Notes to the Financial Statements

June 30, 2015

Note 10 State Retirement Systems

The State sponsors three major public employee retirement systems: the State Employees' Retirement System (SERS)-consisting of Tier I (contributory), Tier II (noncontributory) Tier IIA (contributory) and Tier III (contributory), the Teachers' Retirement System (TRS), and the Judicial Retirement System (JRS). The three plans in this note do not issue separate financial statements, nor are they reported as a part of other entities. The financial statements and other required information are presented in Note 12 and in the Required Supplementary Information (RSI) section of the CAFR.

The State Comptroller's Retirement Division under the direction of the Connecticut State Employees' Retirement Commission administers SERS and JRS. The sixteen members are: the State Treasurer or a designee who serves as a non-voting ex-officio member, six trustees representing employees are appointed by the bargaining agents in accordance with the provisions of applicable collective bargaining agreements, one “neutral” Chairman, two actuarial trustees and six management trustees appointed by the Governor. The Teachers' Retirement Board administers TRS. The fourteen members of the Teachers' Retirement Board include: the State Treasurer, the Secretary of the Office of Policy and Management, the Commissioner of Education or their designees, who serve as ex-officio voting members. Six members who are elected by teacher membership and five public members appointed by the Governor.

Special Funding Situation
The employer contributions for the Teachers' Retirement System (TRS) are funded by the State on behalf of the participating municipal employers. Therefore, these employers are considered to be in a special funding situation and the State is treated as a non-employer contributing entity as defined by GASB 68. As a result, the State reports a liability, deferred outflows of resources and deferred inflows of resources, and expenses. Additionally, the autonomous Component Units that benefit from the services provided by employees of the State are considered, as defined by GASB 68 as non-employer contributing entities. As such they report a liability, deferred outflows of resources and deferred inflows of resources, and expenses as a result of being statutorily required to contribute to SERS.

Plan Descriptions and Funding Policy
Membership of each plan consisted of the following at the date of the latest actuarial evaluation:

SERS TRS JRS
6/30/2014 6/30/2014 6/30/2014
Inactive Members or their
Beneficiaries receiving benefits 45,803 34,310 250
Inactive Members Entitled to but
not yet Receiving Benefits 1,457 13,011 4
Active Members 49,976 51,433 212

State Employees' Retirement System
Plan Description

SERS is a single-employer defined-benefit pension plan covering substantially all of the State full-time employees who are not eligible for another State sponsored retirement plan. Plan benefits, cost-of-living allowances, contribution requirements of plan members and the State, and other plan provisions are described in Sections 5-152 to 5-192 of the General Statutes. The plan provides retirement, disability, and death benefits, and annual cost-of-living allowances to plan members and their beneficiaries.

Funding Policy
The contribution requirements of plan members and the State are established and may be amended by the State legislature subject to the contractual rights established by collective bargaining. Tier I Plan B regular and Hazardous Duty members are required to contribute 2 percent and 4 percent of their annual salary, respectively, up to the Social Security Taxable Wage Base plus 5 percent above that level; Tier I Plan C members are required to contribute 5 percent of their annual salary; Tier II Plan Hazardous Duty members are required to contribute 4 percent of their annual salary; Tier IIA and Tier III Plans regular and Hazardous Duty members are required to contribute 2 percent and 5 percent of their annual salary, respectively. Individuals hired on or after July 1, 2011 otherwise eligible for the Alternative Retirement Plan (ARP) are eligible to become members of the Hybrid Plan in addition to their other existing choices. The Hybrid Plan has defined benefits identical to Tier II/IIA and Tier III for individuals hired on or after July 1, 2011, but requires employee contributions 3 percent higher than the contribution required from the applicable Tier II/IIA/III plan. The State is required to contribute at an actuarially determined rate. Administrative costs of the plan are funded by the State.

Teachers' Retirement System
Plan Description

TRS is a cost-sharing multiple-employer defined-benefit pension plan covering any teacher, principal, superintendent, or supervisor engaged in service of public schools in the State. Plan benefits, cost-of-living allowances, required contributions of plan members and the State, and other plan provisions are described in Sections 10-183b to 10-183ss of the General Statutes. The plan provides retirement, disability, and death benefits, and annual cost-of-living allowances to plan members and their beneficiaries.

Funding Policy
The contribution requirements of plan members and the State are established and may be amended by the State legislature. Plan members are required to contribute 6 percent of their annual salary. Administrative costs of the plan are funded by the State.

Judicial Retirement System
Plan Description
JRS is a single-employer defined-benefit pension plan covering any appointed judge or compensation commissioner in the State. Plan benefits, cost-of-living allowances, required contributions of plan members and the State, and other plan provisions are described in Sections 51-49 to 51-51 of the General Statutes. The plan provides retirement, disability, and death benefits, and annual cost-of-living allowances to plan members and their beneficiaries.

Funding Policy
The contribution requirements of plan members and the State are established and may be amended by the State legislature. Plan members are required to contribute 6 percent of their annual salary. The State is required to contribute at an actuarially determined rate. Administrative costs of the plan are funded by the State.

  SERS TRB JRS
Target Long-Term Expected Target Long-Term Expected Target Long-Term Expected
Asset Class Allocation Real Rate of Return Allocation Real Rate of Return Allocation Real Rate of Return
Large Cap U.S. Equities 21.0% 5.8% 21.0% 5.8% 16.0% 5.8%
Developed Non-U.S. Equities 18.0% 6.6% 18.0% 6.6% 14.0% 6.6%
Emerging Markets (Non-U.S.) 9.0% 8.3% 9.0% 8.3% 7.0% 8.3%
Real Estate 7.0% 5.1% 7.0% 5.1% 7.0% 5.1%
Private Equity 11.0% 7.6% 11.0% 7.6% 10.0% 7.6%
Alternative Investment 8.0% 4.1% 8.0% 4.1% 8.0% 4.1%
Fixed Income (Core) 8.0% 1.3% 7.0% 1.3% 8.0% 1.3%
High Yield Bonds 5.0% 3.9% 5.0% 3.9% 14.0% 3.9%
Emerging Market Bond 4.0% 3.7% 5.0% 3.7% 8.0% 3.7%
Inflation Linked Bonds 5.0% 1.0% 3.0% 1.0% 5.0% 1.0%
Cash 4.0% 0.4% 6.0% 0.4% 3.0% 0.4%


Investments
The State Treasurer employs several outside consulting firms as external money and investment managers, to assist the Chief Investment Officer, as they manage the investment programs of the pension plans. Plan assets are managed primarily through asset allocation decisions with the main objective being to maximize investment returns over the long term at an acceptable level of risk. There is no concentration of investments in any one organization that represents 5.0 percent or more of plan net position available for benefits. The following is the asset allocation policy as of June 30, 2014.

The long-term expected rate of return on pension plan investments was determined using a log-normal distribution analysis in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation.

Rate of Return: For the year ended June 30, 2014, the annual money-weighted rate of return on pension plan investments, net of pension plan expense was 15.6, 15.7, and 13.7 percent for SERS, TRS, and JRS, respectively. The money-weighted rate of return expresses investment performance, net of investment expense, adjusted for the changing amounts actually invested.

Net Pension Liability
The components of the net pension liability at June 30, 2014 were as follows (amounts in millions):

SERS TRS JRS
Total Pension Liability $ 26,487 $ 26,349 $ 352
Fiduciary Net Position 10,473 16,208 188
Net Pension Liability $ 16,014 $ 10,141 $ 164
Ratio of Fiduciary Net Position
to Total Pension Liability 39.54% 61.51% 53.38%

Deferred Retirement Option Program (DROP)
Section 10-183v of the General Statute authorizes that a TRS member teacher receiving retirement benefits from the system may be reemployed for up to one full school year by a local board of education, the State Board of Education or by a constituent unit of the state system of higher education in a position (1) designated by the Commissioner of Education as a subject shortage area, or (2) at a school located in a school district identified as a priority school district. Such reemployment may be extended for an additional school year, by written request for approval to the Teachers' Retirement Board.

As of June 30, 2015 the balance held for the DROP was not available from the Teachers' Retirement Board.

Discount Rate
The discount rate used to measure the total pension liability was 8.0, 8.5, and 8.0 percent for SERS, TRS, and JRS respectively. The projection of cash flows used to determine the SERS, TRS, and JRS discount rate assumed employee contributions will be made at the current contribution rate and that contributions from the State will be made at actuarially determined rates in future years. Based on those assumptions, SERS, TRS, and JRS pension plans' fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability.

Sensitivity of the net pension liability to changes in the discount rate
The following presents the net pension liability of the State, calculated using the discount rates of 8.0, 8.5 and 8.0 percent for SERS, TRS, and JRS, as well as what the State's net pension liabilities would be if it were calculated using a discount rate that is 1-percentage-point lower or 1-percentage-point higher than the current rate (amounts in millions):

  1% Current 1%
Decrease in Discount Increase in
Rate Rate Rate
SERS Net Pension Liability $ 19,103 $ 16,014 $ 13,416
TRS Net Pension Liability $ 12,942 $ 10,141 $ 7,761
JRS Net Pension Liability $ 199 $ 164 $ 134

GASB Statement 68 Employer Reporting
Employer Contributions

The following table presents the primary government's and component units'contributions recognized by the pension plans at the measurement date June 30, 2014 (amounts in thousands):

SERS TRS JRS Total
Primary Government $ 1,257,085 $ 948,540 $ 16,298 $ 2,221,923
Component Units 11,805 - - 11,805
Total Employer Contributions $ 1,268,890 $ 948,540 $ 16,298 $ 2,233,728

Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions
As of the reporting date June 30, 2015, the primary government and component units reported net pension liabilities for the following plans administered by the State as follows (amounts in thousands):

Primary Component
Government Units
Proportionate Share of the Net Pension Liability
State Employees' Retirement System $ 15,865,384 $ 148,982
Net Pension Liability
Teachers' Retirement System 10,141,454 -
Judicial Retirement System 163,993 -
Total Net Pension Liability $ 26,170,831 $ 148,982

The primary government's and component units' proportions of the collective net pension liability for the State Employees' Retirement System as of the measurement date June 30, 2014 as follows (amounts in thousands):

Primary Component
Government Units
State Employees' Retirement System
Proportion-June 30, 2014 99.07% 0.93%

For the reporting year ended June 30, 2015, the primary government and component units' recognized pension expense for the following pension plans administered by the State as follows (amounts in thousands):

Primary Component
Government Units
Pension Expense
State Employees' Retirement System $ 1,258,138 $ 11,815
Teachers' Retirement System 775,485 -
Judicial Retirement System 9,043 -
Total $ 2,042,666 $ 11,815

Deferred Outflows and Inflows of Resources
As of the reporting date June 30, 2015, the State reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources:

  Primary Government Component Units
Deferred Deferred Deferred Deferred
Outflows of Inflows of Outflows of Inflows of
Resources Resources Resources Resources
State Employees' Retirement System
Net Difference Between Projected and
Actual Investment Earnings on
Pension Plan Investments $ - $ 566,620 $ - $ 5,322
Employer Contributions Subsequent to
Measurement Date 1,358,986 - 12,663 -
Total $ 1,358,986 $ 566,620 $ 12,663 $ 5,322
Teachers' Retirement System
Net Difference Between Projected and
Actual Investment Earnings on
Pension Plan Investments $ - $ 856,674
Employer Contributions Subsequent to
Measurement Date 984,110 -
Total $ 984,110 $ 856,674
Judicial Retirement System
Net Difference Between Projected and
Actual Investment Earnings on
Pension Plan Investments $ - $ -
Employer Contributions Subsequent to
Measurement Date 17,731 -
Total $ 17,731 $ -

The amount reported as deferred outflows of resources related to pensions resulting from the State contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability reported in the following fiscal year. The amount reported as deferred inflows of resources related to pensions will be recognized as pension expense as follows (amounts in thousands):

State Employees' Retirement System
Primary Component
Year Ending June 30 Government Units
2016 $ 141,655 $ 1,330
2017 141,655 1,330
2018 141,655 1,330
2019 141,657 1,330
$ 566,622 $ 5,320
Teachers' Retirement System
Primary
Year Ending June 30 Government
2016 $ 214,169
2017 214,169
2018 214,169
2019 214,167
$ 856,674

Actuarial Assumptions
The total pension liability was determined by an actuarial valuation as of June 30, 2014, using the following actuarial assumptions, applied to all periods included in the measurement:

SERS TRS JRS
Valuation Date 6/30/14 6/30/14 6/30/14
Inflation 2.75% 3.0% 2.75%
Salary Increases 4.00%-20.00% 3.75%-7.00% 4.75%
Investment Rate of Return 8.00% 8.5% 8.00%

The actuarial assumptions used in the June 30, 2014 SERS and JRS reported mortality rates based on the RP-2000 Mortality Table projected with the scale AA using 15 years for males and 25 years for females, set back 2 and 1 years respectively, for periods after service retirement and 55% (men) and 80% (women) for periods after disability retirement thus providing approximately a 13% margin in the assumed rates.

The actuarial assumptions used in the June 30, 2014 TRS actuarial report were based on RP-2000 Combined Mortality Table RP-2000 projected 19 years using scale AA, using a two year setback for males and females for the period after retirement and for dependent beneficiaries.

Changes in Net Pension Liability
The following schedule presents changes in the State' s pension liability and fiduciary net position for each plan for the measurement date June 30, 2014 (amounts in thousands):

Total Pension Liability SERS TRS JRS
Service Cost $ 287,473 $ 347,198 $ 7,539
Interest 1,998,736 2,105,069 26,301
Benefit payments (1,566,964) (1,737,144) (21,668)
Net change in total pension liability 719,245 715,123 12,172
Total pension liability - beginning (a) 25,767,688 25,634,086 339,601
Total pension liability - ending (c) $ 26,486,933 $ 26,349,209 $ 351,773
Plan fiduciary net position
Contributions - employer $ 1,268,890 $ 948,540 $ 16,298
Contributions - member 144,807 261,213 1,641
Net investment income 1,443,391 2,277,550 23,156
Benefit payments (1,566,964) (1,737,144) (21,668)
Other - (5,307) -
Net change in plan fiduciary net position 1,290,124 1,744,852 19,427
Plan net position - beginning (b) 9,182,443 14,462,903 168,353
Plan net position - ending (d) $ 10,472,567 $ 16,207,755 $ 187,780
Net pension liability - beginning (a)-(b) $ 16,585,245 $ 11,171,183 $ 171,248
Net pension liability - ending (c)-(d) $ 16,014,366 $ 10,141,454 $ 163,993

Defined Contribution Plan
The State also sponsors the Connecticut Alternate Retirement Program (CARP), a defined contribution plan. CARP is administered by the State Comptroller' s Retirement Office under the direction of the Connecticut State Employees' Retirement Division. Plan provisions, including contribution requirements of plan members and the State, are described in Section 5-156 of the General Statutes.

Unclassified employees at any of the units of the Connecticut State System of Higher Education are eligible to participate in the plan. Plan members are required to contribute 5 percent of their annual salaries. The State is required to contribute 8 percent of covered salary. During the year, plan members and the State contributed $35.4 million and $.9 million, respectively.