2006 annual report [2006]

Employees' Retirement System of Georgia
2006 Annual Report
Fiscal Year Ended June 30, 2006

INTRODUCTORY SECTION
TABLE OF CONTENTS

INTRODUCTORY SECTION

Boards of Trustees

2

Letter of Transmittal

3

Legislation

4

ACTUARIAL SECTION

Employees' Retirement System

6

Public School Employees Retirement System

9

Legislative Retirement System

12

Georgia Judicial Retirement System

15

Group Term Life Insurance Plan

18

Georgia Military Pension Fund

21

INVESTMENT SECTION

Pooled Investment Fund/Structural Analysis

24

Short-Term Investments/Bonds

25

Equity Holdings

26

FINANCIAL SECTION

Independent Auditors' Report

27

Management's Discussion and Analysis (Unaudited)

28

Basic Financial Statements:

Combined Statement of Net Assets as of June 30, 2006

33

(With Comparative Totals as of June 30, 2005)

Combined Statement of Changes in Net Assets for the Year Ended June 30, 2006

34

(With Comparative Totals for the Year Ended June 30, 2005)

Combining Statement of Net Assets as of June 30, 2006

35

Defined Benefit Plans

Combining Statement of Net Assets as of June 30, 2006

36

Combining Statement of Changes in Net Assets for the Year Ended June 30, 2006

37

Defined Benefit Plans

Combining Statement of Changes in Net Assets for the Year Ended June 30, 2006 38

Notes to Financial Statements

39

Required Supplementary Schedules (Unaudited)

Schedules of Funding Progress

53

Schedules of Employer Contributions

54

Notes to Required Supplementary Schedules

55

Additional Information

Administrative Expenses Schedule

Contributions and Expenses for the Year Ended June 30, 2006

57

(With Comparative Totals for the Year Ended June 30, 2005)

2006 - Employees' Retirement System of Georgia

1

INTRODUCTORY SECTION

BOARDS OF TRUSTEES

Russell W. Hinton, ex-officio 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
Ned J. Winsor Vice Chairman 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 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
Wayne St. Claire, ex-officio Commissioner
Georgia 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
Michael D. Kennedy 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 Social Security Trust Fund
2

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
Daniel J. Craig District Attorney Augusta Judicial Circuit Georgia Judicial Retirement System
Kelly D. Turner State Court Judge Lowndes County Georgia Judicial Retirement System
Karlton Van Banke Presiding Judge
Juvenile Court of Clayton County Georgia Judicial Retirement System
Samuel B. Kellett President
Kangaroo Bob's LLC Public School Employees Retirement System
J. Sammons Pearson Account Vice President/Financial Advisor
UBS Financial Services, Inc. Public School Employees Retirement System
Michael Thurmond, ex-officio Commissioner of Labor
State Employees' Assurance Department
H. Phillip Bell Owner
Phillip Bell State Farm Insurance Agency State Employees' Assurance Department
2006 - Employees' Retirement System of Georgia

INTRODUCTORY SECTION
LETTER OF TRANSMITTAL

Two Northside 75 Suite 300
Atlanta, GA 30318-7778 Tel 404-350-6300 Fax 404-350-6310
Michael J. Nehf Executive Director

The Boards of Trustees and staff are pleased to present the 2006 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 defined contribution plans, 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 Plans Georgia Defined Contribution Plan 401(k) Deferred Compensation Plan 457 Deferred Compensation Plan 403(b) Deferred Compensation 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 2006, the net assets of the System increased by $359 million, or 2.3%, to $15.9 billion by June 30, 2006. This improvement was primarily due to the increase in the fair value of the equity investments.
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 J. Nehf, Executive Director

2006 - Employees' Retirement System of Georgia

3

INTRODUCTORY SECTION
LEGISLATION
EMPLOYEES' RETIREMENT SYSTEM
Act No. 477 (Senate Bill 177) Amends 47-2 to add 47-2-327 which provides that effective July 1, 2006, or on the date of employment, whichever is later, officers and employees of the State Road and Tollway Authority shall become ERS members. Any employee who was already a member of ERS on July 1, 2006 shall continue in the same membership status; otherwise all new employees shall be under the New Plan.
Act No. 519 (House Bill 379) Amends 47-2-123(b) to provide that members on July 1, 2006 shall not be entitled to disability benefits if the employer finds a comparable job within the department, taking the medical/physical impairments of the member into consideration.
Act No. 580 (House Bill 644) Amends 47-2-96.1 to allow up to ten (10) years of creditable service to any member who rendered temporary, full-time service in the legislative branch of state government prior to July 1, 2006. Member must make application by January 1, 2007 and pay employer and employee contributions that would have been paid during such period, plus regular interest thereon.
Act No. 915 (House Bill 1020) Amends 47-2-110, 47-4-101, 47-23-103, and 47-24-100 to provide that no retirement application will, in any case, be effective earlier than the first of the month following the final month of the applicant's employment.
Act No. 514 (House Bill 1151) Amends 45-18-38 to provide that the ERS Board of Trustees shall be the successor to the Employee Benefit Council for the purpose of administering any deferred compensation plan provided to employees as referenced in 45-18-52.
PUBLIC SCHOOL EMPLOYEES RETIREMENT SYSTEM
Act No. 915 (House Bill 1020) Amends 47-4-101 to provide that no retirement application will, in any case, be effective earlier than the first of the month following the final month of the applicant's employment. In addition, funds were appropriated by the 2006 General Assembly to provide an increase in the benefit formula for current and future retirees of the Public School Employees Retirement System from $13.50 to $14.00 for each year of service effective July 1, 2006.

4

2006 - Employees' Retirement System of Georgia

INTRODUCTORY SECTION
LEGISLATION
GEORGIA MILITARY PENSION FUND
Act No. 915 (House Bill 1020) Amends 47-24-100 to provide that no retirement application will, in any case, be effective earlier than the first of the month following the final month of the applicant's employment.
GEORGIA JUDICIAL RETIREMENT SYSTEM
Act No. 915 (House Bill 1020) Amends 47-23-103 to provide that the effective date of retirement shall be the first day of the month in which the application is received by the board of trustees, provided that no retirement shall, in any case, be effective earlier than the first day of the month following the final month of the applicant's employment. Applications for retirement shall not be accepted more than 90 days in advance of the effective date of retirement.
GEORGIA DEFINED CONTRIBUTION PLAN Act No. 915 (House Bill 1020) Amends 47-22-9 to provide that if any member who ceases to be an employee has less than the minimum amount as determined by the board credited to such member's account, the board may, at its option, require such member to withdraw all such moneys and the member's account shall be closed.
OTHER LEGISLATION OF INTEREST
Act No. 459 (House Bill 149) Amends 18-4-22 to allow funds or benefits from a pension or retirement program as defined in 29 U.S.C. Section 1002(2)(A) or funds or benefits from an individual retirement allowance as defined in Section 408 or 408A of the United States Internal Revenue Code of 1986, as amended, to be exempt from the process of garnishment until paid or otherwise transferred to the member or beneficiary of such program. Such funds or benefits, when paid or transferred shall be exempt only to the extent provided in 18-4-20, unless a greater exemption is otherwise provided by law.

2006 - Employees' Retirement System of Georgia

5

ACTUARIAL SECTION
ACTUARY'S CERTIFICATION LETTER
Employees' Retirement System
June 6, 2006
Board of Trustees Employees' Retirement System of Georgia Two Northside 75, Suite 300 Atlanta, GA 30318-7778
Attention: Mr. Michael Nehf, 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 annual 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, 2005. The report indicates that annual employer contributions at the rate of 5.66% of compensation for Old Plan Members and 10.41% of compensation for New Plan Members for the fiscal year ending June 30, 2008 are sufficient to support the benefits of the System. Since the previous valuation, the assumed rates of withdrawal, disability, retirement and mortality have been revised to reflect the results of the experience investigation for the four year period ending June 30, 2004. These revised assumptions were adopted by the Board on April 20, 2006. 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 are reasonable as a basis for the valuation. The valuation takes into account the effect of all amendments to the System enacted through the 2005 session of the General Assembly as well as all 1.5% Ad Hoc COLAs effective through January 1, 2008. 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 being amortized as a level percent of payroll within a 6-year period. The 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 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 yours,
Edward A. Macdonald, ASA, FCA, MAAA President
EAM:sh

6

2006 - Employees' Retirement System of Georgia

ACTUARIAL SECTION
VALUATION BALANCE SHEET
Employees' Retirement System

- As of June 30, 2005 -
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

$ 7,160,011 535,608 103,682 $ 7,799,301
7,328,297

(3) TOTAL ACTUARIAL LIABILITIES

$ 15,127,598

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
normal contributions
(7) Prospective unfunded accrued liability contributions = (5)-(6)
(8) TOTAL PRESENT AND PROSPECTIVE ASSETS

$ 13,134,472 $ 1,993,126
1,614,825
378,301 $ 15,127,598

2006 - Employees' Retirement System of Georgia

7

ACTUARIAL SECTION
SUMMARY OF PRINCIPAL RESULTS
Employees' Retirement System

- As of June 30, 2005 -
DOLLAR AMOUNTS IN THOUSANDS

Valuation Date
Number of active members Annual earnable compensation Number of retired members and beneficiaries Annual allowances
Assets: Market Value Actuarial Value
Unfunded accrued liability Amortization period (years)

June 30, 2005

72,716

$

2,514,430

31,355

$

773,445

June 30, 2004*

72,106

$

2,445,619

29,845

$

718,478

$ 12,825,126 $ 13,134,472

$

378,301

$

6

12,396,352 12,797,389
309,259 12

Contributions for Fiscal Year Ending
Annual Required Employer Contribution Rates (ARC): Old Plan Initial Normal Rate Employer Paid on Behalf of Employee Normal Rate Accrued Liability Rate Total
New Plan Normal Rate Accrued Liability Rate
Total
* Reported by prior actuarial firm

June 30, 2008

June 30, 2007

7.16% (4.75) 2.41% 3.25% 5.66%
7.16% 3.25%
10.41%

9.08% (4.75) 4.33% 1.33% 5.66%
9.08% 1.33%
10.41%

8

2006 - Employees' Retirement System of Georgia

ACTUARIAL SECTION
ACTUARY'S CERTIFICATION LETTER
Public School Employees Retirement System
June 12, 2006
Board of Trustees Georgia Public School Employees' Retirement System Two Northside 75, Suite 300 Atlanta, GA 30318
Members of the Board:
Section 47-4-60 of the law governing the operation of the Georgia Public School Employee' Retirement System provides that the employer contribution shall be actuarially determined and approved 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, 2005. The report indicates that annual employer contributions of $1,534,228 or $41.80 per active member for the fiscal year ending June 30, 2008 are sufficient to support the benefits of the System. Since the previous valuation, the assumed rates of withdrawal, retirement and mortality have been revised to reflect the results of the experience investigation for the four year period ending June 30, 2004. These revised assumptions were adopted by the Board on April 20, 2006. 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 are reasonable as a basis for the valuation. The valuation takes into account the effect of all amendments to the System enacted through the 2005 session of the General Assembly and includes the increase in the benefit accrual rate from $13.50 to $14.00 effective July 1, 2006. 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 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 within a 30-year period. The 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 yours,
Edward A. Macdonald, ASA, FCA, MAAA President
EAM:sh

2006 - Employees' Retirement System of Georgia

9

ACTUARIAL SECTION
VALUATION BALANCE SHEET
Public School Employees Retirement System

- As of June 30, 2005 -

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 (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 (7) Present value of future employer contributions = (5) (6) (8) Employer normal contribution rate (9) Present value of future membership service (10) Prospective normal contributions = (8) x (9) (11) Prospective unfunded actuarial accrued liability contributions = (7) (10) (12) Total Present and Prospective Assets

$ 416,790,098 304,564,933
$ 721,355,031

$ (32,411,969)

$ (39,154,661)

$

232.64

$ 187,297

$ 753,767,000 6,742,692
43,572,774

(82,727,345) $ 721,355,031

10

2006 - Employees' Retirement System of Georgia

ACTUARIAL SECTION
SUMMARY OF PRINCIPAL RESULTS
Public School Employees Retirement System

- As of June 30, 2005 -

Valuation Date Number of active members
Retired members and beneficiaries: Number Annual allowances2
Assets: Market Value Actuarial Value
Unfunded actuarial accrued liability
Amortization Period (years)
For Fiscal Year Ending
Employer contribution rate per active member: Normal Accrued liability
Total Annual Required Employer Contribution Rates (ARC)3:
Normal Accrued liability
Total

June 30, 2005 36,704
12,675 $ 41,316,366
$ 737,930,000 753,767,000
$ (82,727,435) 30

June 30, 2008

$

232.64

(190.84)

$

41.80

$ 8,538,819 (7,004,591)
$ 1,534,228

June 30, 20041 35,943
12,325 $ 40,265,812
$ 723,071,000 743,815,000
$ (76,932,018) 25

June 30, 2007

$

294.89

(193.77)

$

101.12

$ 10,599,231 (6,964,735)
$ 3,634,496

1 Reported by prior actuarial firm.
2 Does not include increases in benefit accrual rate effective after the valuation date. The results of the valuation have been adjusted to include these increases.
3 The ARC is in addition to any administrative expense allotments that are contributed to the System.

2006 - Employees' Retirement System of Georgia

11

ACTUARIAL SECTION
ACTUARY'S CERTIFICATION LETTER
Legislative Retirement System
June 8, 2006
Board of Trustees Legislative Retirement System of Georgia Two Northside 75, Suite 300 Atlanta, GA 30318
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 actuarial valuation of the System prepared as of June 30, 2005. The report indicates that no annual employer contributions for the fiscal year ending June 30, 2008 are required to support the benefits of the System. Since the previous valuation, the assumed rates of withdrawal, retirement and mortality have been revised to reflect the results of the experience investigation for the four year period ending June 30, 2004. These revised assumptions were adopted by the Board on April 20, 2006. 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 are reasonable as a basis for the valuation. The valuation takes into account the effect of all amendments to the System enacted through the 2005 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 level 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 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 yours,
Edward A. Macdonald, ASA, FCA, MAAA President
EAM:sh

12

2006 - Employees' Retirement System of Georgia

ACTUARIAL SECTION
VALUATION BALANCE SHEET
Legislative Retirement System

- As of June 30, 2005 -

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 (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 (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

$ 19,550,744 5,801,963
$ 25,352,707

$ (3,109,293) $ (4,688,893)

$ 28,462,000 1,579,600 242,348

(4,931,241) $ 25,352,707

2006 - Employees' Retirement System of Georgia

13

ACTUARIAL SECTION
SUMMARY OF PRINCIPAL RESULTS
Legislative Retirement System

- As of June 30, 2005 -

Valuation Date Number of active members
Retired members and beneficiaries: Number Annual allowances
Assets: Market Value Actuarial Value
Unfunded actuarial accrued liability Amortization Period (years)
For Fiscal Year Ending Employer contribution rate per active member:
Normal Accrued liability
Total Annual Required Employer Contribution Rates (ARC):
Normal Accrued liability
Total

June 30, 2005 217

June 30, 2004* 210

224

206

$

1,594,405 $ 1,360,657

$ 27,835,000 $ 27,067,000

28,462,000

27,892,000

$

(4,931,241) $ (5,868,520)

N/A**

N/A**

June 30, 2008 June 30, 2007

$

215.42 $

443.51

(215.42)

(443.51)

$

0.00 $

0.00

$

46,746 $

93,137

(46,746)

(93,137)

$

0 $

0

* Reported by prior actuarial firm.
** 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 to such that the total ARC equals $0.

14

2006 - Employees' Retirement System of Georgia

ACTUARIAL SECTION
ACTUARY'S CERTIFICATION LETTER
Georgia Judicial Retirement System
June 5, 2006
Board of Trustees Georgia Judicial Retirement System Suite 400, Two Northside 75 Atlanta, GA 30318
Members of the Board:
Section 47-23-21 of the law governs the operation of the Georgia Judicial Retirement System. The actuary makes annual 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, 2005. The report indicates that annual employer contributions at the rate of 3.85% of compensation for the fiscal year ending June 30, 2008 are sufficient to support the benefits of the System. Since the previous valuation, the assumed rates of withdrawal, retirement and mortality have been revised to reflect the results of the experience investigation for the four year period ending June 30, 2004. These revised assumptions were adopted by the Board on April 20, 2006. 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 are reasonable as a basis for the valuation. The valuation takes into account the effect of all amendments to the System enacted through the 2005 session of the General Assembly as well as 1.5% Ad Hoc COLAs effective through January 1, 2008. 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 20-year period. The 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 yours,
Edward A. Macdonald, ASA, FCA, MAAA President
EAM:sh

2006 - Employees' Retirement System of Georgia

15

ACTUARIAL SECTION
VALUATION BALANCE SHEET
Georgia Judicial Retirement System

- As of June 30, 2005 -

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
(3) Total Actuarial Liabilities

$ 85,840,593 199,322,009
$ 285,162,602

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 (10) Prospective normal contributions = (8) x (9) (11) Prospective unfunded actuarial accrued liability
contributions = (7) (10) (12) Total Present and Prospective Assets

$ 20,238,602
$ (8,769,171) 12.41%
$ 347,255,563

$ 264,924,000 29,007,773
43,094,415 (51,863,586) $ 285,162,602

16

2006 - Employees' Retirement System of Georgia

ACTUARIAL SECTION
SUMMARY OF PRINCIPAL RESULTS
Georgia Judicial Retirement System

- As of June 30, 2005 -

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 (years)

June 30, 2005
468 $ 42,916,253
174 $ 9,460,350

June 30, 2004*
451 $ 40,908,303
155 $ 7,697,943

$ 256,919,000 264,924,000
$ (51,863,586)
20

$ 239,957,000 250,313,000
$ (53,810,626)
11

For Fiscal Year Ending
Annual Required Employer Contribution Rates (ARC): Normal Accrued liability Total
* Reported by prior actuarial firm.

June 30, 2008

June 30, 2007

12.41% (8.56)
3.85%

19.25% (15.40)
3.85%

2006 - Employees' Retirement System of Georgia

17

ACTUARIAL SECTION
ACTUARY'S CERTIFICATION LETTER
Group Term Life Insurance Plan
August 9, 2006
Board of Trustees Employees' Retirement System of Georgia Two Northside 75, Suite 300 Atlanta, GA 30318-7778
Attention: Mr. Michael Nehf, 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. In addition, Governmental Accounting Standards Board Statements No. 43 and 45 require actuarial valuations of post-employment benefit plans. In accordance with GASB 43 and 45, we have determined liabilities and assets separately for life insurance benefits payable upon death in active service and those payable upon death after retirement.
We have submitted the report giving the results of the valuation of the Plan prepared as of June 30, 2005. 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, members of the Legislative Retirement System and members of the Judicial Retirement System are sufficient to support the benefits of the Plan. No employer contributions are required for the fiscal year ending June 30, 2008 for either pre-retirement or post-retirement benefits.
Since the previous valuation, the assumed rates of withdrawal, disability, retirement and mortality have been revised to reflect the results of the experience investigation for the four-year period ending June 30, 2004. These revised assumptions were adopted by the Board on April 20, 2006. Also, the funding method has been changed to Projected Unit Credit.
The funding method used for this valuation is the unit credit actuarial cost method with projected benefits. Gains and losses are reflected in the unfunded accrued liability. 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, ASA, FCA, MAAA President
EAM:sh

18

2006 - Employees' Retirement System of Georgia

ACTUARIAL SECTION
VALUATION BALANCE SHEET
Group Term Life Insurance Plan

- As of June 30, 2005 -

(1) ACTUARIAL ACCRUED LIABILITY:

Present value of benefits payable on account of present retired

members

$

Present value of benefits payable on account of present active members

TOTAL ACTUARIAL ACCRUED LIABILITY

$

(2) PRESENT ASSETS FOR VALUATION PURPOSES:

$

(3) UNFUNDED ACTUARIAL ACCRUED LIABILITY: (1)-(2) (4) NORMAL CONTRIBUTION:

(5) ACCRUED LIABILITY CONTRIBUTION:

$

(6) TOTAL CONTRIBUTION: (4)+(5)

336,743,116 248,908,796 585,651,912
915,432,000 (329,780,088)
12,633,430 (12,633,430)
0

2006 - Employees' Retirement System of Georgia

19

ACTUARIAL SECTION
SUMMARY OF PRINCIPAL RESULTS
Group Term Life Insurance Plan

- As of June 30, 2005 -

Valuation Date Active members:
Number Annual compensation
Retired members: Number Insurance amount
Assets: Market Value Actuarial Value
Actuarial Deficit

June 30, 2005

June 30, 2004*

73,267

72,316

$ 2,548,643,667 $ 2,449,021,089

25,810

24,353

$

983,744,409 $

894,574,810

$

894,601,000 $

843,947,000

$

915,432,000 $

871,004,000

$ (329,780,088) $ (240,166,076)

For Fiscal Year Ending
Contribution rates: Old Plan Members Employee Employer Total
New Plan, LRS Members and JRS Members Employee Employer Total
* Reported by prior actuarial firm. ** 0.25% paid by employer.

June 30, 2008

June 30, 2007

0.50%** 0.00 0.50%
0.25% 0.00 0.25%

0.50%** 0.00 0.50%
0.25% 0.00 0.25%

20

2006 - Employees' Retirement System of Georgia

ACTUARIAL SECTION
ACTUARY'S CERTIFICATION LETTER
Georgia Military Pension Fund
June 13, 2006
Board of Trustees Georgia Military Pension Fund Two Northside 75, Suite 300 Atlanta, GA 30318
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 Pension 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, 2005. The report indicates that annual employer contributions of $1,103,073 or $124.36 per active member for the fiscal year ending June 30, 2008 are sufficient to support the benefits of the Fund. In preparing the valuation, the actuary relied on data provided by the Fund. 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 are reasonable as a basis for the valuation. The valuation takes into account the effect of all amendments to the Fund enacted through the 2005 session of the General Assembly.
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 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 dollar per active member. Gains and losses are reflected in the unfunded accrued liability which is being amortized as a level dollar per active member within a 30-year period.
The 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 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 Fund.
Sincerely yours,
Edward A. Macdonald, ASA, FCA, MAAA President
EAM:sh

2006 - Employees' Retirement System of Georgia

21

ACTUARIAL SECTION
VALUATION BALANCE SHEET
Georgia Military Pension Fund

- As of June 30, 2005 -

ACTUARIAL LIABILITIES Present value of prospective benefits payable on account of:
(1) Present retired members (2) Former members entitled to deferred benefits (3) Present active members (4) Total Actuarial Liabilities
PRESENT AND PROSPECTIVE ASSETS (5) Actuarial Value of Assets: (6) Present value of total future contributions = (4) (5) (7) Employer normal contribution rate (8) Present value of future membership service (9) Prospective normal contributions = (7) x (8) (10) Prospective unfunded actuarial accrued liability contributions = (6) (9) (11) Total Present and Prospective Assets

$

1,068,294

2,779,050

10,944,419

$ 14,791,763

$ $ 12,615,763

$

7.16

$ 47,220

2,176,000 338,095

12,277,668 $ 14,791,763

22

2006 - Employees' Retirement System of Georgia

ACTUARIAL SECTION
SUMMARY OF PRINCIPAL RESULTS
Georgia Military Pension Fund

- As of June 30, 2005 -

Valuation Date Number of active members
Retired members: Number Annual pensions
Former members entitled to deferred vested pensions: Number Annual deferred pensions
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 Contribution Rates (ARC):
Normal Accrued liability
Total
* Reported by prior actuarial firm

June 30, 2005 8,870

June 30, 2004* 8,573

103

48

$

109,920 $

49,740

497

385

$

474,492 $

371,160

$

2,181,000 $

1,280,000

$

2,176,000 $

1,250,000

$

12,277,668 $

11,092,583

30 years

30 years

June 30, 2008

June 30, 2007

$

7.16 $

7.68

117.20

109.56

$

124.36 $

117.24

$

63,509 $

65,841

1,039,564

939,258

$

1,103,073 $

1,005,099

2006 - Employees' Retirement System of Georgia

23

INVESTMENT SECTION

POOLED INVESTMENT FUND
- As of June 30, 2006 -

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

$ 13,003,559 744,226 28,281 268,929 932,829 3,051 1,310 45,809
$ 15,027,994

* The Superior Court Judges Retirement Fund was closed on December 31, 1976. As of June 30, 2006 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 Stock

Total

June 30, 2006 0.8% 37.4%
61.8% 100.0%

24

2006 - Employees' Retirement System of Georgia

INVESTMENT SECTION

Face Amount

SHORT-TERM INVESTMENTS
- As of June 30, 2006 -
Issuer

Fair Value

$121,279,000*

United States Government, Agency and Corporate Obligations
(subject to repurchase agreements due 7/01/06)

$ 121,279,000*

*Consists of Pooled Investment Fund $107,924,000 and Georgia Defined Contribution Plan $13,355,000

US GOVERNMENT, AGENCY AND CORPORATE BONDS
- As of June 30, 2006 -

Issuer US TREAS. NOTE US TREAS. BOND US TREAS. NOTE US TREAS. NOTE US TREAS. NOTE US TREAS. NOTE US TREAS. BOND US TREAS. NOTE FHLMC US TREAS. NOTE GENERAL ELECTRIC CAP CORP FNMA GENERAL ELECTRIC CAP CORP US TREAS. NOTE FHLMC FHLB CITIGROUP INC WELLS FARGO SR HLD CO NTS WELLS FARGO GENERAL ELECTRIC CAP CORP FNMA US TREAS. NOTE US TREAS. NOTE US TREAS. NOTE FNMA FNMA US TREAS. NOTE
ERS Fixed Income Securities

Year of Maturity 2016 2036 2006 2006 2007 2007 2028 2007 2011 2010 2009 2008 2010 2010 2011 2007 2013 2010 2015 2026 2011 2011 2008 2006 2011 2009 2008

Interest Rate %

Par Value

4.500

$ 723,000,000 $

4.500

742,000,000

2.375

435,000,000

3.500

365,000,000

3.750

342,000,000

4.250

225,000,000

5.250

220,000,000

3.375

217,000,000

5.125

210,000,000

3.625

207,000,000

3.500

198,000,000

3.750

174,000,000

4.250

175,000,000

3.875

167,000,000

4.750

150,000,000

4.020

143,000,000

5.850

120,000,000

3.980

125,000,000

4.750

125,000,000

5.550

120,000,000

4.500

115,000,000

4.250

98,000,000

3.250

96,000,000

2.500

90,000,000

4.680

81,000,000

4.570

73,000,000

2.625

61,000,000

$ 5,797,000,000 $

Fair Value 687,869,430 665,306,880 433,146,900 362,674,950 338,152,500 222,030,000 218,968,200 214,313,540 206,719,800 197,086,770 187,917,840 168,237,120 166,033,000 159,354,740 145,546,500 141,302,590 120,067,200 117,298,750 115,407,500 112,923,600 110,579,400 94,627,820 92,370,240 89,419,500
78,190,110 71,220,990 58,247,680
5,575,013,550

Georgia Defined Contribution Plan Fixed Income Securities Total ERS and Georgia Defined Contribution Fixed Income Securities

10,000,000 $ 5,807,000,000

9,901,480 $ 5,584,915,030

2006 - Employees' Retirement System of Georgia

25

Shares 3,856,300 1,852,494 2,169,140 1,911,952 1,532,055 3,355,200 1,261,433
168,500 934,000 2,749,645 1,067,360 1,055,120 938,500 564,320 1,389,000 1,323,379 846,878 815,880 1,119,200 2,660,300

INVESTMENT SECTION

EQUITY HOLDINGS
- As of June 30, 2006 -
Company General Electric Co. Exxon Mobil Corp. Citigroup Inc. Bank of America Corp. Procter & Gamble Co. Microsoft Corp. American International Group Inc. Google Inc. Altria Group Inc. Pfizer Inc. Pepsico Inc. Johnson & Johnson Schlumberger Ltd. Occidental Petroleum Corp. QUALCOMM Inc. JPMorgan Chase & Co. ConocoPhillips Amgen Inc. Medtronic Inc. Cisco Systems Inc.
Total - 20 Largest Holdings
Total - All Holdings

Fair Value

$

127,103,648

113,650,507

104,661,005

91,964,891

85,182,258

78,176,160 74,487,619

70,657,105

68,583,620 64,534,168

64,084,294

63,222,790

61,105,735

57,871,016

55,657,230

55,581,918

55,495,915

53,219,852

52,512,864

51,955,659

$

1,449,708,254

$

9,252,645,047

A complete listing is available upon written request, subject to restrictions of O.C.G.A. Section 47-1-14.

26

2006 - Employees' Retirement System of Georgia

FINANCIAL SECTION
INDEPENDENT AUDITOR'S REPORT

Independent Auditors' Report
The Board of Trustees Employees' Retirement System of Georgia:

KPMG LLP Suite 2000 303 Peachtree Street, NE Atlanta, GA 30308

We have audited the accompanying 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, 2006 as listed in the table of contents. These financial statements are the responsibility of the System's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the System's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial status of the System as of June 30, 2006 and the changes in financial status for the year then ended in conformity with U.S. generally accepted accounting principles.
In accordance with Government Auditing Standards, we have also issued our report dated September 22, 2006 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, and the required supplementary schedules listed in the table of contents, are not a required part of the basic financial statements but are supplementary information required by U.S. generally accepted accounting principles. 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, accordingly, we express no opinion on it.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The administrative expenses schedule is presented for purposes of additional analysis and is not a required part of the basic financial statements. The additional information is the responsibility of the System's management. 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. The introductory, investment and actuarial sections have not been subjected to the auditing procedures applied by us in the audit of the basic financial statements and, accordingly, we express no opinion on them.

September 22, 2006

2006 - Employees' Retirement System of Georgia

27

FFIINNAANNCCIIAALL SSEECCTTIIOONN
MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED)
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, 2006. The discussion and analysis of the System's financial performance is within the context of the accompanying basic financial statements, notes to the financial statements, required supplementary schedules, and additional information following this section.
Effective July 1, 2005, the System assumed legal responsibility for administering the 401(k), 457, and 403(b) Deferred Compensation Plans. For comparative purposes, the year ended June 30, 2005 amounts have been restated to include balances related to these plans. The System is responsible for administering a cost sharing, multiple employer defined benefit pension plan for various employer agencies of Georgia, along with seven other defined benefit pension plans and four defined contribution plans.
The defined benefit pension plans include: Employees' Retirement System (ERS) Public School Employees' Retirement System (PSERS) Legislative Retirement System (LRS) Georgia Judicial Retirement System (GJRS) Georgia Military Pension Fund (GMPF) State Employees' Assurance Department (SEAD) Superior Court Judges Retirement Fund (SCJRF) District Attorneys Retirement Fund (DARF)
The defined contribution retirement plans include: Georgia Defined Contribution Plan (GDCP) 401(k) Deferred Compensation Plan (401(k)) 457 Deferred Compensation Plan (457) 403(b) Deferred Compensation Plan (403(b))
Financial Highlights
The following highlights are discussed in more detail later in this analysis: The net assets of the System increased by $359 million, or 2.3%, from $15.6 billion at June 30, 2005 to $15.9 billion at June 30, 2006. The improvement was primarily due to the increase in the fair value of investments.
For the year ended June 30, 2006, the total additions to net assets were $1.4 billion compared to $1.5 billion for the year ended June 30, 2005. For the year ended June 30, 2006, the additions consisted of employer and member contributions totaling $417 million, insurance premiums of $8 million, net investment income of $957 million, participant fees of $0.4 million, and other income of $1 million. For the year ended June 30, 2005, the additions consisted of employer and member contributions totaling $385 million, insurance premiums of $8 million, net investment income of $1.1 billion, and other income of $1 million.
Net investment income of $957 million (comprised of interest and dividend income, the change in fair value of investments, and other reduced by investment expenses) represents a $165 million decrease, compared to the net investment income of $1.1 billion for the year ended June 30, 2005. The decrease was primarily due to lower returns in the fixed income markets in 2006 compared to 2005.
The total deductions were $1.0 billion and $923 million for years ended June 30, 2006 and 2005, respectively. For the year ended June 30, 2006, the deductions consisted of benefit payments of $966 million, refunds of $21 million, death benefits of $23 million, and administrative expenses of $15 million. For the year ended June 30, 2005, the deductions consisted of benefit payments of $872 million, refunds of $17 million, death benefits of $22 million, and administrative expenses of $12 million.
Benefit payments paid to retirees and beneficiaries increased by $94 million, or 10.8% from $872 million in 2005 to $966 million in 2006. 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.

28

2006 - Employees' Retirement System of Georgia

FINANCIAL SECTION
MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED)
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 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 U.S. generally accepted accounting principles. 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. This statement is 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, participant fees, and investment income, which includes interest and dividends and the net increase 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. This statement is presented 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. These statements begin on page 35.
Notes to the 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 39.
There are two Required Supplementary Schedules included in this report. These required schedules are applicable to five of the 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, ongoing 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 53.
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 55.
Additional information is presented, beginning on page 57. 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.

2006 - Employees' Retirement System of Georgia

29

FINANCIAL SECTION

MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED)

Financial Analysis of the System
A summary of the System's net assets at June 30, 2006 and 2005 is as follows:

Assets: Cash and receivables Investments Capital assets, net Total assets

Net assets (in thousands)

June 30

2006

2005 (Restated)

$

181,010 $

130,017 $

15,802,360 11,311

15,480,946 6,271

15,994,681

15,617,234

Liabilities:
Due to brokers and accounts payable

64,150

46,084

Net assets

$ 15,930,531 $ 15,571,150 $

Amount change
50,993 321,414
5,040 377,447
18,066 359,381

Percentage change
39.2% 2.1% 80.4% 2.4%
39.2% 2.3%

The following table presents the investment allocation at June 30, 2006 and 2005:

Asset allocation at June 30 (in percentages): Equities U.S. Treasuries U.S. Agencies Corporate and other bonds Mutual Funds
Short-term securities Asset allocation at June 30 (in thousands):
Equities U.S. Treasuries U.S. Agencies Corporate and other bonds Mutual Funds Short-term securities

2006

58.6% 24.3% 5.8% 5.2% 5.3% 0.8%

$

9,252,645

3,843,470

921,796

819,648

843,522

121,279

$

15,802,360

2005 (Restated)

56.8% 23.5% 8.0% 5.7% 4.9% 1.1%

$

8,786,268

3,636,764

1,240,728

891,191

755,816

170,179

$

15,480,946

The total investment portfolio increased $321 million from 2005, which is due primarily to an increase in the fair value of investments.

30

2006 - Employees' Retirement System of Georgia

FINANCIAL SECTION
MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED)

The investment rate of return in fiscal year ended June 30, 2006 was 6.2%, with an 11.1% return on equities and a (1.4%) return on fixed income investments. The five year annualized rate of return on investments at June 30, 2006 was 4.7%, with a 3.9% return on equities and a 5.4% return on fixed income investments.
A summary of the changes in the System's net assets for the years ended June 30, 2006 and 2005 is as follows:

Additions: Employer contributions Member contributions Participant fees Insurance premiums Net investment income Other Total additions
Deductions: Benefit payments Refunds Death benefits Administrative expenses Total deductions
Net increase in net assets

Changes in net assets

(in thousands)

2006

2005 (Restated)

Amount change

$ 282,126 135,276 449 7,699 956,794 903
1,383,247

$ 254,621 130,441 451 8,424
1,122,191 903
1,517,031

$ 27,505 4,835 (2) (725)
(165,397) --
(133,784)

965,626 20,907 22,772 14,561 1,023,866

871,780 17,001 21,916 12,270 922,967

93,846 3,906
856 2,291 100,899

$ 359,381 $ 594,064 $ (234,683)

Percentage change
10.8% 3.7% (0.4)% (8.6)% (14.7)% 0.0% (8.8)%
10.8% 23.0% 3.9% 18.7% 10.9%
(39.5)%

Additions The System accumulates resources needed to fund benefit payments through contributions and returns on invested funds. In fiscal year 2006, total contributions increased 8.4%, reflecting a contribution percentage that remained unchanged with a modest overall salary increase. Net investment income decreased by $165 million. This decrease is principally due to lower returns in the fixed income markets in 2006 as compared to 2005.
Deductions For fiscal year 2006, total deductions increased 10.9%, primarily because of a 10.8% increase in benefit payments. This was due to an increase of approximately 7.8% in the number of retirees receiving benefit payments across all defined benefit plans and to postretirement cost of living increases in benefits. Refunds increased 23.0%, which was primarily due to an increase in the number of refunds processed during 2006. Administrative expenses increased 18.7% over the prior year, due primarily to increases in salaries, accounting and investment services, and computer services.

2006 - Employees' Retirement System of Georgia

31

FINANCIAL SECTION

MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED)

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, 2005 and 2004 actuarial valuations, the latest valuations available, indicate the actuarial value of assets and funding ratios for the five applicable defined benefit retirement plans were as follows:

ERS PSERS LRS GJRS GMPF

Actuarial value of plan

assets (in thousands)

June 30,

June 30,

2005

2004

$ 13,134,472 $ 12,797,389

753,767

743,815

28,462

27,892

264,924

250,313

2,176

1,250

Funding ratio

June 30,

June 30,

2005

2004

97.2%

97.6%

112.3%

111.5%

121.0%

126.6%

124.3%

127.4%

15.1%

10.1%

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

2006 - Employees' Retirement System of Georgia

FINANCIAL SECTION

COMBINED STATEMENT 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 STATEMENT OF NET ASSETS June 30, 2006 (With Comparative Totals as of June 30, 2005) (In thousands)
ASSETS CASH RECEIVABLES:
Employer and member contributions Interest and dividends Due from brokers for securities sold Other
Total receivables

2005

2006

(Restated)

$

4,429 $

12,278

35,200 82,317 58,919
145 176,581

31,550 74,409 11,780
-- 117,739

INVESTMENTS AT FAIR VALUE: Short-term U.S. Treasuries U.S. Agencies Corporate and other bonds Common stocks Mutual funds
Total investments
CAPITAL ASSETS, NET
Total assets

121,279 3,843,470
921,796 819,648 9,252,645 843,522
15,802,360
11,311
15,994,681

170,179 3,636,764 1,240,728
891,191 8,786,268
755,816
15,480,946
6,271
15,617,234

LIABILITIES Accounts payable and other Due to brokers for securities purchased
Total liabilities

17,437 46,713 64,150

20,311 25,773 46,084

NET ASSETS HELD IN TRUST FOR PENSION BENEFITS $ 15,930,531 $ 15,571,150

(A schedule of funding progress is presented on page 53.) See accompanying notes to financial statements.

2006 - Employees' Retirement System of Georgia

33

FINANCIAL SECTION

COMBINED 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)

COMBINED STATEMENT OF CHANGES IN NET ASSETS Year Ended June 30, 2006 (With Comparative Totals for the Year Ended June 30, 2005) (In thousands)

NET ASSETS HELD IN TRUST FOR PENSION BENEFITS BEGINNING OF YEAR
ADDITIONS: Contributions: Employer Member Participant fees Insurance premiums Administrative expense allotment Investment income: Net increase in fair value of investments Interest and dividends Other 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

2006
$ 15,571,150
282,126 135,276
449 7,699
903
535,488 435,713
731 971,932 (15,138) 956,794 1,383,247
965,626 20,907 22,772 14,561 1,023,866 359,381
$ 15,930,531

2005 (Restated)
$ 14,977,086
254,621 130,441
451 8,424
903
736,262 401,861
1,331 1,139,454
(17,263) 1,122,191 1,517,031
871,780 17,001 21,916 12,270 922,967 594,064
$ 15,571,150

See accompanying notes to financial statements.

34

2006 - Employees' Retirement System of Georgia

2006 - Employees' Retirement System of Georgia

FINANCIAL SECTION
COMBINING STATEMENT 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)

COMBINING STATEMENT OF NET ASSETS June 30, 2006 (In thousands)

Defined Contribution Plans

Assets
Cash Receivables:
Employer and member contributions Interest and dividends Due from brokers for securities sold Other Unremitted insurance premiums
Total receivables Investments at fair value: Short-term U.S. Treasuries U.S. Agencies Corporate and other bonds Common stocks Mutual funds 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

Georgia

Defined

Pooled

Defined

Benefit

Investment

Contribution

401(k)

457

Plans

Fund

Plan

Plan

Plan

$

3,160 $

1 $

76 $

603 $

583 $

31,618 -- -- --
1,110 32,728

-- 82,281 58,913
-- -- 141,194

1,220

1,568

794

36

--

--

6

--

--

27

118

--

--

--

--

1,289

1,686

794

-- -- -- -- -- -- 14,982,185 14,982,185 11,311 15,029,384

107,924 3,833,569
921,796 819,648 9,252,645
-- -- 14,935,582 -- 15,076,777

13,355 9,901 -- -- -- -- 45,809 69,065 -- 70,430

-- -- -- -- -- 270,847 -- 270,847 -- 273,136

-- -- -- -- -- 572,212 -- 572,212 -- 573,589

14,931 --
1,110 16,041

2,070 46,713
-- 48,783

--

253

183

--

--

--

--

--

--

--

253

183

403(b) Plan

Eliminations

6 $

-- $

--

--

--

--

--

--

--

--

--

(1,110)

--

(1,110)

--

--

--

--

--

--

--

--

--

--

463

--

--

(15,027,994)

463

(15,027,994)

--

--

469

(15,029,104)

--

--

--

--

--

(1,110)

--

(1,110)

Total 2006
4,429
35,200 82,317 58,919
145 --
176,581
121,279 3,843,470
921,796 819,648 9,252,645 843,522
-- 15,802,360
11,311 15,994,681
17,437 46,713
-- 64,150

Net assets held in trust for pension benefits (A schedule of funding progress is presented on page 53.)

$ 15,013,343 $ 15,027,994 $

70,430 $ 272,883 $ 573,406 $

469 $ (15,027,994) $ 15,930,531

See accompanying notes to financial statements.

35

36

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)
DEFINED BENEFIT PLANS - COMBINING STATEMENT OF NET ASSETS June 30, 2006 (In thousands)

FINANCIAL SECTION
DEFINED BENEFIT PLANS COMBINING STATEMENT OF NET ASSETS

Assets
Cash Receivables:
Employer and member contributions Interest and dividends Due from brokers for securities sold Other Unremitted insurance premiums
Total receivables Investments at fair value:
Short-term U.S. Treasuries U.S. Agencies Corporate and other bonds Common stocks Mutual funds 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

Employees' Retirement
System

Public School Employees' Retirement
System

Legislative Retirement
System

Defined Benefit Plans

Georgia Judicial Retirement System

State Employees' Assurance Department

Georgia Military Pension
Fund

Superior Court Judges
Retirement Fund

District Attorneys Retirement
Fund

$

3,075 $

2 $

40 $

15 $

6 $

2 $

19 $

1 $

Defined Benefit Plans Total
3,160

31,183 -- -- -- --
31,183

--

--

434

--

--

1

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

1,110

--

--

--

--

434

1,110

--

1

--

31,618

--

--

--

--

--

--

--

1,110

--

32,728

-- -- -- -- -- -- 13,003,559 13,003,559 11,311 13,049,128

-- -- -- -- -- -- 744,226 744,226 -- 744,228

-- -- -- -- -- -- 28,281 28,281 -- 28,321

-- -- -- -- -- -- 268,929 268,929 -- 269,378

-- -- -- -- -- -- 932,829 932,829 -- 933,945

-- -- -- -- -- -- 3,051 3,051 -- 3,053

-- -- -- -- -- -- 1,310 1,310 -- 1,330

--

--

--

--

--

--

--

--

--

--

--

--

--

14,982,185

--

14,982,185

--

11,311

1

15,029,384

14,194 --
1,073 15,267

539

19

148

--

--

30

--

--

--

--

--

--

--

14

23

--

--

--

539

33

171

--

--

30

1

14,931

--

--

--

1,110

1

16,041

2006 - Employees' Retirement System of Georgia

Net assets held in trust for pension benefits

$

13,033,861 $

(A schedule of funding progress is presented on page 53.) See accompanying notes to financial statements.

743,689 $

28,288 $

269,207 $

933,945 $

3,053 $

1,300 $

-- $ 15,013,343

FINANCIAL SECTION
COMBINING STATEMENT OF CHANGES IN NET ASSETS

2006 - Employees' Retirement System of Georgia

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, 2006 (In thousands)

Defined Contribution Plans

Net assets held in trust for pension benefits beginning of year Additions:
Contributions: Employer Member
Participant fees Insurance premiums Administrative expense allotment Investment income:
Net increase (decrease) infair value of investments Interest and dividends Other 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

Defined Benefit Plans
$ 14,745,806

Pooled Investment
Fund
$ 14,762,805

Georgia Defined Contribution
Plan

$

65,778

401(k) Plan
$ 221,678

266,748

--

56,902

--

--

--

7,699

--

903

--

-- 206
-- (1,540) 892,811 891,477 1,223,729

496,405 412,200
-- (13,145)
-- 895,460 895,460

914,005

--

7,691

--

22,772

--

11,724

--

956,192

--

--

(630,271)

267,537

265,189

$ 15,013,343 $ 15,027,994 $

-- 14,677
-- -- --

15,378 34,557
252 -- --

(11) 865
-- (2) 2,649 3,501 18,178

15,144 4,795 202 (252) -- 19,889 70,076

-- 13,216
-- 310 13,526
-- 4,652 70,430

17,566 -- --
1,305 18,871
-- 51,205 $ 272,883

457 Plan
$ 537,622

403(b) Plan

Eliminations

$

266 $ (14,762,805)

Total 2006
$ 15,571,150

--

--

28,967

173

197

--

--

--

--

--

--

282,126

--

135,276

--

449

--

7,699

--

903

23,933

17

--

535,488

17,634

13

--

435,713

529

--

--

731

(199)

--

--

(15,138)

--

--

(895,460)

--

41,897

30

(895,460)

956,794

71,061

203

(895,460)

1,383,247

34,055 -- --
1,222 35,277
-- 35,784 $ 573,406 $

-- -- -- -- -- -- 203 469 $

-- -- -- -- -- 630,271 (265,189) (15,027,994)

965,626 20,907 22,772 14,561
1,023,866 --
359,381 $ 15,930,531

See accompanying notes to financial statements.

37

38

FINANCIAL SECTION
DEFINED BENEFIT PLANS 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)

DEFINED BENEFIT PLANS - COMBINING STATEMENT OF CHANGES IN NET ASSETS Year ended June 30, 2006 (In thousands)

Employees' Retirement
System

Public School Employees' Retirement
System

Legislative Retirement
System

Defined Benefit Plans

Georgia Judicial Retirement System

State Employees' Assurance Department

Georgia Military Pension
Fund

Superior Court Judges
Retirement Fund

District Attorneys Retirement
Fund

Defined Benefit Plans Total

Net assets held in trust for pension benefits - beginning of year $ 12,825,126 $

737,930 $

27,835 $

256,919 $

894,601 $

2,181 $

1,214 $

-- $ 14,745,806

Additions:

Contributions:

Employer

258,482

3,638

54

1,683

--

891

1,910

90

266,748

Member

50,963

1,380

324

4,221

--

--

14

--

56,902

Participant fees

--

--

--

--

--

--

--

--

--

Insurance premiums

--

--

--

--

7,699

--

--

--

7,699

Administrative expense allotment

--

588

110

175

--

--

30

--

903

Investment income:

Net increase (decrease) in fair value of investments

--

--

--

--

--

--

--

--

--

Interest and dividends

206

--

--

--

--

--

--

--

206

Other

--

--

--

--

--

--

--

--

--

Less investment expenses

(1,540)

--

--

--

--

--

--

--

(1,540)

Allocation of investment earnings

776,058

44,561

1,684

15,665

54,642

131

70

--

892,811

Net investment income

774,724

44,561

1,684

15,665

54,642

131

70

--

891,477

Total additions

1,084,169

50,167

2,172

21,744

62,341

1,022

2,024

90

1,223,729

Deductions:

Benefit payments

857,860

43,504

1,591

8,902

--

150

1,908

90

914,005

Refunds of member contributions and interest

6,978

316

18

379

--

--

--

--

7,691

Death benefits

--

--

--

--

22,772

--

--

--

22,772

Administrative expenses

10,596

588

110

175

225

--

30

--

11,724

Total deductions

875,434

44,408

1,719

9,456

22,997

150

1,938

90

956,192

Transfers to systems from pooled investment fund Net increase in net assets

--

--

--

--

--

--

--

--

--

208,735

5,759

453

12,288

39,344

872

86

--

267,537

Net assets held in trust for pension benefits end of year

$ 13,033,861 $

743,689 $

28,288 $

269,207 $

933,945 $

3,053 $

1,300 $

-- $ 15,013,343

2006 - Employees' Retirement System of Georgia

See accompanying notes to financial statements.

FINANCIAL SECTION

NOTES TO 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, 2006

(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 System (PSERS), Legislative Retirement System (LRS), Georgia Judicial Retirement System (GJRS), Georgia Military Pension Fund (GMPF), State Employees' Assurance Department (SEAD), Superior Court Judges Retirement Fund (SCJRF), District Attorneys Retirement Fund (DARF), Georgia Defined Contribution Plan (GDCP), 401(k) Deferred Compensation Plan (401(k) Plan), 457 Deferred Compensation Plan (457 Plan), and 403(b) Deferred Compensation Plan (403(b) Plan). 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.
Effective July 1, 2005, the System assumed legal responsibility for administering the 401(k), 457, and 403(b) Deferred Compensation Plans from the Georgia Merit System of Personnel Administration. For comparative purposes, the fiscal year ended June 30, 2005 amounts have been restated to include these plans as follows (in thousands):

As Previously Reported

Net Assets

$14,811,584

Change in Net Assets $ 520,808

Adjustment $759,567 $ 73,257

As Restated $15,571,150 $ 594,064

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 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, 2006, 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

32,685 66,019 77,196

Total

175,900

Employers

545

2006 - Employees' Retirement System of Georgia

39

FINANCIAL SECTION
NOTES TO 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 60 or 30 years of creditable service regardless of age. Additionally, there are some provisions allowing for early retirement after 25 years of creditable service for members under age 60.
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. The state contributions are not at any time refundable to the member or his/her beneficiary.
Employer contributions required for fiscal year 2006 were based on the June 30, 2003 actuarial valuation as follows:

Employer: Normal Employer paid for member Accrued liability
Total

Old plan
5.94% 4.75 (0.28) 10.41%

New plan
10.69% -- (0.28) 10.41%

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 unfunded actuarial accrued liability within 6 years, based upon the actuarial valuation at June 30, 2005, 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.

40

2006 - Employees' Retirement System of Georgia

FINANCIAL SECTION
NOTES TO FINANCIAL STATEMENTS

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 224 members eligible to participate in this portion of ERS for the year ended June 30, 2006. Employer contributions of $1,400,000 and benefit payments of $1,302,000 under the SRBP are included in the combined statements of changes in net assets for the year ended June 30, 2006. Cash of $104,000 under the SRBP is included in the combined statements of net assets as of June 30, 2006.
(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, 2006, 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

12,786 45,026 61,649 119,461
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 $13.50, 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.
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 year ended June 30, 2006 were $23.35 per active member and were based on the June 30, 2003 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 contribution, the member forfeits all rights to retirement benefits.
The employer contributions are projected to liquidate the actuarial accrued funding excess within 30 years, based upon the actuarial valuation at June 30, 2005.

2006 - Employees' Retirement System of Georgia

41

FINANCIAL SECTION
NOTES TO FINANCIAL STATEMENTS

(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, 2006, participation in LRS is as follows:

Retirees and beneficiaries currently receiving benefits

216

Terminated employees entitled to benefits but not yet receiving benefits

149

Active plan members

223

Total

588

Employers

1

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 $36, 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.
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 year ended June 30, 2006 based on the June 30, 2003 actuarial valuation.
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.

42

2006 - Employees' Retirement System of Georgia

FINANCIAL SECTION
NOTES TO FINANCIAL STATEMENTS

Membership

As of June 30, 2006, participation in GJRS is as follows:

Retirees and beneficiaries currently receiving benefits

164

Terminated employees entitled to benefits but not yet receiving benefits

4

Active plan members

598

Total

766

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 state paid salary at retirement for district attorneys and superior court judges and 66-2/3% of the average over 24 consecutive months for trial judges and solicitors, 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.

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 2006 were based on the June 30, 2003 actuarial valuation as follows:

Employer: Normal Accrued liability

19.70% (15.85)

Total

3.85%

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 20 years, based upon the actuarial valuation at June 30, 2005, assuming that the amount of accrued liability payment increases 4.00% 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.

2006 - Employees' Retirement System of Georgia

43

FINANCIAL SECTION
NOTES TO FINANCIAL STATEMENTS

Membership
As of June 30, 2006, GMPF had 159 retirees and beneficiaries, respectively, 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.
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, 2006 were $89.19 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 30 years, based upon the actuarial valuation at June 30, 2005.
(f) 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.
(g) 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, 2006, participation in SCJRF is as follows:

Retirees and beneficiaries currently receiving benefits

27

Terminated employees entitled to benefits but not yet receiving benefits

4

Active plan members

2

Total

33

Employers

1

44

2006 - Employees' Retirement System of Georgia

FINANCIAL SECTION
NOTES TO FINANCIAL STATEMENTS

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. (h) 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, 2006, DARF had 7 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.
(i) 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, 2006, participation in GDCP is as follows:

Terminated employees entitled to benefits but not yet receiving benefits Active plan members
Total
Employers

96,424 34,476
130,900
277

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.

2006 - Employees' Retirement System of Georgia

45

FINANCIAL SECTION
NOTES TO 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.

(j) The 401(k) Plan was established by the State of Georgia Employees Benefit 401(k) Plan Council (the "Council") in accordance with Georgia Law 1985, page 441, as amended, Official Code of Georgia, Sections 45-18-50 through 45-18-58, and Section 401(k) of the Internal Revenue Code ("IRC"). On July 1, 1994, activity commenced when the 401(k) Plan became available to employees of the State of Georgia Community Service Boards ("CSBs"). On December 1, 1998, the 401(k) Plan became available to employees of the Georgia Lottery Corporation (the "GLC").

Effective July 1, 1998, the State of Georgia Employee's Deferred Compensation Group Trust ("Master Trust") was formed for the State of Georgia Deferred Compensation Program to serve as the funding medium for the 401(k) Plan. At that time, the 401(k) Plan began operating on an employee elective deferral basis for all state employees working at least 1,000 hours in a 12-month period. The Master Trust is also the funding medium for other State sponsored employee benefit plans. All assets of the 401(k) Plan are held in trust for the exclusive benefit of the participants and their beneficiaries. The assets of the 401(k) Plan and the State of Georgia Employees' Deferred Compensation 457 Plan are commingled in the Master Trust with the respective trusts owning units of the Master Trust.

Great-West Life & Annuity Insurance Company ("Great West") has been appointed by the council to hold, administer, and invest the assets of the Master Trust. Effective July 1, 2005, ERS became the trustee of the 401(k) Plan.

Contributions and Vesting

The 401(k) Plan requires participating CSBs and the GLC to annually contribute 7.5% of all eligible employees' base salary (limited to a maximum of $170,000 base salary for 2006). Through December 31, 2001, the 401(k) Plan allowed individual participants to defer up to the lesser of 15% of eligible gross compensation earned (increased to 100% of eligible compensation as of January 1, 2002) or up to limits prescribed by the IRC. A maximum 50% matching contribution of participant deferrals may be made by the employer, subject to appropriation by the State Legislature. No appropriations by the State Legislature were made during 2006. The aggregate of employer contributions, employee contributions, and any matching contributions cannot exceed the lesser of 25% of eligible gross compensation earned or up to limits prescribed by the IRC.

Employer contributions vest according to the following schedule:

Less than 2 years

0%

2

20%

3

40%

4

60%

5

80%

6 or more

100%

For participants whose services terminated prior to January 1, 2002, the following schedule applies:

Less than 3 years

0%

3

20%

4

40%

5

60%

6

80%

7 or more

100%

Employee contributions and earnings thereon are 100% vested at all times. The 401(k) Plan also allows participants to roll over amounts from other qualified plans to their respective account in the 401(k) Plan on approval by the 401(k) Plan administrator. Such rollovers are 100% vested at the time of transfer.

46

2006 - Employees' Retirement System of Georgia

FINANCIAL SECTION
NOTES TO FINANCIAL STATEMENTS
Distributions
The participant may receive the value of their vested accounts upon attaining age 59.5, qualifying financial hardship, or retirement or other termination of service. Upon death of a participant, his or her beneficiary shall be entitled to the full value of his or her accounts. Distributions are made in installments or in a lump sum.
(k) The 457 Plan was established by the State Personnel Board in accordance with Georgia laws 1974, page 198 as amended, Official Code of Georgia, Sections 45-18-30 through 45-18-36, and Section 457 of the Internal Revenue Code ("IRC"). The 457 Plan is available to employees of the State of Georgia and county health departments and permits such employees to defer a portion of their annual salary until future years. Employee contributions and earnings thereon are 100% vested at all times.
Effective July 1, 1998, the State of Georgia Employee's Deferred Compensation Group Trust ("Master Trust") was formed for the State of Georgia Deferred Compensation Program to serve as the funding medium for the 457 Plan. The Master Trust is also the funding medium for other State sponsored employee benefit plans. All assets of the 457 Plan are held in trust for the exclusive benefit of the participants and their beneficiaries. The assets of the 457 Plan and the State of Georgia Employees' Deferred Compensation 401(k) Plan are commingled in the Master Trust with the respective trusts owning units of the Master Trust.
Great-West Life & Annuity Insurance Company ("Great West") has been appointed by the council to hold, administer, and invest the assets of the Master Trust. Effective July 1, 2005, ERS became trustee of the 457 Plan.
Distributions
The balance in the employee's account in the 457 Plan is not available to the employee until termination, retirement, death, or unforeseeable emergency as defined in the 457 Plan.
(l) The 403(b) Plan was established by the State of Georgia Employee Benefit Plan Council (the "Council") in accordance with Georgia Laws 1985, page 441, as amended, Official Code of Georgia, Sections 45-18-50 through 45-18-58, and Section 403(b) of the Internal Revenue Code ("IRC"). On May 22, 2002, the 403(b) Plan was adopted by the Council and became operational on July 1, 2004 for employees of the Fayette County Board of Education.
Effective July 1, 1998, the State of Georgia Employees' Deferred Compensation Group Trust ("Master Trust") was formed for the State of Georgia Deferred Compensation Program to serve as the funding medium for the state-sponsored 457 and 401(k) Plans. The Trust was amended on July 1, 2003 to also include the 403(b) Plan. All assets of the 403(b) Plan are held in trust for the exclusive benefit of the participants and their beneficiaries. The assets of the 403(b) Plan and the State of Georgia Deferred Compensation 457 and 401(k) Plans are commingled in the Master Trust with the respective trusts owning units of the Master Trust.
Great-West Life & Annuity Insurance Company ("Great-West") has been appointed to hold, administer and invest the assets of the Master Trust. Effective July 1, 2005, ERS became trustee of the 403(b) Plan.
Distributions
In accordance with the 403(b) Plan, a participant may receive the value of their account upon attaining age 59, qualifying financial hardship, retirement or other termination of state service, or via an IRC 90-24 Transfer to another 403(b) Plan. Upon death of a participant, his or her beneficiary shall be entitled to the full value of the account. Distributions are made in installments or in a lump sum.

2006 - Employees' Retirement System of Georgia

47

FINANCIAL SECTION
NOTES TO FINANCIAL STATEMENTS
(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.
During fiscal year 2006, the System adopted the provisions of GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries. This pronouncement requires additional accounting and disclosure requirements when a capital asset has been impaired. The System did not experience any capital asset impairment during fiscal year 2006.
(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) Capital Assets
Capital assets, including software development costs, are stated at cost less accumulated depreciation. The capitalization thresholds are $100,000 for buildings and building improvements and $5,000 for equipment and vehicles. Depreciation on capital assets is computed using the straight line method over estimated useful lives of three to forty years. Depreciation expense is included in administrative expenses. Maintenance and repairs are charged to administrative expenses when incurred. When assets are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the statements of changes in plan net assets in the period of disposal.
During the fiscal year ended June 30, 2005, the System contracted with a consulting firm for the development of a new pension administration system. The new pension administration system will be fully operational during the fiscal year ended June 30, 2007 at which time depreciation on the capitalized costs will begin.
(d) Comparative Information
The fiscal year ended June 30, 2005 amounts shown on the financial statements have been restated to reflect the activities and balances of the 401(k), 457, and 403(b) deferred compensation plans as of and for the fiscal year ended June 30, 2005 (See note 1) and are presented for comparative purposes only.
(e) Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 financial statements.

48

2006 - Employees' Retirement System of Georgia

FINANCIAL SECTION
NOTES TO 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.
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
State statutes authorize the System 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 $121,279,000 at June 30, 2006.
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: U.S. and foreign government obligations with terms up to 30 years. The System held U.S. Treasuries of $3,843,470,630 at June 30, 2006. Obligations unconditionally guaranteed by agencies of the U.S. Government with terms up to 30 years. The System held agency bonds of $921,796,510 at June 30, 2006. 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. The System held corporate bonds of $819,647,890 at June 30, 2006. Private placements are authorized under the same general restrictions applicable to corporate bonds.
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.

2006 - Employees' Retirement System of Georgia

49

FINANCIAL SECTION
NOTES TO FINANCIAL STATEMENTS

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 on a historical cost basis 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 $9,252,645,000 at June 30, 2006.

Substantially all of the investments of ERS, PSERS, LRS, SCJRF, GJRS, GMPF, and SEAD, and certain investments of GDCP are pooled into one common investment fund. Investments of approximately $23,256,000 at June 30, 2006 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, 2006 were as follows (dollars in thousands):

2006

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

$ 13,003,559 744,226 28,281 268,929 932,829 3,051 1,310 45,809

5,979,500 342,222 13,004 123,663 428,948 1,403 603 21,065

$ 15,027,994

6,910,408

The State of Georgia Employee's Deferred Compensation Group Trust ("Master Trust") invests in various mutual funds as selected by participants. Each participant is allowed to select and invest contributions into pre-approved mutual funds. Mutual funds are reported at the fair value of participant balances.
Credit Risk. Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations to the Employees' Retirement System. State law limits investments to investment grade securities.
It is the System's investment policy to require that the bond portfolio be of high quality and chosen with respect to maturity ranges, coupon levels, refunding characteristics and marketability. The System's policy is to require that new purchases of bonds be restricted to high grade bonds rated no lower than "A" by any nationally recognized statistical rating organization. The System's investment in U.S. Agencies was 16.5% of the total fixed income portfolio and was rated AAA by Standard & Poor's and Aaa by Moody's Investors Service. The System's investment in corporate bonds was 14.7% of the total fixed income portfolio which consisted of 8.4% rated AAA/Aaa and 6.3% rated AA/Aa.

50

2006 - Employees' Retirement System of Georgia

FINANCIAL SECTION
NOTES TO FINANCIAL STATEMENTS

The investment policy requires that repurchase agreements be limited to the purchase of U.S. Treasury or Agency obligations or corporate bonds rated no lower than "A" by any nationally recognized statistical rating organization with a market value in excess of funds advanced. As of June 30, 2006, the System held repurchase agreements of $121,279,000.

Mutual fund investments of the deferred compensation plans are not considered to have credit risk and do not require disclosure of credit risk rating.

Concentration of Credit Risk. Concentration of credit risk is the risk of loss that may be attributed to the magnitude of a government's investment in a single issue. State statutes and the System's investment policy limit investments to no more than 5% of total System net assets in any one corporation. On June 30, 2006, the System did not have debt or equity investments in any one organization, other than those issued by the U. S. Government, which represented greater than 5% of plan net assets.

Interest Rate Risk. Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. This risk is managed within the portfolio using the effective duration method. This method is widely used in the management of fixed income portfolios and quantifies to a much greater degree the sensitivity to interest rate changes when analyzing a bond portfolio with call options, prepayment provisions, and any other cash flows. Effective duration makes assumptions regarding the most likely timing and amounts of variable cash flows and is best utilized to gauge the effect of a change in interest rates on the fair value of a portfolio. It is believed that the reporting of effective duration found in the table below quantifies to the fullest extent possible the interest rate risk of the System's fixed assets.

Fixed income and repurchase agreements security type

Market value June 30, 2006

Percent of all fixed income assets and repurchase agreements

Effective duration (years)

U.S. Treasuries

$ 3,843,470,630

67.4%

5.3

U.S. Agencies

921,796,510

16.1%

4.2

Corporate Bonds

819,647,890

14.4%

5.1

Repurchase Agreements

121,279,000

2.1%

0.0

Total

$ 5,706,194,030

100.0%

5.0

Mutual fund investments of the deferred compensation plans are not considered to have interest rate risk and do not require disclosure of interest rate risk.
(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 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.
Securities loaned totaled $5,576,854,000 at fair value at June 30, 2006. The collateral value was equal to 104.5% of the loaned securities' value at June 30, 2006. The System's lending collateral was held in the System's name by the tri-party custodian.

2006 - Employees' Retirement System of Georgia

51

FINANCIAL SECTION
NOTES TO FINANCIAL STATEMENTS

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, 2005. The valuation indicated that the employee contribution rates of 0.50% and 0.25% of members' salaries for old plan members and new plan members, respectively, were appropriate as of June 30, 2005. There were no employer contributions required for the year ended June 30, 2006. 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, 2006 and for the year

then ended:

Balance at

Balance at

June 30, 2005

Additions

Disposals

June 30, 2006

Capital assets:

Land

$

Building

Equipment

Vehicles

Software under development

944,225 2,800,000
698,606 20,551 2,036,877

$

--

--

116,877

--

5,151,304

$

--

--

(41,597)

--

--

$ 944,225 2,800,000 773,886 20,551 7,188,181

6,500,259

5,268,181

(41,597)

11,726,843

Accumulated depreciation for: Building Equipment Vehicles Software under development

(70,000) (139,943)
(19,082) --

(70,000) (156,877)
(1,467) --

-- 41,597
-- --

(140,000) (255,223) (20,549)
--

(229,025)

(228,344)

41,597

(415,772)

Capital assets, net $ 6,271,234

$ 5,039,837 $

--

$ 11,311,071

During fiscal year 2006, the System did not experience any capital asset impairment loss with respect to the provisions of GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries.
(8) Commitments and Contingencies
The System is subject to legal actions in the ordinary course of its business. In the opinion of management, the System has adequate legal defenses and insurance coverage with respect to such actions and their final outcome will not have a material adverse effect upon the financial status of the System.

52

2006 - Employees' Retirement System of Georgia

53

2006 - Employees' Retirement System of Georgia

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

Actuarial valuation
date 6/30/2000 6/30/2001 6/30/2002 6/30/2003 6/30/2004 6/30/2005

Actuarial value of plan
assets (a)

Actuarial accrued liability (AAL) entry age
(b)

Unfunded AAL/(funding
excess) (b-a)

$

10,999,901 $

10,573,408 $

(426,493)

11,750,624

11,557,255

(193,369)

12,124,414

11,994,850

(129,564)

12,428,736

12,370,563

(58,173)

12,797,389

13,106,648

309,259

13,134,472

13,512,773

378,301

Public School Employees' Retirement System 1

6/30/2000 6/30/2001 6/30/2002 6/30/2003 6/30/2004 6/30/2005

667,642 708,391 727,529 734,879 743,815 753,767

615,357 613,347 630,295 664,207 666,883 671,040

(52,285) (95,044) (97,234) (70,672) (76,932) (82,727)

Funding ratio (a/b) 104.0% $ 101.7% 101.1% 100.5% 97.6% 97.2%
108.5% 115.5% 115.4% 110.6% 111.5% 112.3%

Annual covered payroll
(c) 2,304,289 2,397,169 2,408,306 2,489,490 2,445,619 2,514,430
N/A N/A N/A N/A N/A N/A

Legislative Retirement System Georgia Judicial Retirement System

6/30/2000 6/30/2001 6/30/2002 6/30/2003 6/30/2004 6/30/2005
6/30/2000 6/30/2001 6/30/2002 6/30/2003 6/30/2004 6/30/2005

24,666 26,034 26,637 27,157 27,892 28,462
204,136 219,288 228,417 237,683 250,313 264,924

21,628 21,610 21,779 21,898 22,023 23,531
138,427 156,083 175,154 185,825 196,502 213,060

(3,038) (4,424) (4,858) (5,259) (5,869) (4,931)
(65,709) (63,205) (53,263) (51,858) (53,811) (51,864)

114.0% 120.5% 122.3% 124.0% 126.6% 121.0%
147.5% 140.5% 130.4% 127.9% 127.4% 124.3%

2,411 3,567 3,413 3,434 3,402 3,586
34,856 37,688 38,630 38,867 40,908 42,916

Georgia Military Pension Fund 2

6/30/2002

--

8,322

8,322

--

N/A

6/30/2003

609

11,098

10,489

5.5%

N/A

6/30/2004

1,250

12,343

11,093

10.1%

N/A

6/30/2005

2,176

14,454

12,278

15.1%

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.
1No statistics regarding covered payroll are available. Contributions are not based upon members' salaries, but are simply $4.00 per member per month for nine months each fiscal year.
2No statistics regarding covered payroll are available. Active and inactive plan member information is maintained by the Georgia Department of Defense.

See accompanying notes to required supplementary schedules.

Excess as percentage of
covered payroll [(b-a)/c]
(18.5)% (8.1)% (5.4)% (2.3)% 12.6% 15.0%
N/A N/A N/A N/A N/A N/A
(126.0)% (124.0)% (142.3)% (153.1)% (172.5)% (137.5)%
(188.5)% (167.7)% (137.9)% (133.4)% (131.5)% (120.9)%
N/A N/A N/A N/A

FINANCIAL SECTION
REQUIRED SUPPLEMENTARY SCHEDULES (UNAUDITED)

FINANCIAL SECTION
REQUIRED SUPPLEMENTARY SCHEDULES (UNAUDITED)

(Including All Plans and Funds Administered by the Employees' Retirement System of Georgia) (A Component Unit of the State of Georgia)

REQUIRED SUPPLEMENTARY SCHEDULES SCHEDULES OF EMPLOYER CONTRIBUTIONS (In thousands)
Employees' Retirement System
Public School Employees' Retirement System

Year ended June 30
2000 2001 2002 2003 2004 2005
2000 2001 2002 2003 2004 2005

State annual required
contribution

$

302,332

315,505

233,229

246,172

245,388

243,074

9,789 12,874 11,623 4,121
833 833

Percentage contributed
100% 100% 100% 100% 100% 100%
184% 132% 100% 86% 100% 100%

Legislative Retirement System

2000

22

2001

--

2002

--

2003

--

2004

--

2005

--

Georgia Judicial Retirement System

2000 2001 2002 2003 2004 2005

834 1,741
-- -- 1,558 1,594

Georgia Military Pension Fund

2003

591

2004

617

2005

891

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.

436% N/A N/A N/A N/A N/A
100% 11% N/A N/A
100% 100%
100% 100% 100%

54

2006 - Employees' Retirement System of Georgia

FINANCIAL SECTION
NOTES TO REQUIRED SUPPLEMENTARY SCHEDULES

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, 2006

(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: Investment rate of return1 Projected salary increases1 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: Investment rate of return1 Projected salary increases Postretirement cost-of-living adjustment

June 30, 2005 Entry age Level percent of pay, open
6 years 5-year smoothed market
7.50% 5.45-9.25%
None
June 30, 2005 Entry age Level dollar, open
30 years 5-year smoothed market
7.50% N/A
3% annually

June 30, 2004 Entry age Level percent of pay, open
12 years 5-year smoothed market
7.50% 5.45-9.25%
None
June 30, 2004 Entry age Level dollar, open
25 years 5-year smoothed market
7.50% N/A
3% annually

2006 - Employees' Retirement System of Georgia

55

FINANCIAL SECTION
NOTES TO REQUIRED SUPPLEMENTARY SCHEDULES

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, 2006

Legislative Retirement System: Valuation date Actuarial cost method Amortization method Remaining amortization period of the Funding Excess
Asset valuation method Actuarial assumptions:

June 30, 2005 Entry Age Level dollar, open
N/A 5-year smoothed market

Investment rate of return1 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: Investment rate of return1 Projected salary increases1 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:

7.50% N/A
3% annually
June 30, 2005 Entry age Level percent of pay, open
20 years 5-year smoothed market
7.50% 6.00%
None
June 30, 2005 Entry age Level dollar, open
30 years 5-year smoothed market

Investment rate of return1

7.50%

Projected salary increases

N/A

Postretirement cost-of-living adjustment

None

1Includes inflation rate of 4.00% in 2004 and 3.75% in 2005

June 30, 2004 Unit credit Level dollar, open
N/A 5-year smoothed market
7.50% N/A
3% annually
June 30, 2004 Entry age Level percent of pay, open
11 years 5-year smoothed market
7.50% 6.00%
None
June 30, 2004 Entry age Level dollar, open
30 years 5-year smoothed market
7.50% N/A None

56

2006 - 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 Year Ended June 30, 2006 (With Comparative Totals for the Year Ended June 30, 2005) (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 401(k) Plan 457 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
2006 - Employees' Retirement System of Georgia

2006

2005 (Restated)

$

10,596 $

9,587

588

588

110

110

175

175

225

225

310

310

1,305

647

1,222

598

30

30

14,561

12,270

4,235 441 304 607 23
5,610
221 92 76 24 413
3,697 1,387 1,294
420 193 186 37 7,214

3,791 367 262 499 22
4,941
204 72 78 10 364
2,971 732
1,333 334 233 68 24
5,695 (continued)
57

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 Year ended June 30, 2006 (With Comparative Totals for the Year Ended June 30, 2005) (In thousands)

Expenses, Continued: Management fees: Building maintenance Other services and charges: Temporary services Supplies and materials Repairs and maintenance Courier services Depreciation Miscellaneous Office equipment
Total expenses Net income Balance: Beginning of year End of year

2006

$

568

283 121 61 13 228 50 -- 756 14,561
--

--

$

--

2005 (Restated)

$

561

292 154 57 13 156 34
3 709 12,270
--

--

$

--

See accompanying independent auditors' report.

58

2006 - Employees' Retirement System of Georgia

Notes

2006 - Employees' Retirement System of Georgia

59

Notes

60

2006 - Employees' Retirement System of Georgia

Two Northside 75, Suite 300 Atlanta, GA 30318-7701
404-350-6300 or 1-800-805-4609 www.ersga.org