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