Gregg Rademacher
Chief Executive Officer
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INTRODUCTORY SECTION
I am pleased to present the Los Angeles County Employees Retirement Association (LACERA) Comprehensive Annual Financial Report for the fiscal year ended June 30, 2009. This report is intended to provide a detailed review of the association’s financial, actuarial, and investment status.
LACERA has the duty and authority to administer defined retirement plan benefits for the employees of Los Angeles County and outside Districts. It is our mission to produce, protect, and provide the promised benefits to our members and their beneficiaries. In the course of fulfilling that mission, we provide comprehensive customer services to 157,000 members, including more than 53,000 benefit recipients.
The keystones of our mission can be summarized by two elements: investments and customer service. We are mandated to grow the retirement fund and to provide eligible recipients with benefits as prescribed by law.
Investment of the Fund is guided by a prudent Investment Policy established by our Board of Investments. The Policy calls for a diversified portfolio, carefully balanced to minimize risk and maximize the Fund’s long-term health and stability. The Fund is managed with the ultimate objective of achieving and maintaining a fully funded status. Although LACERA has not been immune to the impact of recent market volatility and the unfavorable economic climate, we continue to employ solid investment and business strategies designed to serve the best interests of our members and their beneficiaries. We remain confident about our future and soundness of the Fund.
Customer service is a cornerstone of efficient benefit disbursement and is integral to our business operation. Our all-encompassing services begin the moment a new hire becomes a LACERA member and receives a New Member Guide and continue throughout the member’s career to retirement… and beyond. After the member is gone, our service continues through benefits we provide to the member’s eligible beneficiary. The services we offer take many forms, from printed materials to workshops, to services available by phone and on lacera.com. Although technology plays an important role in the scope and format of service options we provide (and we are proud of the online service enhancements we added this year), it is the men and women who comprise our highly trained staff who make the greatest impact on customer service. From one-on-one counseling at our public counter, to regularly scheduled educational workshops, to the more than 120,000 questions personally answered each year by our Call Center, to the seamless processing of our monthly retiree payroll, our staff is dedicated to providing our members with attentive, responsive, and personalized service.
LACERA AND ITS SERVICES
On January 1, 1938, LACERA was established to provide retirement allowances and other benefits to the safety and general members employed by Los Angeles County. Subsequently, LACERA expanded its membership program to include four other outside Districts:
- Little Lake Cemetery District
- Local Agency Formation Commission
- Los Angeles County Office of Education
- South Coast Air Quality Management District
LACERA is governed by the California Constitution, the County Employees Retirement Law of 1937 (CERL), and the bylaws, procedures, and policies adopted by LACERA’s Boards of Retirement and Investments. The Los Angeles County Board of Supervisors may also adopt resolutions, as permitted by the CERL, which may affect benefits of LACERA members.
The Board of Retirement is responsible for the general management of LACERA. The Board of Investments is responsible for determining LACERA’s investment objectives, strategies, and policies. Both Boards appoint a Chief Executive Officer, to whom is delegated the responsibility of overseeing the day-to-day management of LACERA and adopting its annual administrative budget.
FINANCIAL INFORMATION
Internal Control
The financial attest audit performed by Brown Armstrong CPAs states that LACERA’s financial statements are presented in conformity with Generally Accepted Accounting Principles (GAAP) and are free of material misstatement. Maintaining appropriate internal controls and the financial statement presentation are the responsibility of management, with oversight by LACERA’s Internal Audit Services staff and LACERA’s Audit Committee, which is comprised of members of the Boards of Retirement and Investments.
Analysis
An overview of LACERA’s fiscal operations is presented in the Management’s Discussion and Analysis (MD&A) preceding the financial statements. This transmittal letter, when taken into consideration with the MD&A, provides an enhanced picture of the activities of the organization.
INVESTMENT ACTIVITIES
The Board of Investments adopted an Investment Policy Statement that provides a framework for the management of LACERA’s investments. This Statement established LACERA’s investment policies and objectives and defines the principal duties of the Board, the investment staff, investment managers, master custodian, and consultants.
A pension fund’s strategic asset allocation policy, implemented in a consistent and disciplined manner, is generally recognized to have the most impact on a fund’s investment performance. The asset allocation process determines a fund’s optimal long-term asset class mix (target allocation), which is expected to achieve a specific set of investment objectives. LACERA’s strategic asset allocation targets are long-term by design because of the Fund’s long-term investment horizon, and the illiquidity of certain asset classes such as Private Equity and Real Estate.
Returns this fiscal year were significantly impacted by extraordinary market volatility and the deepening of the international financial crisis. The total Fund returned a negative 18.3 percent (net of fees). It is pertinent to note in four of the five fiscal years prior to this year, LACERA’s Fund generated positive double digit returns. Over the five year period ending June 30, 2009, the total Fund’s annualized return was 3.6 percent (net of fees).
ACTUARIAL FUNDING STATUS
Pursuant to provisions in the CERL, LACERA engages an independent actuarial firm to perform annual actuarial valuations. A system actuarial valuation is performed every three years (triennial valuation). The economic and non-economic assumptions are updated at the time each triennial valuation is performed. Triennial valuations serve as the basis for changes in member contribution rates necessary to properly fund the system. LACERA also hires an independent actuarial firm to audit the results of each triennial valuation. A triennial valuation was conducted as of June 30, 2007.
LACERA is funded by member and employer contributions, and investment earnings on those contributions. Normal member contributions are those required to fund a specific annuity at a specified age. Member contribution rates vary according to the member’s plan and age at first membership. The CERL also requires members to pay half the contributions required to fund the cost-of-living benefit, which is affected by changes in both economic and non-economic assumptions.
Liabilities not funded through member contributions are the responsibility of the employer. Changes in any of the economic and non-economic assumptions impact employer contribution rates. The employer is responsible for contributing to cover the cost of benefits expected to be accrued in the future and half of the cost-of-living benefit. These are called normal cost contributions. The employer is also responsible for making additional contributions to eliminate any shortfalls in funding covering liabilities that have accrued in the past, which is known as the Unfunded Actuarial Accrued Liability (UAAL).
On June 4, 2002, LACERA and the County entered into a Retirement Benefits Enhancement Agreement (Agreement) that enhanced retirement benefits and implemented an interim, short-term funding policy that is in effect through the June 30, 2008 valuation. Under the Agreement, employer contribution rates are adjusted annually following completion of an actuarial valuation.
The June 30, 2008 valuation, determining the funding ratio to be 94.5 percent, recognized an Unfunded Actuarial Accrued Liability (UAAL) of $2.31 billion. The County contribution rate was therefore set equal to 1.99 percent of payroll for the amortization of the UAAL over an open 30-year period, plus the normal cost rate of 10.09 percent, for a total contribution rate of 12.08 percent of payroll.
