004 compared to 2003. For the year ended June 30 2003, the total additions to net assets were $907 million and the total deductions were $728 million. The deductions consisted of benefit payments of $684 million, refunds of $15 million, death benefits of $19 million and administrative expenses of $10 million. The additions consisted of employer and member contributions totaling $327 million, insurance premiums of $15 million, net investment income of $564 million and other income of $1 million. Net investment income of $564 million (comprised of interest and dividend income and the change in fair value of investments, reduced by investment expenses) was an improvement over the net investment loss of $562 million for the year ended June 30, 2002. The increase was primarily due to the improved market conditions in 2003 compared to 2002. Benefit payments paid to retirees and beneficiaries increased by $69 million, or 10% from $684 million in 2003 to $753 million in 2004. This increase was the result of increases in the number of retirees and beneficiaries receiving benefits across all plans and postretirement cost-of-living increases in benefits. Benefit payments paid to retirees and beneficiaries increased by $65 million, or 10.6% from $619 million in 2002 to $684 million in 2003. The increase was the result of increases in the number of retirees and beneficiaries receiving benefits across all plans and postretirement cost-of-living increases in benefits. 28 2004 Employees' Retirement System of Georgia FINANCIAL SECTION MANAGEMENT'S DISCUSSION AND ANALYSIS Overview of the Financial Statements The basic financial statements include: (1) the combined statements of net assets and changes in net assets, (2) the combining statements of net assets and changes in net assets, and (3) notes to the financial statements. The System also includes in this report additional information to supplement the basic financial statements. In addition, the System presents two types of required supplementary schedules, which provide historical trend information about the plans' funding. The two types of schedules include: (1) a schedule of funding progress and (2) a schedule of employer contributions. The System prepares its financial statements on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. These statements provide information about the System's overall financial status. Description of the Financial Statements The Combined Statement of Net Assets is the statement of financial position presenting information that includes all of the System's assets and liabilities with the balance representing the Net Assets Held in Trust for Pension Benefits. The investments of the System in this statement are presented at fair value. These statements are presented on page 33. The Combined Statement of Changes in Net Assets reports how the System's net assets changed during the fiscal year. The additions and deductions to net assets are summarized in this statement. The additions include contributions to the retirement plans from employers and members, group life insurance premiums, and investment income (loss), which includes interest and dividends and the net increase (decrease) in the fair value of investments. The deductions include benefit payments, life insurance death benefit payments, refunds of member contributions and interest, and administrative expenses. These statements begin on page 34. The Combining Statements of Net Assets and Combining Statements of Changes in Net Assets present the financial position and change in financial position for each of the funds administered by the System, including the Pooled Investment Fund that holds and invests funds from each of the participating plans and funds. Notes to the basic financial statements are presented to provide the information necessary for a full understanding of the financial statements. The notes to the financial statements begin on page 43. There are two Required Supplementary Schedules included in this report. These required schedules are applicable to the five defined benefit plans: ERS, PSERS, LRS, GJRS and GMPF. The Schedule of Funding Progress presents historical trend information about the actuarially-determined funded status of the plans from a long-term, on-going plan perspective, and the progress made in accumulating sufficient assets to fund benefit payments as they become due. The Schedule of Employer Contributions presents historical trend information about the annual required contributions of employers and percentage of such contributions in relation to actuarially determined requirements for the years presented. The required supplementary schedules begin on page 55. Notes to Required Supplementary Schedules are presented to provide the information necessary for a full understanding of the supplementary schedules. The notes to required supplementary schedules begin on page 57. Additional information is presented, beginning on page 59. This section includes the Administrative Expenses Schedule. The Administrative Expenses Schedule presents the expenses incurred in the administration of these plans and funds, and the contributions from each plan and fund to provide for these expenses. 2004 Employees' Retirement System of Georgia 29 FINANCIAL SECTION MANAGEMENT'S DISCUSSION AND ANALYSIS Financial Analysis of the System A summary of the System's net assets is as follows: Assets: Cash and receivables $ Investments Capital assets, net Total assets Net assets (in thousands) June 30, 2004 2003 2002 2004 Amount Percentage change change 2003 Amount Percentage change change 117,392 $ 14,207,320 243 14,324,955 104,721 $ 13,407,279 42 13,512,042 108,753 $ 13,195,741 33 13,304,527 12,671 800,041 201 812,913 12.1 % $ 6.0 % 478.6 % 6.0 % (4,032) 211,538 9 207,515 (3.7) % 1.6 % 27.3 % 1.6 % Liabilities: Due to brokers and accounts payable Net assets 34,179 39,339 10,684 $ 14,290,776 $ 13,472,703 $ 13,293,843 $ (5,160) 818,073 (13.1) % 6.1 % $ 28,655 178,860 268.2 % 1.3 % The following table presents the investment allocation at June 30, 2004, 2003, and 2002: Asset allocation at June 30 (in percentages): Equities Fixed income Short-term securities* 2004 2003 58.9 % 39.8 % 1.3 % 51.5 % 47.0 % 1.5 % 2002 54.1 % 44.1 % 1.8 % Asset allocation at June 30 (in thousands): Equities $ 8,373,078 $ Fixed income 5,649,196 Short-term securities* 185,046 $ 14,207,320 $ 6,912,595 $ 6,295,131 199,553 13,407,279 $ 7,140,706 5,815,140 239,895 13,195,741 * Includes mortgages and real estate The total investment portfolio increased $800 million from 2003, which is due primarily to an increase in the fair value of equity investments. The total investment portfolio increased $212 million from 2002, which is due primarily to an increase in the fair value of fixed income investments. The investment rate of return in fiscal year ended June 30, 2004 was 9.8%, with a 20.1% return on equities and a (1.4)% return on fixed income investments. The five-year annualized rate of return on investments at June 30, 2004 was 2.1%, with a (2.0)% return on equities, and a 7.7% return on fixed income investments. The investment rate of return in fiscal year ended June 30, 2003 was 4.5%, with a (2.3)% return on equities and a 12.8% return on fixed income investments. The five-year annualized rate of return on investments at June 30, 2003 was 2.3%, with a (2.1)% return on equities, and an 8.1% return on fixed income investments. 30 2004 Employees' Retirement System of Georgia FINANCIAL SECTION MANAGEMENT'S DISCUSSION AND ANALYSIS A summary of the changes in the System's net assets for the years ended June 30 is as follows: Additions: Employer contributions $ Member contributions Insurance premiums Net investment income (loss) Other Total additions Changes in net assets (in thousands) 2004 2003 2002 2004 Amount Percentage change change 2003 Amount Percentage change change 250,356 $ 73,691 9,223 1,284,938 903 1,619,111 252,852 $ 74,550 14,847 563,690 909 906,848 247,101 $ 75,704 14,364 (562,199) 940 (224,090) (2,496) (859) (5,624) 721,248 (6) 712,263 (1.0) % $ 5,751 (1.2) % (1,154) (37.9) % 483 128.0 % 1,125,889 (0.7) % (31) 78.5 % 1,130,938 2.3 % (1.5) % 3.4 % 200.3 % (0.3) % 504.7 % Deductions: Benefit payments Refunds Death benefits Administrative expenses Total deductions Net increase (decrease) in net assets $ 752,447 15,418 23,261 9,912 801,038 818,073 $ 684,118 14,993 18,924 9,953 727,988 618,682 13,704 18,227 9,446 660,059 68,329 425 4,337 (41) 73,050 10.0 % 2.8 % 22.9 % (0.4) % 10.0 % 65,436 1,289 697 507 67,929 10.6 % 9.4 % 3.8 % 5.4 % 10.3 % 178,860 $ (884,149) $ 639,213 357.4 % $ 1,063,009 120.2 % Additions The System accumulates resources needed to fund benefit payments through contributions and returns on invested funds. In fiscal year 2004, total contributions decreased 1.0%, reflecting a contribution percentage that remained unchanged with a modest overall salary decline. Insurance premiums decreased 37.9% due to a reduction in the employer contribution rate. Net investment income increased by over $721 million. This increase is principally due to the improved market conditions in 2004 as compared to 2003. For fiscal year 2003, total contributions increased 1.4%, reflecting a contribution percentage that remained unchanged with a modest increase in overall salary growth. The new investment income increased by over $1 billion. This increase is principally due to the improved market conditions in 2003 as compared to 2002. Deductions For fiscal year 2004, deductions increased 10%, primarily because of a 10% increase in benefit payments. This is due to an increase of approximately 3.8% in the number of retirees receiving benefit payments across all defined benefit plans and to postretirement cost-of-living increases in benefits. Death benefits increased 22.9%, which was primarily due to an increase in the number of death claims processed during 2004. During 2003, deductions increased 10.3%, primarily because of a 10.6% increase in benefit payments. This is due to an increase of approximately 3.7% in the number of retirees receiving benefit payments across all defined benefit plans and to postretirement cost-of-living increases in benefits. Refunds of member contributions increased by 9.4%, which was primarily due to a 19% increase in refunds paid from the Georgia Defined Contribution Plan. Administrative expenses increased by approximately $.5 million, an increase of 5.4% over the prior year due primarily to an increase in management staffing. 2004 Employees' Retirement System of Georgia31 FINANCIAL SECTION MANAGEMENT'S DISCUSSION AND ANALYSIS Funding Status The schedules of funding progress and employer contributions provide information regarding how the plans are performing and funded from an actuarial perspective. The information is based upon actuarial valuations conducted by certified actuaries. The funding ratio, which is presented on the schedule of funding progress, indicates the ratio of the actuarial value of assets and the actuarial accrued liabilities. The higher this ratio, the better position the System is in with regards to its funding requirements. The June 30, 2003, 2002, and 2001 actuarial valuations, the latest valuations available, indicate the actuarial value of assets and funding ratios for the five defined benefit retirement plans were as follows: Actuarial value of plan assets (in thousands) June 30, June 30, June 30, 2003 2002 2001 ERS $ PSERS LRS GJRS GMPF 12,428,736 $ 734,879 27,157 237,683 609 12,124,414 $ 727,529 26,637 228,417 -- 11,750,624 708,391 26,034 219,288 N/A June 30, 2003 Funding ratio June 30, 2002 June 30, 2001 100.5 % 110.6 % 124.0 % 127.9 % 5.5 % 101.1 % 101.7 % 115.4 % 115.5 % 122.3 % 120.5 % 130.4 % 140.5 % 0.0 % N/A The System continues to be in a sound financial position as evidenced by the funding ratios. A funding ratio over 100% indicates the plans, from an actuarial perspective, have more assets available than will be necessary to satisfy the obligations of the plans. Requests for Information This financial report is designed to provide a general overview of the System's finances for all those with interest in the System's finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to Employees' Retirement System of Georgia, Two Northside 75, Suite 300, Atlanta, GA 30318. 32 2004 Employees' Retirement System of Georgia FINANCIAL SECTION COMBINED STATEMENTS OF NET ASSETS EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) (A Component Unit of the State of Georgia) COMBINED STATEMENTS OF NET ASSETS June 30, 2004 and 2003 (In thousands) ASSETS Cash $ Receivables:: Employer and member contributions Interest and dividends Due from brokers for securities sold Total receivables Investments at fair value: Short-term Obligations of the U.S. Government and its agencies, corporate, and other bonds Common stocks Mortgage loans and real estate Total investments Capital assets, net Total assets LIABILITIES Accounts payable and other Due to brokers for securities purchased Total liabilities Net assets held in trust for pension benefits $ 2004 12,526 $ 30,186 62,378 12,302 104,866 180,777 5,649,196 8,373,078 4,269 14,207,320 243 14,324,955 14,222 19,957 34,179 14,290,776 $ 2003 4,707 26,467 45,397 28,150 100,014 195,254 6,295,131 6,912,595 4,299 13,407,279 42 13,512,042 12,187 27,152 39,339 13,472,703 (A schedule of funding progress is presented on page 55.) See accompanying notes to basic financial statements. 2004 Employees' Retirement System of Georgia33 FINANCIAL SECTION COMBINED STATEMENTS OF CHANGES IN NET ASSETS EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) (A Component Unit of the State of Georgia) COMBINED STATEMENTS OF CHANGES IN NET ASSETS Years ended June 30, 2004 and 2003 (In thousands) Net Assets Held In Trust For Pension Benefits beginning of year $ ADDITIONS : Contributions : Employer Member Insurance premiums Administrative expense allotment Investment income: Net increase in fair value of investments Interest and dividends Total investment income Less investment expenses Net investment income Total additions DEDUCTIONS: Benefit payments Refunds of member contributions and interest Death benefits Administrative expenses Total deductions Net increase Net Assets Held In Trust For Pension Benefits end of year $ 2004 13,472,703 2003 $ 13,293,843 250,356 73,691 9,223 903 971,901 327,149 1,299,050 14,112 1,284,938 1,619,111 752,447 15,418 23,261 9,912 801,038 818,073 14,290,776 $ 252,852 74,550 14,847 909 236,390 339,805 576,195 12,505 563,690 906,848 684,118 14,993 18,924 9,953 727,988 178,860 13,472,703 See accompanying notes to basic financial statements. 34 2004 Employees' Retirement System of Georgia FINANCIAL SECTION COMBINING STATEMENT OF NET ASSETS 2004 Employees' Retirement System of Georgia35 EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) (A Component Unit of the State of Georgia) COMBINING STATEMENT OF NET ASSETS June 30, 2004 (In thousands) EMPLOYEES RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees Retirement System of Georgia) (A Component Unit of the State of Georgia) Combining Statement of Net Assets June 30, 2004 (In thousands) Assets Cash Receivables: Employer and member contribution Interest and dividends Due from brokers for securities sold Unremitted insurance premiums Total receivables Investments at fair value: Short-term Obligations of the U.S. Government and its agencies, corporate, and other bonds Common stocks Mortgage loans and real estate Equity in pooled investment fund Total investments Capital assets, net Total assets Liabilities Accounts payable and other Due to brokers for securities purchased Insurance premiums payable Total liabilities Net assets held in trust for pension benefits Plans and funds Employees Retirement System Public School Employees Retirement System Legislative Retirement System Georgia Judicial Retirement System State Employees Assurance Department $ 11,770 $ 208 $ 13 $ 114 $ (90) $ 28,020 2 31 955 -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 1,163 28,020 2 31 955 1,163 -- -- -- -- -- -- -- 3,744 12,366,625 12,370,369 243 12,410,402 -- -- -- 723,394 723,394 -- 723,604 -- -- -- 27,052 27,052 -- 27,096 -- -- -- 239,036 239,036 -- 240,105 -- -- -- 843,149 843,149 -- 844,222 12,916 -- 1,134 14,050 $ 12,396,352 $ 533 -- -- 533 723,071 $ 20 -- 9 29 27,067 $ 128 -- 20 148 239,957 $ 275 -- -- 275 843,947 $ Georgia Military Pension Fund 50 Superior Court Judges And District Attorneys Retirement Funds $ 102 $ Pooled Investment Fund Georgia Defined Contribution Plan Eliminations 1 $ 358 $ -- $ -- -- -- 1,17 -- -- -- 62,314 64 -- -- -- 12,302 -- -- -- -- -- -- (1,163) -- -- 74,616 1,242 (1,163) -- -- 174,104 6,673 -- Total 2004 12,526 30,186 62,378 12,302 -- 104,866 180,777 -- -- -- 1,230 1,230 -- 1,280 -- -- -- 1,058 1,058 -- 1,160 5,639,244 8,373,078 525 -- 14,186,951 -- 14,261,568 9,952 -- -- 40,067 56,692 -- 58,292 -- -- -- (14,241,611) (14,241,611) -- (14,242,774) 5,649,196 8,373,078 4,269 -- 14,207,320 243 14,324,955 -- -- -- -- 1,280 $ 40 -- -- 19,957 -- -- 40 19,957 1,120 $ 14,241,611 $ 310 -- 14,222 -- -- 19,957 -- (1,163) -- 310 (1,163) 34,179 57,982 $ (14,241,611) $ 14,290,776 (A schedule of funding progress is presented on page 36.) See accompanying notes to basic financial statements. (A schedule of funding progress is presented on page 55.) See accompanying notes to basic financial statements. 13 FINANCIAL SECTION NCOOTMESBITNOINBGASITCATFEINMAENNCTIAOLF SNTEATTAEMSSEENTTSS EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) (A Component Unit of the State of Georgia) SUPERIOR COURT JUDGES AND DISTRICT ATTORNEYS RETIREMENT FUNDS COMBINING STATEMENT OF NET ASSETS June 30, 2004 (In thousands) ASSETS Pension trust funds Superior Court District Judges Attorneys Retirement Retirement Fund Fund Cash $ Receivables: Employer and member contributions 101 $ -- 1 $ -- Total receivables -- -- Investments at fair value: Equity in pooled investment fund 1,058 -- Total assets 1,159 1 LIABILITIES Accounts payable and other 39 1 Total liabilities 39 1 Net assets held in trust for pension benefits $ 1,120 $ -- $ (A schedule of funding progress is presented on page 55.) See accompanying notes to basic financial statements. Total 2004 102 -- -- 1,058 1,160 40 40 1,120 36 2004 Employees' Retirement System of Georgia FINANCIAL SECTION COMBINING STATEMENT OF CHANGES IN NET ASSETS 2004 Employees' Retirement System of Georgia37 EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) (A Component Unit of the State of Georgia) COMBINING STATEMENT OF CHANGES IN NET ASSETS Year Ended June 30, 2004 (In thousands) EMPLOYEES RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees Retirement System of Georgia) (A Component Unit of the State of Georgia) Combining Statement of Changes in Net Assets Year ended June 30, 2004 (In thousands) Net assets held in trust for pension benefits beginning of year Additions: Contributions: Employer Member Insurance premiums Administrative expense allotment Investment income: Net increase (decrease) in fair value of investments Interest and dividends Less investment expenses Allocation of investment earnings Net investment income Total additions Deductions: Benefit payments Refunds of member contributions and interest Death benefits Administrative expenses Total deductions Transfers to systems from pooled investment fund Net increase in net assets Net assets held in trust for pension benefits end of year Plans and funds Employees Retirement System Public School Employees Retirement System Legislative Retirement System Georgia Judicial Retirement System State Employees Assurance Department Georgia Military Pension Fund Superior Court Judges And District Attorneys Retirement Funds Pooled Investment Fund Georgia Defined Contribution Plan Eliminations Total 2004 $ 11,697,607 $ 694,709 $ 25,615 $ 220,585 $ 782,791 $ 626 $ 1,023 $ 13,437,841 $ 49,747 $ (13,437,841) $ 13,472,703 245,388 54,166 -- -- 836 1,317 -- 588 52 1,558 -- 293 3,848 -- -- -- 9,223 110 175 -- 617 1,905 -- 181 -- -- -- 30 -- 13,886 -- -- -- -- 250,356 -- 73,691 -- 9,223 -- 903 -- -- (1,895) 1,117,693 1,115,798 1,415,352 702,314 5,819 -- 8,474 716,607 -- 698,745 $ 12,396,352 $ -- -- (37) 66,186 66,149 68,890 39,646 294 -- 588 40,528 -- 28,362 723,071 $ -- -- (5) 2,449 2,444 2,899 1,323 14 -- 110 1,447 -- 1,452 27,067 $ -- -- (4) 21,319 21,315 26,896 7,042 307 -- 175 7,524 -- 19,372 239,957 $ -- 3 -- 75,416 75,419 84,642 -- -- 23,261 225 23,486 -- 61,156 843,947 $ -- -- (3) 89 86 703 49 -- -- -- 49 -- 654 1,280 $ -- -- (9) 90 81 2,197 972,059 326,885 (12,149) -- 1,286,795 1,286,795 2,070 -- -- -- -- -- 30 -- 2,100 -- -- (483,025) 97 803,770 1,120 $ 14,241,611 $ (158) 261 (10) 3,553 3,646 17,532 -- -- -- (1,286,795) (1,286,795) (1,286,795) 971,901 327,149 (14,112) -- 1,284,938 1,619,111 3 8,984 -- 310 9,297 -- 752,447 -- 15,418 -- 23,261 -- 9,912 -- 801,038 -- 8,235 483,025 (803,770) -- 818,073 57,982 $ (14,241,611) $ 14,290,776 See accompanying notes to basic financial statements. See accompanying notes to basic financial statements. 15 FINANCIAL SECTION COMBNINOITNEGS STTOATBEAMSIECNFTINOAFNCCHIANLGSETASTINEMNEENTTASSSETS EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) (A Component Unit of the State of Georgia) SUPERIOR COURT JUDGES AND DISTRICT ATTORNEYS RETIREMENT FUNDS COMBINING STATEMENT OF CHANGES IN NET ASSETS Year ended June 30, 2004 (In thousands) Pension trust funds Superior Court District Judges Attorneys Retirement Retirement Fund Fund Net Assets Held In Trust For Pension Benefits beginning of year $ 1,023 $ -- $ Additions: Contributions: Employer Member Administrative expense allotment 1,807 181 30 98 -- -- Investment income: Interest and dividends Less investment expenses Allocation of investment earnings -- (9) 90 -- -- -- Net investment income Total additions 81 -- 2,099 98 Deductions: Benefit payments Administrative expenses 1,972 30 98 -- Total deductions Net increase 2,002 98 97 -- Net Assets Held In Trust For Pension Benefits end of year $ 1,120 $ -- $ See accompanying notes to basic financial statements. Total 2004 1,023 1,905 181 30 -- ((99)) 90 81 2,197 2,070 30 2,100 97 1,120 38 2004 Employees' Retirement System of Georgia FINANCIAL SECTION COMBINING STATEMENT OF NET ASSETS 2004 Employees' Retirement System of Georgia39 EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) (A Component Unit of the State of Georgia) COMBINING STATEMENT OF NET ASSETS June 30, 2003 (In thousands) EMPLOYEES RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees Retirement System of Georgia) (A Component Unit of the State of Georgia) Combining Statement of Net Assets June 30, 2003 (In thousands) Assets Employees Retirement System Cash $ 4,101 Receivables: Employer and member contributions Interest and dividends -- Due from brokers for securities sold -- Unremitted insurance premiums -- Total receivables 25,137 Investments at fair value: Short-term Obligations of the U.S. Government and its agencies, corporate, and other bonds Common stocks Mortgage loans and real estate Equity in pooled investment fund -- -- -- 3,744 11,679,683 Total investments 11,683,427 Capital assets, net 42 Total assets 11,712,707 Liabilities Accounts payable and other Due to brokers for securities purchased Insurance premiums payable 11,480 -- 3,620 Total liabilities 15,100 Net assets held in trust for pension benefits $ 11,697,607 (A schedule of funding progress is presented on page 36.) Public School Employees Retirement System Legislative Retirement System $ 87 $ 61 -- -- -- 8 -- -- -- -- 695,093 695,093 -- 695,188 479 -- -- 479 $ 694,709 $ -- -- -- -- -- -- -- -- 25,613 25,613 -- 25,674 18 -- 41 59 25,615 Plans and funds Georgia Judicial Retirement System State Employees Assurance Department $ 54 $ 4 $ -- -- -- -- -- 3,795 293 3,795 -- -- -- -- -- 220,497 220,497 -- 220,844 -- -- -- 779,032 779,032 -- 782,831 125 40 -- -- 134 -- 259 40 $ 220,585 $ 782,791 $ Georgia Military Pension Fund 85 Superior Court Judges And District Attorneys Retirement Funds Pooled Investment Fund $ 195 $ -- -- -- -- -- -- -- -- -- 541 541 -- 626 -- -- -- -- 626 $ -- 45,356 -- 28,150 -- -- 1 73,506 -- 188,292 -- -- -- 869 869 -- 1,065 6,290,045 6,912,595 555 -- 13,391,487 -- 13,464,993 42 -- -- 27,152 -- -- 42 27,152 1,023 $ 13,437,841 Georgia Defined Contribution Plan Eliminations $ 120 $ $ Total 4,707 41 -- -- 1,069 6,962 -- -- (3,795) (3,795) -- 45,397 28,150 -- 100,014 195,254 5,086 -- -- 36,513 48,561 -- 49,750 -- -- -- (13,437,841) (13,437,841) -- (13,441,636) 6,295,131 6,912,595 4,299 -- 13,407,279 42 13,512,042 3 -- 12,187 -- -- 27,152 -- (3,795) -- 3 (3,795) 39,339 $ 49,747 $ (13,437,841) $ 13,472,703 See accompanying notes to basic financial statements. See accompanying notes to basic financial statements. 17 FINANCIAL SECTION NCOOTMESBITNOINBGASITCATFEINMAENNCTIAOLF SNTEATTAEMSSEENTTSS EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) (A Component Unit of the State of Georgia) SUPERIOR COURT JUDGES AND DISTRICT ATTORNEYS RETIREMENT FUNDS COMBINING STATEMENT OF NET ASSETS June 30, 2003 (In thousands) ASSETS Pension trust funds Superior Court District Judges Attorneys Retirement Retirement Fund Fund Cash $ Receivables: Employer and member contributions Total receivables Investments at fair value: Equity in pooled investment fund 194 $ 1 1 869 1 $ -- -- -- Total assets 1,064 1 LIABILITIES Accounts payable and other 41 1 Total liabilities 41 1 Net assets held in trust for pension benefits $ 1,023 $ -- $ (A schedule of funding progress is presented on page 55.) See accompanying notes to basic financial statements. Total 2004 195 1 1 869 1,065 42 42 1,023 40 2004 Employees' Retirement System of Georgia 2004 Employees' Retirement System of Georgia FINANCIAL SECTION COMBINING STATEMENT OF CHANGES IN NET ASSETS EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) (A Component Unit of the State of Georgia) COMBINING STATEMENT OF CHANGES IN NET ASSETS Year Ended June 30, 2003 (In thousands) EMPLOYEES RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees Retirement System of Georgia) (A Component Unit of the State of Georgia) Combining Statement of Changes in Net Assets Year ended June 30, 2003 (In thousands) Net assets held in trust for pension benefits beginning of year Additions: Contributions: Employer Member Insurance premiums Administrative expense allotment Investment income: Net increase (decrease) in fair value of investments Interest and dividends Less investment expenses Allocation of investment earnings Net investment income Total additions Deductions: Benefit payments Refunds of member contributions Death benefits Administrative expenses Total deductions Transfers to systems from pooled investment fund Net increase in net assets Net assets held in trust for pension benefits end of year Plans and funds Employees Retirement System Public School Employees Retirement System Legislative Retirement System Georgia Judicial Retirement System State Employees Assurance Department $ 11,558,373 $ 697,461 $ 25,467 $ 213,611 $ 754,054 $ 246,172 55,456 -- -- 3,555 1,298 -- 594 43 373 -- 297 3,814 -- -- -- 14,847 110 175 -- -- 1 (2,497) 491,107 488,611 790,239 637,243 5,253 -- 8,509 651,005 -- 139,234 $ 11,697,607 $ -- -- (24) 29,673 29,649 35,096 37,021 233 -- 594 37,848 -- (2,752) 694,709 $ -- -- (3) 1,077 1,074 1,524 1,246 20 -- 110 1,376 -- 148 25,615 $ -- -- (7) 9,347 9,340 13,702 6,483 70 -- 175 6,728 -- 6,974 220,585 $ -- 2 -- 33,037 33,039 47,886 -- -- 18,924 225 19,149 -- 28,737 782,791 $ Georgia Military Pension Fund Superior Court Judges And District Attorneys Retirement Funds Pooled Investment Fund Georgia Defined Contribution Plan Eliminations Total --$ 978 $ 13,251,782 $ 43,899 $ (13,251,782) $ 13,293,843 591 2,118 -- 8 -- -- -- 30 -- -- -- 13,677 -- -- -- -- -- 252,852 -- 74,550 -- 14,847 -- 909 -- -- -- 41 41 632 6 -- -- -- 6 -- 626 626 $ -- -- (1) 39 38 2,194 236,467 339,460 (9,966) -- 565,961 565,961 2,119 -- -- -- -- -- 30 -- 2,149 -- -- (379,902) 45 186,059 1,023 $ 13,437,841 $ (77) 342 (7) 1,640 1,898 15,575 -- -- -- (565,961) (565,961) (565,961) 236,390 339,805 (12,505) -- 563,690 906,848 -- 9,417 -- 310 9,727 -- 684,118 -- 14,993 -- 18,924 -- 9,953 -- 727,988 -- 5,848 379,902 (186,059) -- 178,860 49,747 $ (13,437,841) $ 13,472,703 See accompanying notes to basic financial statements. See accompanying notes to basic financial statements. 19 41 FINANCIAL SECTION COMBNINOITNEGS STTOATBEAMSIECNFTINOAFNCCHIANLGSETASTINEMNEENTTASSSETS EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) (A Component Unit of the State of Georgia) SUPERIOR COURT JUDGES AND DISTRICT ATTORNEYS RETIREMENT FUNDS COMBINING STATEMENTS OF CHANGES IN NET ASSETS Year ended June 30, 2003 (In thousands) Pension trust funds Superior Court District Judges Attorneys Retirement Retirement Fund Fund Net Assets Held In Trust For Pension Benefits beginning of year $ Additions: Contributions: Employer Member Administrative expense allotment 978 $ 2,005 8 30 -- $ 113 -- -- Investment income: Interest and dividends Less investment expenses Allocation of investment earnings Net investment income Total additions -- (1) 39 38 2,081 -- -- -- -- 113 Deductions: Benefit payments Administrative expenses 2,006 30 113 -- Total deductions Net increase 2,036 113 45 -- Net Assets Held In Trust For Pension Benefits end of year $ 1,023 $ -- $ See accompanying notes to basic financial statements. Total 2004 978 2,118 8 30 -- (1) 39 38 2,194 2,119 30 2,149 45 1,023 42 2004 Employees' Retirement System of Georgia FINANCIAL SECTION NOTES TO BASIC FINANCIAL STATEMENTS EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) (A Component Unit of the State of Georgia) June 30, 2004 and 2003 (1) General The accompanying basic financial statements of the Employees' Retirement System of Georgia, including all plans and funds administered by the Employees' Retirement System of Georgia (collectively, the "System"), is comprised of the Employees' Retirement System of Georgia ("ERS"), Public School Employees' Retirement Systems ("PSERS"), Legislative Retirement System ("LRS"), Georgia Judicial Retirement System ("GJRS"), Georgia Military Pension Fund ("GMPF"), Superior Court Judges Retirement Fund ("SCJRF"), District Attorneys Retirement Fund ("DARF"), Georgia Defined Contribution Plan ("GDCP"), and State Employees' Assurance Department ("SEAD"). All significant accounts and transactions among the various systems, departments, and funds have been eliminated. In evaluating how to define the System for financial reporting purposes, the management of the System has considered all potential component units. The decision to include a potential component unit in the reporting entity is made by applying the criteria set forth by Governmental Accounting Standards Board (GASB) Statement No. 14, as amended by GASB Statement No. 39. Based on these criteria, the System has not included any other entities in its reporting entity. Although the System is a component unit of the State of Georgia's financial reporting entity, it is accountable for its own fiscal matters and presentation of its separate, basic financial statements. The Boards of Trustees, comprised of active and retired members and ex-officio state employees, are ultimately responsible for the administration of the System. (2) Authorizing Legislation and Plan Descriptions Each plan and fund, including benefit and contribution provisions, was established and can be amended by state law. The following summarizes authorizing legislation and the plan description of each retirement fund: (a) ERS is a cost-sharing multiple employer defined benefit pension plan established by the Georgia General Assembly during the 1949 Legislative Session for the purpose of providing retirement allowances for employees of the State of Georgia and its political subdivisions. ERS is directed by a Board of Trustees and has the powers and privileges of a corporation. Membership As of June 30, 2004, participation in ERS is as follows: Retirees and beneficiaries currently receiving benefits Terminated employees entitled to benefits but not yet receiving benefits Active plan members Total Employers 29,847 60,039 73,509 163,395 526 2004 Employees' Retirement System of Georgia 43 FINANCIAL SECTION NOTES TO BASIC FINANCIAL STATEMENTS Benefits The benefit structure of ERS was significantly modified on July 1, 1982. Unless the employee elects otherwise, an employee who currently maintains membership with ERS based upon state employment that started prior to July 1, 1982 is an "old plan" member subject to the plan provisions in effect prior to July 1, 1982. All other members are "new plan" members subject to the modified plan provisions. Under both the old and new plans, a member may retire and receive normal retirement benefits after completion of 10 years of creditable service and attainment of age 65. Additionally, there are some provisions allowing for retirement after 25 years of creditable service regardless of age. Retirement benefits paid to members are based upon the monthly average of the member's highest 24 consecutive calendar months multiplied by the number of years of creditable service multiplied by the applicable benefit factor. Annually, postretirement cost-of-living adjustments are also made to members' benefits. The normal retirement pension is payable monthly for life; however, options are available for distribution of the member's monthly pension at reduced rates to a designated beneficiary upon the member's death. Death and disability benefits are also available through ERS. Contributions and Vesting Member contributions under the old plan are 4% of annual compensation up to $4,200 plus 6% of annual compensation in excess of $4,200. Under the old plan, the state pays member contributions in excess of 1.25% of annual compensation. Under the old plan, these state contributions are included in the members' accounts for refund purposes and are used in the computation of the members' earnable compensation for the purpose of computing retirement benefits. Member contributions under the new plan are 1.25% of annual compensation. The state is required to contribute at a specified percentage of active member payroll determined annually by actuarial valuation. Employer contributions required for fiscal year 2004 were based on the June 30, 2002 actuarial valuation as follows: Old Plan New Plan Employer: Normal Employer paid for member Accrued liability Total 6.21 % -- (0.55) % 5.66 % 6.21 % 4.75 % (0.55) % 10.41 % Employer contributions required for fiscal year 2003 were based on the June 30, 2001 actuarial valuation as follows: Old Plan New Plan Employer: Normal Employer paid for member Accrued liability Total 6.24 % -- (0.58) % 5.66 % 6.24 % 4.75 % (0.58) % 10.41 % 44 2004 Employees' Retirement System of Georgia FINANCIAL SECTION NOTES TO BASIC FINANCIAL STATEMENTS Members become vested after ten years of membership service. Upon termination of employment, member contributions with accumulated interest are refundable upon request by the member. However, if an otherwise vested member terminates and withdraws his/her member contributions, the member forfeits all rights to retirement benefits. The employer contributions are projected to liquidate the actuarial accrued funding excess within 10 years based upon the actuarial valuation at June 30, 2003, on the assumption that the total payroll of active members will increase by 3.75% each year. On November 20, 1997, the ERS Board of Trustees created the Supplemental Retirement Benefit Plan of ERS (SRBP). SRBP was established as a qualified governmental excess benefit plan in accordance with Section 415 of the Internal Revenue Code (IRC 415) as a portion of ERS. The purpose of the SRBP is to provide retirement benefits to employees covered by ERS whose benefits are otherwise limited by IRC 415. Beginning January 1, 1998, all members and retired former members in ERS are eligible to participate in this plan whenever their benefits under ERS exceed the limitation on benefits imposed by IRC 415. There were 199 and 162 members eligible to participate in this portion of ERS as of June 30, 2004 and 2003, respectively. Employer contributions of $2,200,000 and $1,308,000 and benefit payments of $2,193,000 and $1,907,000 under the SRBP are included in the combined statements of changes in net assets for the years ended June 30, 2004 and 2003, respectively. Cash of $48,000 and $42,000 under the SRBP is included in the combined statements of net assets for the years ended June 30, 2004 and 2003, respectively. (b) PSERS is a cost-sharing multiple employer defined benefit pension plan established by the Georgia General Assembly in 1969 for the purpose of providing retirement allowances for public school employees who are not eligible for membership in the Teachers Retirement System of Georgia. The ERS Board of Trustees plus two additional trustees administers PSERS. Membership As of June 30, 2004, participation in PSERS is as follows: Retirees and beneficiaries currently receiving benefits Terminated employees entitled to benefits but not yet receiving benefits Active plan members Total Employers 12,353 41,709 54,883 108,945 183 Benefits A member may retire and elect to receive normal monthly retirement benefits after completion of ten years of creditable service and attainment of age 65. A member may choose to receive reduced benefits after age 60 and upon completion of ten years of service. Upon retirement, the member will receive a monthly benefit of $13.00 multiplied by the number of years of creditable service. Death, disability, and spousal benefits are also available through PSERS. Additionally, PSERS makes periodic cost-of-living adjustments to the monthly benefits. 2004 Employees' Retirement System of Georgia 45 FINANCIAL SECTION NOTES TO BASIC FINANCIAL STATEMENTS Contributions and Vesting Members contribute $4 per month for nine months each fiscal year. The state of Georgia, although not the employer of PSERS members, is required by statute to make employer contributions actuarially determined and approved and certified by the PSERS Board of Trustees. Employer contributions required for the years ended June 30, 2004 and 2003 were $24.36 and $105.67 per active member, respectively, and were based on the June 30, 2002 and 2001 actuarial valuations, respectively. Members become vested after ten years of creditable service. Upon termination of employment, member contributions with accumulated interest are refundable upon request by the member. However, if an otherwise vested member terminates and withdraws his/her member contribution, the member forfeits all rights to retirement benefits. The employer contributions are projected to liquidate the actuarial accrued funding excess within 11 years based upon the actuarial valuation at June 30, 2003. (c) LRS is a cost-sharing multiple employer defined benefit plan established by the Georgia General Assembly in 1979 for the purpose of providing retirement allowances for all members of the Georgia General Assembly. LRS is administered by the ERS Board of Trustees. Membership As of June 30, 2004, participation in LRS is as follows: Retirees and beneficiaries currently receiving benefits 207 Terminated employees entitled to benefits but not yet receiving benefits 148 Active plan members 215 Total 570 Employers 3 Benefits A member's normal retirement is after eight years of creditable service and attainment of age 65, or eight years of membership service (four legislative terms) and attainment of age 62. A member may retire early and elect to receive a monthly retirement benefit after completion of eight years of membership service and attainment of age 60; however, the retirement benefit is reduced by 5% for each year the member is under age 62. Upon retirement, the member will receive a monthly service retirement allowance of $32 multiplied by the number of years of creditable service reduced by age reduction factors, if applicable. Death, disability, and spousal benefits are also available through the plan. 46 2004 Employees' Retirement System of Georgia FINANCIAL SECTION NOTES TO BASIC FINANCIAL STATEMENTS Contributions and Vesting Member contributions are 8.5% of annual salary. The state pays member contributions in excess of 4.75% of annual compensation. Employer contributions are actuarially determined and approved and certified by the ERS Board of Trustees. There were no employer contributions required for the years ended June 30, 2004 and 2003 based on the June 30, 2002 and 2001 actuarial valuations, respectively. Members become vested after eight years of creditable service. Upon termination of employment, member contributions with accumulated interest are refundable upon request by the member. However, if an otherwise vested member terminates and withdraws his/her member contributions, the member forfeits all rights to retirement benefits. (d) The GJRS is a system created to serve the members and beneficiaries of the Trial Judges and Solicitors, the Superior Court Judges, and the District Attorneys (collectively, the Predecessor Retirement Systems). As of June 30, 1998, any person who was an active, inactive, or retired member or beneficiary of the Predecessor Retirement Systems was transferred to GJRS in the same status effective July 1, 1998. All assets of the Predecessor Retirement Systems were transferred to GJRS as of July 1, 1998. The ERS Board of Trustees and three additional trustees administer GJRS. GJRS is a cost-sharing multiple employer defined benefit pension plan established by the Georgia General Assembly for the purpose of providing retirement allowances for trial judges and solicitors of certain courts in Georgia, and their survivors and other beneficiaries, superior court judges of the state of Georgia, and district attorneys of the state of Georgia. Membership As of June 30, 2004, participation in GJRS is as follows: Retirees and beneficiaries currently receiving benefits 151 Terminated employees entitled to benefits but not yet receiving benefits 75 Active plan members 451 Total 677 Employers 4 Benefits The normal retirement for GJRS is age 60 with 16 years of creditable service; however, a member may retire at age 60 with a minimum of 10 years of creditable service. Annual retirement benefits paid to members are computed as 66-2/3% of annual salary plus 1% for each year of credited service over 16 years, not to exceed 24 years. Early retirement benefits paid to members are computed as the pro rata portion of the normal retirement benefit, based on service not to exceed 16 years. Death, disability, and spousal benefits are also available. 2004 Employees' Retirement System of Georgia 47 FINANCIAL SECTION NOTES TO BASIC FINANCIAL STATEMENTS Contributions and Vesting Members are required to contribute 7.5% of their annual salary plus an additional 2.5% of their annual salary if spousal benefit is elected. Employer contributions are actuarially determined and approved and certified by the GJRS Board of Trustees. Employer contributions required for fiscal year 2004 were based on the June 30, 2002 actuarial valuation as follows: Employer: Normal Accrued liability Total 20.33 % (16.48) % 3.85 % There were no employer contributions required for the year ended June 30, 2003 based on the June 30, 2001 actuarial valuation. Members become vested after ten years of creditable service. Upon termination of employment, member contributions with accumulated interest are refundable upon request by the member. However, if an otherwise vested member terminates and withdraws his/her member contributions, the member forfeits all rights to retirement benefits. The employer contributions are projected to liquidate the actuarial accrued funding excess within eleven years based upon the actuarial valuation at June 30, 2003 assuming that the amount of accrued liability payment increases 3.75% each year. (e) The GMPF is a single employer defined benefit pension plan established on July 1, 2002 by the Georgia General Assembly for the purpose of providing retirement allowances and other benefits for members of the Georgia National Guard (National Guard). The ERS Board of Trustees administers the GMPF. Membership As of June 30, 2004, GMPF had 61 retirees and beneficiaries currently receiving benefits. Active and inactive plan member information is maintained by one employer, the Georgia Department of Defense. Benefits A member becomes eligible for benefits upon attainment of age 60 with 20 or more years of creditable service (including at least 15 years of service as a member of the National Guard), having served at least 10 consecutive years as a member of the National Guard immediately prior to discharge, and having received an honorable discharge from the National Guard. The retirement allowance is payable for life in the amount of $50 per month plus $5 per month for each year of creditable service in excess of 20 years. The maximum benefit is $100 per month. 48 2004 Employees' Retirement System of Georgia FINANCIAL SECTION NOTES TO BASIC FINANCIAL STATEMENTS Contributions and Vesting Employer contributions are actuarially determined and approved and certified by the ERS Board of Trustees. There are no member contributions required. Employer contributions required for the year ended June 30, 2004 were $68.79 per active member and were based on the June 30, 2003 actuarial valuation. A member becomes vested after 20 years of creditable service (including at least 15 years of service as a member of the National Guard), having served at least 10 consecutive years as a member of the National Guard immediately prior to discharge, and having received an honorable discharge from the National Guard. The employer contributions are projected to liquidate the unfunded actuarial accrued liability within 40 years based upon the actuarial valuation at June 30, 2003. (f) SCJRF is a single employer defined benefit pension plan established by the Georgia General Assembly in 1945 for the purpose of providing retirement benefits to the superior court judges of the state of Georgia. SCJRF is directed by its own Board of Trustees. The Boards of Trustees for ERS and SCJRF entered into a contract for ERS to administer the plan effective July 1, 1995. Membership As of June 30, 2004, participation in SCJRF is as follows: Retirees and beneficiaries currently receiving benefits 31 Terminated employees entitled to benefits but not yet receiving benefits 4 Active plan members 2 Total 37 Employers 1 Benefits The normal retirement for SCJRF is age 68 with 19 years of creditable service with a benefit of two-thirds the salary paid to superior court judges. A member may also retire at age 65 with a minimum of 10 years of creditable service with a benefit of one-half the salary paid to superior court judges. Death, disability, and spousal benefits are also available. Contributions and Vesting Member contributions are 5.0% of their salary plus an additional 2.5% for the spousal coverage benefit if elected. The state pays member contributions of 5.0% of the member's annual salary. Additional employer contributions are not actuarially determined but are provided on an as-needed basis to fund current benefits. 2004 Employees' Retirement System of Georgia 49 FINANCIAL SECTION NOTES TO BASIC FINANCIAL STATEMENTS (g) DARF is a defined benefit pension plan established by the Georgia General Assembly in 1949 for the purpose of providing retirement benefits to the district attorneys of the state of Georgia. DARF is directed by its own Board of Trustees. The Boards of Trustees for ERS and DARF entered into a contract for ERS to administer the plan effective July 1, 1995. Membership As of June 30, 2004, DARF had eight retirees and beneficiaries currently receiving benefits. Benefits Persons appointed as district attorney emeritus shall receive an annual benefit of $15,000 or one-half of the state salary received by such person as a district attorney for the calendar year immediately prior to the person's retirement, whichever is greater. Contributions and Vesting Member contributions were 5.0% of their annual salary plus an additional 2.5% for the spousal coverage benefit if elected. The state paid member contributions of 5.0% of the member's annual salary. Employer contributions are not actuarially determined but are provided on an as-needed basis to fund current benefits. (h) GDCP is a defined contribution plan established by the Georgia General Assembly in July 1992 for the purpose of providing retirement allowances for state employees who are not members of a public retirement or pension system. GDCP is administered by the ERS Board of Trustees. Membership As of June 30, 2004, participation in GDCP is as follows: Terminated employees entitled to benefits but not yet receiving benefits Active plan members Total Employers 83,289 32,593 115,882 296 Benefits A member may retire and elect to receive periodic payments after attainment of age 65. The payments will be based upon mortality tables and interest assumptions to be adopted by the ERS Board of Trustees. If a member has less than $3,500 credited to his/her account, the ERS Board of Trustees has the option of requiring a lump-sum distribution to the member. Upon the death of a member, a lump-sum distribution equaling the amount credited to his/her account will be paid to the member's designated beneficiary. 50 2004 Employees' Retirement System of Georgia FINANCIAL SECTION NOTES TO BASIC FINANCIAL STATEMENTS Contributions Members are required to contribute 7.5% of their annual salary. There are no employer contributions. Earnings will be credited to each member's account as adopted by the ERS Board of Trustees. Upon termination of employment, the amount of the member's account is refundable upon request by the member. (i) SEAD was created in 1953 by the Georgia General Assembly to furnish survivors' benefits for eligible members of ERS. SEAD contracts with ERS, LRS, GJRS, and SCJRF to provide group term life insurance coverage for their participants. Death benefit payments are payable to the beneficiary or estate of the insured individual. (3) Significant Accounting Policies and System Asset Matters (a) Basis of Accounting The System's basic financial statements are prepared on the accrual basis of accounting. Contributions from the employers and members are recognized as additions in the period in which the members provide services. Retirement and refund payments are recognized as deductions when due and payable. (b) Investments Investments are reported at fair value. Short-term investments are reported at cost, which approximates fair value. Securities traded on a national or international exchange are valued at the last reported sales price. Investment income is recognized as earned by the System. No investment in any one organization except the U.S. Government represents 5% or more of the net assets available for pension benefits. There are no investments in, loans to, or leases with parties related to the System. (c) Real Estate Investments An office building that is included in mortgage loans and real estate is owned equally by the System and the Teachers Retirement System of Georgia. The System incurred approximately $561,000 and $437,000 in rental expense for the years ended June 30, 2004 and 2003, respectively, which is included in administrative expenses. The remainder of the building is leased to outside parties, and the rental revenue is included in interest and dividends. (d) 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 of net assets and changes therein. Actual results could differ from those estimates. The System utilizes various investment instruments. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the basic financial statements. (4) Investment Program The System maintains sufficient cash to meet its immediate liquidity needs. Cash not immediately needed is invested in either short-term or long-term investment securities as directed by the Board of Trustees. All investments are held by agent custodial banks in the name of the System. 2004 Employees' Retirement System of Georgia51 FINANCIAL SECTION NOTES TO BASIC FINANCIAL STATEMENTS Cash Cash balances are fully insured through the Federal Deposit Insurance Corporation, an agency of the U.S. Government. Fiduciary accounts, such as those of the System, are granted $100,000 of insurance coverage per participant in the System. Temporary cash on hand not committed for a specific purpose is invested overnight. Investments The System's investments are categorized as an indication of the level of custodial credit risk assumed by the System at yearend. Category 1 includes investments that are insured or registered or for which the securities are held by the System or its agent in the System's name. Category 2 includes uninsured and unregistered investments for which the securities are held by the counterparty's trust department or agent in the System's name. Category 3 includes uninsured and unregistered investments for which the securities are held by the counterparty, or by its trust department or agent but not in the System's name. All of the securities held by the System at June 30, 2004 and 2003 are of Category 1 risk level. The System is authorized by its Board of Trustees (through statutes) to invest in a variety of short-term and long-term securities, as follows: (a) Short-Term Short-term investments are authorized in the following instruments: Repurchase and reverse repurchase agreements, whereby the System and a broker exchange cash for direct obligations of the U.S. Government or in obligations unconditionally guaranteed by the agencies of the U.S. Government or U.S. corporations. The System or broker promises to repay the cash received plus interest at a specific date in the future in exchange for the same securities. The System held repurchase agreements of $180,777,000 and $195,254,000 at June 30, 2004 and 2003, respectively. U.S. Treasury obligations with varying terms up to 360 days. Other short-term securities authorized, but not currently used, are: Commercial paper, with a maturity of 180 days or less. Commercial paper is an unsecured promissory note issued primarily by corporations for a specific amount and maturing on a specific day. The System considers for investment only commercial paper of the highest quality, rated P-l and/or A-l by national credit rating agencies. Master notes, an overnight security administered by a custodian bank and an obligation of a corporation whose commercial paper is rated P-l and/or A-l by national credit rating agencies. Investments in commercial paper or master notes are limited to no more than $100 million in any one name. (b) Long-Term Fixed income investments are authorized in the following instruments: Obligations unconditionally guaranteed by agencies of the U.S. Government and corporate bonds with at least an "A" rating by a national rating agency and limited to no more than 5% of total System assets in any one name. Maturities of these securities vary up to a period of 40 years to provide the System with flexibility necessary to meet changing market conditions. The System held agency and corporate bonds of $1,754,167,000 and $139,706,000 at June 30, 2004 and 2003, respectively. U.S. and foreign government obligations with terms up to 30 years. Quality and call requirements of corporate bonds are applicable. The System held U.S. Government obligations of $3,895,029,000 and $6,155,425,000 at June 30, 2004 and 2003, respectively. Private placements are authorized under the same general restrictions applicable to corporate bonds. 52 2004 Employees' Retirement System of Georgia FINANCIAL SECTION NOTES TO BASIC FINANCIAL STATEMENTS Mortgage investments are authorized to the extent that they are secured by first mortgages on improved real property located in the state of Georgia having a loan-to-value ratio no higher than 75%. Mortgages, as a group cannot exceed 10% of total assets or 1% for any one loan. Equity securities are also authorized (in statutes) for investment as a complement to the System's fixed-income portfolio and as a long-term inflation hedge. By statute, no more than 60% of the total invested assets may be placed in equities and no more than 5% in any one corporation. Equity holdings in any one corporation may not exceed 5% of the outstanding equity of the issuing corporation. The equity portfolio is managed by the Division of Investment Services (the Division) in conjunction with independent advisors. Buy/sell decisions are based on securities meeting rating criteria established by the Board of Trustees, in-house research considering such things as yield, growth, and sales statistics, and analysis of independent market research. Equity trades are approved and executed by the Division's staff. Common stocks eligible for investment are approved by the Investment Committee of the Board of Trustees before being placed on an approved list. The System held common stocks totaling $8,373,078,000 and $6,912,595,000 at June 30, 2004 and 2003, respectively. Substantially all of the investments of ERS, PSERS, LRS, SCJRF, GJRS, GMPF, SEAD, and certain investments of GDCP are pooled into one common investment fund. Investments of approximately $16,624,000 and $12,048,000 at June 30, 2004 and 2003, respectively, held by GDCP, are not included in the common investment fund. Units in the pooled common investment fund are allocated to the respective plans based upon the cost of assets contributed, and additional units are allocated to the participating plans based on the market value of the pooled common investment fund at the date of contribution. Net income of the pooled common investment fund is allocated monthly to the participating plans based upon the number of units outstanding during the month. The units and fair value of each plan's equity in the pooled common investment fund at June 30, 2004 and 2003 were as follows (dollars in thousands): 2004 2003 Fair value Units Fair value Units Employees' Retirement System $ Public School Employees' Retirement System Legislative Retirement System Georgia Judicial Retirement System State Employees' Assurance Department Georgia Military Pension Fund Superior Court Judges Retirement Fund Georgia Defined Contribution Plan $ 12,366,625 723,394 27,052 239,036 843,149 1,230 1,058 40,067 14,241,611 6,501,622 $ 380,317 14,222 125,670 443,277 647 556 21,065 7,487,376 $ 11,679,683 695,093 25,613 220,496 779,032 541 869 36,514 13,437,841 6,737,963 400,996 14,776 127,203 449,421 312 501 21,065 7,752,237 (5) Investments Lending Program State statutes and Board of Trustees policies permit the System to lend its securities to broker-dealers with a simultaneous agreement to return the collateral for the same securities in the future. The System is presently involved in a securities lending program with major brokerage firms. The System lends equity and fixed income securities for varying terms and receives a fee based on the loaned securities' value. During a loan, the System continues to receive dividends and interest as the owner of the loaned securities. The brokerage firms pledge collateral securities consisting of U.S. Government and agency securities, mortgage-backed securities issued by a U.S. Government agency, and U.S. corporate bonds. The collateral value must be equal to at least 102% to 110% of the loaned securities' value, depending on the type of collateral security. 2004 Employees' Retirement System of Georgia53 FINANCIAL SECTION NOTES TO BASIC FINANCIAL STATEMENTS Securities loaned totaled $5,345,289,000 and $6,220,148,000 at fair value at June 30, 2004 and 2003, respectively. The collateral value was equal to 105.0% and 104.2% of the loaned securities value at June 30, 2004 and 2003, respectively. The loaned securities are classified as Category 1 investments (see note 4) based on the custodial arrangements for the collateral securities. Loaned securities are included in the accompanying statements of net assets since the System maintains ownership. The related collateral securities are not recorded as assets on the System's statements of net assets, and a corresponding liability is not recorded, since the System is deemed not to have the ability to pledge or trade the collateral securities. The System is deemed not to have the ability to pledge or sell the collateral securities since the System's lending contracts do not address whether the lender can pledge or sell the collateral securities without a borrower default, the System has not previously demonstrated that ability, and there are no indications of the System's ability to pledge or sell the collateral securities. (6) SEAD Actuarial Valuation According to the SEAD policy terms covering the lives of members, insurance coverage is provided on a monthly, renewable term basis, and no return premiums or cash value are earned. The net assets represent the excess accumulation of investment income and premiums over benefit payments and expenses and is held as a reserve for payment of death benefits under existing policies. The most current actuarial valuation of SEAD is as of June 30, 2003. The valuation indicated that the employee contribution rates of .50% and .25% of members' salaries for old plan members and new plan members, respectively, were appropriate as of June 30, 2003. There were no employer contributions required for the year ended June 30, 2004. Old plan members were hired prior to July 1, 1982, and new plan members were hired on or after July 1, 1982. (7) Capital Assets The following is a summary of capital assets and depreciation information as of June 30, 2004 and 2003 and for the years then ended: Capital assets: Equipment Vehicles June 30, 2003 Additions $ 62,686 $ 233,137 $ 20,551 -- 83,237 233,137 Accumulated depreciation for: Equipment Vehicles (28,006) (13,211) (41,217) (28,795) (2,935) (31,730) Capital assets, net $ 42,020 $ 201,407 $ Capital assets: Equipment Vehicles Balance at: June 30, 2002 Additions $ 41,597 $ 21,089 $ 20,551 -- 62,148 21,089 Accumulated depreciation for: Equipment Vehicles (18,639) (10,276) (9,367) (2,935) (28,915) (12,302) Capital assets, net $ 33,233 $ 8,787 $ Disposals June 30, 2004 -- $ -- -- 295,823 20,551 316,374 -- -- -- (56,801) (16,146) (72,947) -- $ 243,427 Disposals June 30, 2003 -- $ -- -- 62,686 20,551 83,237 -- -- -- -- $ (28,006) (13,211) (41,217) 42,020 54 2004 Employees' Retirement System of Georgia FINANCIAL SECTION REQUIRED SUPPLEMENTARY INFORMATION 2004 Employees' Retirement System of Georgia55 EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) (A Component Unit of the State of Georgia) REQUIRED SUPPLEMENTARY SCHEDULES (unaudited) SCHEDULES OF FUNDING PROGRESS (in thousands) Employees' Retirement System Public School Employees' Retirement System1 Legislative Retirement System Georgia Judicial Retirement System Georgia Military Pension Fund Actuarial valuation date Actuarial value of plan assets (a) Actuarial accrued liability (AAL) entry age (b) Unfunded AAL/(funding excess) (b-a) 6/30/1998 $ 8,613,575 $ 9,093,758 $ 480,183 6/30/1999 9,848,723 9,695,614 (153,109) 6/30/2000 10,999,901 10,573,408 (426,493) 6/30/2001 11,750,624 11,557,255 (193,369) 6/30/2002 12,124,414 11,994,850 (129,564) 6/30/2003 12,428,736 12,370,563 (58,173) 6/30/1998 528,770 504,779 (23,991) 6/30/1999 599,464 586,352 (13,112) 6/30/2000 667,642 615,357 (52,285) 6/30/2001 708,391 613,347 (95,044) 6/30/2002 727,529 630,295 (97,234) 6/30/2003 734,879 664,207 (70,672) 6/30/1998 20,375 19,272 (1,103) 6/30/1999 22,679 20,129 (2,550) 6/30/2000 24,666 21,628 (3,038) 6/30/2001 26,034 21,610 (4,424) 6/30/2002 26,637 21,779 (4,858) 6/30/2003 27,157 21,898 (5,259) 6/30/1998 160,171 117,771 (42,400) 6/30/1999 183,249 129,233 (54,016) 6/30/2000 204,136 138,427 (65,709) 6/30/2001 219,288 156,083 (63,205) 6/30/2002 228,417 175,154 (53,263) 6/30/2003 237,683 185,825 (51,858) 6/30/2002 -- 8,322 8,322 6/30/2003 609 11,098 10,489 Funding ratio (a/b) 94.7 % $ 101.6 % 104.0 % 101.7 % 101.1 % 100.5 % 104.8 % 102.2 % 108.5 % 115.5 % 115.4 % 110.6 % 105.7 % 112.7 % 114.0 % 120.5 % 122.3 % 124.0 % 136.0 % 141.8 % 147.5 % 140.5 % 130.4 % 127.9 % 0.0 % 5.5 % Annual covered payroll (c) Excess as percentage of covered payroll [(b-a)/c] 2,055,966 23.4 % 2,152,072 (7.1) % 2,304,289 (18.5) % 2,397,169 (8.1) % 2,408,306 (5.4) % 2,489,490 (2.3) % N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 2,363 (46.7) % 2,411 (105.8) % 2,411 (126.0) % 3,567 (124.0) % 3,413 (142.3) % 3,434 (153.1) % 26,226 (161.7) % 29,594 (182.5) % 34,856 (188.5) % 37,688 (167.7) % 38,630 (137.9) % 38,867 (133.4) % N/A N/A N/A N/A This data, except for annual covered payroll, was provided by the System's actuary. Information is shown only for the years available in accordance with the parameters of GASB No. 25. Additional years will be added as data become available. 1 No statistics regarding covered payroll are available. Contributions are not based upon members' salaries, but are simply $4.00 per member per month for nine monthseach fiscal year. See accompanying notes to required supplementary schedules. FINANCIAL SECTION REQUIRED SUPPLEMENTARY INFORMATION EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) REQUIRED SUPPLEMENTARY SCHEDULES (unaudited) SCHEDULES OF EMPLOYER CONTRIBUTIONS (In thousands) Employees' Retirement System Public School Employees' Retirement System Legislative Retirement System Georgia Judicial Retirement System Georgia Military Pension Plan Year ended June 30 1998 1999 2000 2001 2002 2003 1998 1999 2000 2001 2002 2003 1998 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 2003 State annual required contribution $ 286,794 304,461 302,332 315,505 233,229 246,172 13,638 10,839 9,789 12,874 11,623 4,121 164 84 22 -- -- -- 694 834 1,741 -- -- 591 Percentage contributed 100 % 100 % 100 % 100 % 100 % 100 % 107 % 158 % 184 % 132 % 100 % 86 % 126 % 108 % 436 % N/A N/A N/A 100 % 100 % 11 % N/A N/A 100 % This data was provided by the System's actuary. Information is shown only for the years available in accordance with the parameters of GASB No. 25. Additional years will be added as data become available. See accompanying notes to required supplementary schedules. 56 2004 Employees' Retirement System of Georgia FINANCIAL SECTION NOTES TO REQUIRED SUPPLEMENTARY INFORMATION EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) NOTES TO REQUIRED SUPPLEMENTARY SCHEDULES (unaudited) June 30, 2004 1) Schedule of Funding Progress The actuarial value of assets recognizes a portion of the difference between the fair value of assets and the expected actuarial value of assets, based on the assumed valuation rate of return. The amount recognized each year is 20% of the difference between fair value and expected actuarial value. (2) Schedule of Employer Contributions The required employer contributions and percent of those contributions actually made are presented in the schedule. (3) Actuarial Assumptions The information presented in the required supplementary schedules was determined as part of the actuarial valuations at the dates indicated. Additional information from the actuarial valuations for the most recent two-year period is as follows: Employees' Retirement System: Valuation date Actuarial cost method Amortization method Remaining amortization period of the Funding Excess Asset valuation method Actuarial assumptions: 1 Investment rate of return 1 Projected salary increases Postretirement cost-of-living adjustment Public School Employees' Retirement System: Valuation date Actuarial cost method Amortization method Remaining amortization period of the Funding Excess Asset valuation method Actuarial assumptions: 1 Investment rate of return Projected salary increases Postretirement cost-of-living adjustment June 30, 2003 June 30, 2002 Entry age Entry age Level percent of pay, open Level percent of pay, open 10 years 13 years 5-year smoothed market 5-year smoothed market 7.25% 5.45-9.25% None 7% 5.20-9.00% None June 30, 2003 Entry age Level dollar, open June 30, 2002 Entry age Level dollar, open 11years 20 years 5-year smoothed market 5-year smoothed market 7.25% N/A 3% annually 7% N/A 3% annually 2004 Employees' Retirement System of Georgia57 FINANCIAL SECTION NOTERSETQOURIREEQDUISRUEPDPLSEUMPPELNETMAERNYTIANRFYORINMFAOTRIOMNATION EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) NOTES TO REQUIRED SUPPLEMENTARY SCHEDULES (unaudited) June 30, 2004 Legislative Retirement System: Valuation date Actuarial cost method Amortization method Remaining amortization period of the Funding Excess Asset valuation method Actuarial assumptions: 1 Investment rate of return Projected salary increases Postretirement cost-of-living adjustment Georgia Judicial Retirement System: Valuation date Actuarial cost method Amortization method Remaining amortization period of the Funding Excess Asset valuation method Actuarial assumptions: 1 Investment rate of return 1 Projected salary increases Postretirement cost-of-living adjustment Georgia Military Pension Fund: Valuation date Actuarial cost method Amortization method Remaining amortization period of the unfunded actuarial accrued liability Asset valuation method Actuarial assumptions: 1 Investment rate of return 1 Projected salary increases Postretirement cost-of-living adjustment 1Includes inflation rate of 3.75% June 30, 2003 Unit credit Level dollar, open N/A 5-year smoothed market 7.25% N/A 3% annually June 30, 2003 Entry age Level percent of pay, open 11 years 5-year smoothed market 7.25% 5.75% None June 30, 2003 Entry age Level dollar, open 40 years 5-year smoothed market 7.25% N/A None June 30, 2002 Unit credit Level dollar, open N/A 5-year smoothed market 7% N/A 3% annually July 1, 2002 Entry age Level percent of pay, open 10 years 5-year smoothed market 7% 5.50% None June 30, 2002 Entry age Level dollar, open 40 years 5-year smoothed market 7% N/A None 58 2004 Employees' Retirement System of Georgia FINANCIAL SECTION ADDITIONAL INFORMATION EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) (A Component Unit of the State of Georgia) Administrative Expenses Schedule CONTRIBUTIONS AND EXPENSES Years ended June 30, 2004 and 2003 (In thousands) Contributions: Employees' Retirement System $ Public School Employees' Retirement System Legislative Retirement System Georgia Judicial Retirement System State Employees' Assurance Department Georgia Defined Contribution Plan Superior Court Judges Retirement Fund Total contributions Expenses: Personal services: Salaries and wages Retirement contributions FICA Health insurance Miscellaneous Communications: Postage Publications and printing Telecommunications Travel Professional services: Accounting and investment services Computer services Contracts Actuarial services Medical services Professional fees Legal services 2004 8,474 $ 588 110 175 225 310 30 9,912 2,623 259 179 343 11 3,415 210 35 130 15 390 2,616 1,022 268 347 200 72 24 4,549 2003 8,509 594 110 175 225 310 30 9,953 2,247 235 160 294 40 2,976 165 105 96 22 388 2,147 883 1,202 521 163 69 27 5,012 Continued 2004 Employees' Retirement System of Georgia59 FINANCIAL SECTION ADDITIONAL INFORMATION EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA (Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) (A Component Unit of the State of Georgia) Administrative Expenses Schedule CONTRIBUTIONS AND EXPENSES Years ended June 30, 2004 and 2003 (In thousands) Rentals: Office space $ Office equipment Other services and charges: Equipment Temporary services Supplies and materials Repairs and maintenance Courier services Depreciation Miscellaneous Total expenses Net income Balance: Beginning of year End of year $ See accompanying independent auditors' report. 2004 561 $ 1 562 9 689 84 53 14 32 115 996 9,912 -- -- -- $ 2003 437 1 438 18 611 127 33 13 12 325 1,139 9,953 -- -- -- 60 2004 Employees' Retirement System of Georgia Two Northside 75 Suite 300 Atlanta, Georgia 30318-7778 404-350-6300 1-800-805-4609 Fax 404-350-6309