In Memoriam: Frank P. Casula...In Memoriam: Frank P. Casula March 28, 1920 to October 21, 2001...

In Memoriam:

Frank P. CasulaMarch 28, 1920 to October 21, 2001

MEMBER, BOARD OF TRUSTEES OF THE STATE RETIREMENTAND PENSION SYSTEM OF MARYLAND

1986 - 2001

CHAIRMAN OF THE REAL ESTATE SUBCOMMITTEEMEMBER OF THE INVESTMENT COMMITTEE

During his distinguished 30-year career in Public Office, Mr. Casula dedicated his life to the service of the citizens ofMaryland. From 1986 until his untimely death, Mr. Casula was astrong advocate for the rights and benefits of the participants of the State Retirement and Pension System. His absence will be felt greatly by the Board, the staff of the State Retirement

Agency, and the membership of the System.

STATE RETIREMENT AND PENSION SYSTEM OF MARYLAND

COMPREHENSIVE ANNUALFINANCIAL REPORT

A Pension Trust Fund of the State of Maryland

For the Year Ended June 30, 2001

prepared by:State Retirement Agency of Maryland

301 W. Preston StreetBaltimore, Maryland 21201

We gratefully acknowledge the State Archives of the State of Maryland for their permission in reprinting the Great Seal of Maryland.

State Retirement and Pension System of Maryland2

Introduction

Introductory Section:

Letter of Transmittal ........................................................................................................................ 4Message from the Chairman of the Board ................................................................................. 7Board of Trustees ............................................................................................................................. 8Public Advisors to the Investment Committee .......................................................................... 9Organizational Chart ..................................................................................................................... 10Consulting, Professional and Investment Management Services ....................................... 11Certificate of Achievement ........................................................................................................... 12Mission Statement .......................................................................................................................... 13

Financial Section:

Independent Auditor’s Report .................................................................................................... 16Financial Statements:

Statements of Plan Net Assets .............................................................................................. 17Statements of Changes in Plan Net Assets ........................................................................ 18Notes to the Financial Statements ...................................................................................... 19

Required Supplementary Information:Schedule of Funding Progress ............................................................................................. 26Schedule of Contributions from Employers

and Other Contributing Entity ...................................................................................... 26Notes to the Required Supplementary Information ....................................................... 27

Other Supplementary Information: Schedule of Fund Balances ................................................................................................... 28Schedule of Administrative Expenses ................................................................................. 29Schedule of Investment Expenses ....................................................................................... 30Transfer Refund Rate .............................................................................................................. 31Schedule of Plan Net Assets by System ............................................................................. 32Schedule of Changes in Plan Net Assets by System ....................................................... 34

Investment Section:

Chief Investment Officer’s Report .............................................................................................. 38Investment Portfolios by Manager ............................................................................................. 40Investment Portfolio Summary ................................................................................................... 40Investment Portfolio Allocation .................................................................................................. 41Fixed Income Distribution by Type .......................................................................................... 41Equity Distribution by Strategy .................................................................................................. 42Real Estate Distribution by Strategy ....................................................................................... 42Comparative Investment Returns:

Large Capitalization Equity ................................................................................................. 43Small Capitalization Equity ................................................................................................... 43International/Global/Emerging Equity ............................................................................. 44Fixed Income ............................................................................................................................. 44

Ten-Year History of Time-Weighted Annual Returns ............................................................ 45Ten-Year Growth of Investment Portfolio ................................................................................. 45Largest 25 Holdings ...................................................................................................................... 46Commissions to Brokers ............................................................................................................... 47

Comprehensive Annual Financial Report 2001 3

Introduction

Actuarial Section:

Independent Actuary’s Certification Letter ............................................................................. 50Board Summary .............................................................................................................................. 51Actuarial Methods and Assumptions ......................................................................................... 54Accounting Statement Information ........................................................................................... 55Summary of Unfunded Actuarial Liabilities/Solvency Test ................................................ 56Summary of Retirees and Beneficiaries Added to and Removed from Rolls .................. 56Statement of Changes in Total Actuarial Present Value of All Accrued Benefits ......... 57Summaries of Principal Results ................................................................................................. 58Schedule of Active Member Valuation Data by Plan ............................................................ 65

Statistical Section:

Schedule of Retired Members by Type of Retirement and Option Selected ................... 70Schedule of Benefit Expense by Type ...................................................................................... 70Summary of Membership Data by Plan ................................................................................... 72Ten-Year History of Membership by Plan ................................................................................. 74Total System Membership ............................................................................................................ 74Membership in Teachers’ Plans .................................................................................................. 74Membership in Employees’ Plans ............................................................................................... 74Ten-Year History of Retirees and Beneficiaries by Plan ....................................................... 75Total System Retirees and Beneficiaries .................................................................................. 75Ten-Year History of Changes in Fund Balance ...................................................................... 76Ten-Year History of Employer Contribution Rates by Plan ................................................. 76Ten-Year History of Revenues by Source and Expenses by Type ...................................... 77Contributions Required and Made ............................................................................................. 78Ten-Year History of Funding Progress ...................................................................................... 79Ten-Year History of Revenues vs. Expenses ............................................................................ 79Governmental Units Participating in the

Employees’ Retirement and Pension Systems ................................................................... 80Withdrawn Governmental Units ..................................................................................................80

Plan Summary Section:

Teachers’ Retirement System ...................................................................................................... 82Teachers’ Pension System ............................................................................................................ 84Employees’ Retirement System ................................................................................................... 86Employees’ Pension System ........................................................................................................ 88Judges’ Retirement System .......................................................................................................... 90State Police Retirement System .............................................................................................. 91Law Enforcement Officers’ Pension System ............................................................................ 93Local Fire and Police System ...................................................................................................... 95


Introduction

301 EAST BALTIMORE STREETBALTIMORE, MARYLAND 21202

TELEPHONE: 410-625-55551-800-492-5909

PETER VAUGHNEXECUTIVE DIRECTOR

SECRETARY TO THE BOARD

BOARD OF TRUSTEES

RICHARD N. DIXONCHAIRMAN

William Donald SchaeferVice Chairman

Dr. Ali A. AlemiWilliam D. BrownArthur N. Caple, Jr.T. Eloise FosterDr. Nancy S. GrasmickG. Bruce HarrisonDebra B. HumphriesMajor Morris L. KromeCarl D. LancasterCol. David B. MitchellDavid A. RakesGeorge R. Tydings

STATE RETIREMENT AND PENSION SYSTEM OF MARYLANDSTATE RETIREMENT AGENCY

December 15, 2001

Letter of Transmittal

Honorable Chairman & Members of the Board of Trustees:

We are pleased to submit the Comprehensive AnnualFinancial Report for the State Retirement and

Pension System of Maryland (the "System") for the fiscalyear ended June 30, 2001. We believe this report fairlyreflects the results achieved during 2001.

The System is charged with the fiduciary responsibility forproperly administering the retirement and pensionallowances and other benefits, while striving to keepemployer contribution rates as affordable as possible whilemaximizing investment returns and minimizing the risksinherent in any investment program. Members covered bythe plans include State employees, teachers, law enforce-ment officers, legislators, judges, as well as local govern-ment employees and fire fighters whose employers haveelected to participate in the System.

Seventy-four years ago, the first statewide retirement planin Maryland (the Teachers’ Retirement System) was estab-lished. Fourteen years later, in 1941, the Employees’Retirement System was established. Together these twoplans comprise the majority of the System’s membership.The System now provides monthly allowances to 84,000retirees and beneficiaries, and is an essential element ofthe future financial security for over 184,600 active participating members. Descriptions of the membershiprequirements of, and benefits provided by, each planadministered by the System are included in the PlanSummary Section starting on page 81.

This Comprehensive Annual Financial Report contains sixsections. The Introductory Section includes this letter oftransmittal, along with information about the administra-

tive structure of the System. The Financial, Actuarial andInvestment Sections provide a comprehensive review ofthe System’s financial position, the results of its opera-tions and its funded status. Viewed separately, each ofthese three sections provides information about a differentaspect of the System’s long-standing record of stewardshipand financial stability. In this regard, the FinancialSection contains the report from the System’s independ-ent auditor, the combined financial statements and supple-mentary financial data. The Actuarial Section containsthe independent actuary’s certification, as well as theresults of the System’s annual actuarial valuation. TheInvestment Section includes a report from the System’sChief Investment Officer highlighting the past year’s per-formance in addition to various summary level portfoliocomposition and performance data. The Plan Summaryand Statistical Sections provide detailed descriptions ofthe various plans’ provisions and the demographic compo-sition of the membership segments affected by each plan.

Economic Environment

For the first time in many years, the slowing economicenvironment during fiscal year 2001 presented a signifi-cant challenge to public pension funds. The ensuing mar-ket corrections resulted in reduced investment earningsand a decrease in the System’s overall funded status.However, despite this temporary downturn, the Systemremains financially strong and very near its goal of beingfully funded.


Investment Strategies

Under the experienced direction of its Board of Trustees,the System plans to continue following its steady coursetoward maximizing investment returns while minimizingits exposure to risk. In the months ahead, the System willcontinue to deploy assets at home as well as throughoutthe expanding global markets in an effort to maintain anappropriate portfolio balance.

Major Issues and Initiatives

In May 1998, the System signed a contract for the devel-opment and implementation of a fully integrated, state-of-the-art data processing and document management sys-tem. During fiscal year 2001, the system developmentproject progressed into the integration and system testingphases. With implementation and system integrationexpected to be completed by the end of fiscal year 2003,the System should be well positioned to enter the 21stcentury as an industry leader.

During 2001, the System adopted a new actuarial fundingmethodology to help reduce the potential for contributionrate volatility as the System continues to mature. In thisregard, Senate Bill 222 was signed into law by theGovernor to modify certain actuarial assumptions used inthe annual actuarial valuation of the System’s liabilitiesand funded status. Specifically, the legislation required theSystem to continue to amortize the liabilities existing as ofJune 30, 2001 over the remaining 19-year period to June30, 2020. However, all liabilities accrued after June 30,2001 will be amortized over a layered 25-year period com-mencing in the year in which they arise. Additionally, theSystem’s Board of Trustees adopted a new actuarial assetvaluation method that increases the asset "smoothing"period from 3 to 5 years.

Financial Information

Because System management is responsible for the infor-mation contained in this report, we have committed theresources necessary to maintain an internal control struc-ture which provides reasonable assurance that assets areadequately safeguarded and that the financial records areconsistently and accurately maintained. Accordingly, weare confident that the financial statements, supportingschedules and statistical tables included in this report fair-ly present the System’s financial condition and the resultsof its operations in all material respects.

Accounting System and Reports

The System reports its transactions on the accrual basis ofaccounting, under which revenues are reported in theaccounting period in which they are earned and becomemeasurable and expenses are reported when the relatedliability is incurred. Investments are reported at fair valueat fiscal year end. Investment purchases and sales arereported in the accounting period in which the relatedtrade dates occur.

Revenues

The reserves necessary to finance retirement allowancesand other benefits are accumulated through investmentearnings and the collection of employer and member contributions. During fiscal year 2001, investment earnings were a negative $3.1 billion, while revenues from employer and member contributions were $625 million and $190 million, respectively. For fiscal year2001, member contribution rates remained unchanged,while employer rates increased slightly.

Expenses

The System’s expenses consist of monthly retirementallowances, refunds of contributions to terminated andtransferring members and withdrawing employers, and theadministrative cost of System operations. As expected,payments to retirees, beneficiaries and transferring orwithdrawing members and employers continued to be theSystem’s primary disbursements during 2001, totaling$1,290 million. Of this amount, the System disbursed$1,273 million as retirement allowances to members andbeneficiaries. The remaining $17 million was paid to mem-bers and withdrawing employers as a result of employmentterminations, system transfers or withdrawal.

Administrative and investment expenses are entirely fund-ed through investment income. Of the $227 million dis-bursed during fiscal year 2000 to manage the investmentportfolio and to administer the System, $202 million waspaid for investment management, portfolio custody andsecurities lending services while only $25 million wasused to fund the System’s administrative operations.

Introduction


Funding and Reserves

Funds, derived from the excess of revenues over expenses,are accumulated by the System in order to meet benefitobligations to both current and future retirees and benefi-ciaries. The Annotated Code of Maryland requires partici-pating employers to make periodic contributions which, asa level percentage of payroll, will fund the employers’"normal costs" over the members’ average active serviceperiod, and the System’s accrued unfunded liability in sep-arate annual layers. Specifically, the unfunded actuarialliability which existed at June 30, 2001 will continue to beamortized over the remaining 19-year period to June 30,2020, whereas each subsequent annual liability layer willbe amortized over a 25-year period. Each year the Boardof Trustees certifies the required employer contributionrates based on the actuary’s annual valuation and recom-mendations.

At June 30, 2001, the System’s actuarial accrued liabilitywas $32.5 billion. With the actuarial value of assets accu-mulated to pay the liability at $31.9 billion, the Systemnow stands at 98.3 percent funded.

Investments

The entire $3.1 billion unrealized investment loss for fiscalyear 2001, was attributable to temporary market valuedeclines stemming from a slowing economy. Partially offsetting the effects of such market declines was approxi-mately $822 million representing interest, dividends, securities lending net income and real estate operating netincome.

Professional Services

The System contracts for the services of various independ-ent consulting, investment advisory and financial profes-sionals to assist the Board in carrying out its fiduciaryresponsibility to efficiently and effectively manage theSystem. For example, actuarial services were provided byMilliman USA and independent financial statement auditservices were provided by the State of Maryland’s Office ofLegislative Audits. The System’s asset custody and portfo-lio accounting services are provided by the State StreetBank & Trust Company under a multi-year, master cus-tody arrangement. A complete listing of the System’s pro-fessional consultants and external investment advisors ispresented on page 11.

Certificate of Achievementfor Excellence in Financial Reporting

The Government Finance Officers Association of theUnited States and Canada (GFOA) awarded a Certificate ofAchievement for Excellence in Financial Reporting to theState Retirement and Pension System of Maryland for itscomprehensive annual financial report for the fiscal yearended June 30, 2000. This was the twelfth consecutiveyear (1989 through 2000) the State Retirement andPension System of Maryland has achieved this prestigiousaward. In order to be awarded a Certificate ofAchievement, a governmental unit must publish an easilyreadable and efficiently organized comprehensive annualfinancial report. This report must satisfy both generallyaccepted accounting principles and applicable legalrequirements.

A Certificate of Achievement is valid for a period of oneyear only. We believe our current comprehensive annualfinancial report continues to meet the Certificate ofAchievement Program’s requirements, and we are submit-ting it to the GFOA to determine its eligibility for anothercertificate.

Acknowledgments

This annual report reflects the dedicated efforts of theSystem’s staff under the steady direction of the Board ofTrustees. We extend our sincere gratitude to each mem-ber of the Board of Trustees, the Agency’s staff, theBoard’s advisors and the many people who worked sohard to make fiscal year 2001 a success.

Peter Vaughn Ricky L. Harrison, CPAExecutive Director & Chief Financial OfficerSecretary to the Board

Introduction


Introduction

Dear Members and Beneficiaries:

On behalf of the Board of Trustees, I am pleased to presentthe Comprehensive Annual Financial Report on the opera-

tions of the State Retirement and Pension System of Marylandfor the fiscal year ended June 30, 2001. It was prepared andsubmitted by the management of the Retirement Agency andaccepted by the Board of Trustees on December 18, 2001. Thereport is divided into several sections, providing an in-depthreview of the financial, actuarial, investment and administrativefunctions of the System we manage for your exclusive benefit.

After more than a decade of extraordinary portfolio returns, fiscal year 2001 was a negative year fornearly all types and styles of equity investments and your fund. As a result, the portfolio gave back someof the large gains we achieved in prior years. This year was only the second time in the last 17 yearsthat the System did not meet or exceed its’ assumed rate of return.

It is important to note that we were not the only one affected by this poor investment climate. All pension funds, both public and private, defined benefit as well as defined contribution plans were similarly affected.

Despite this downturn, we remain very strong financially with $29.5 billion in assets with a funding ratioof 98.3% at year end.

As prudent long term investors, we continue to believe that equity returns will outpace all other types ofasset classes over the long term. History has demonstrated this fact time and time again. We will con-tinue to prudently diversify the portfolio to accumulate the assets necessary to pay retirement benefits.

Sincerely,

Richard N. DixonState TreasurerChairman of the Board


Introduction

T. Eloise FosterEx Officio since June 1, 2000

Member, Investment CommitteeMember, Executive Committee

Dr. Nancy S. GrasmickEx Officio since September 16, 1991

Member, Executive Committee

Dr. Ali A. AlemiAugust 1, 1999 – July 31, 2003Member, Executive Committee

Member, Audit Committee

William D. BrownAugust 1, 2001 – July 31, 2005Chairman, Executive Committee

Chairman, Audit Committee

Arthur N. Caple, Jr.August 1, 2001 – July 31, 2005

Chairman, Investment Committee

Richard N. Dixon, ChairmanState Treasurer

Ex Officio since February 1, 1996Member, Investment CommitteeMember, Executive Committee

William Donald Schaefer, Vice ChairmanState Comptroller

Ex Officio since January 25, 1999Member, Investment Committee

Member, Real Estate Subcommittee

Board of Trustees


Introduction

Robert W. Schaefer Wayne H. Shaner Robert H. Patzwall, Jr.

Carl D. LancasterAugust 1, 1987 – July 31, 2003

Vice Chairman, Investment CommitteeMember, Real Estate Subcommittee

Col. David B. MitchellEx Officio since January 18, 1995

Member, Executive Committee

George R. TydingsMay 31, 1994 – June 30, 2003

Member, Investment Committee

G. Bruce HarrisonAugust 1, 2001 – July 31, 2005Member, Investment Committee

Member, Audit Committee

Debra B. HumphriesAugust 1, 2001 – July 31, 2005Member, Investment Committee

Major Morris L. KromeAugust 1, 1998 – July 31, 2002

Vice Chairman, Executive Committee

Board of Trustees

Public Advisors to the Investment Committee


Introduction

Organizational Chart(October 2001)

Board of TrusteesRichard N. Dixon

Chairman

State RetirementAgency

Peter VaughnExecutive Director

IndependentActuary

Milliman USA

ProfessionalInvestmentManagers

Legal DepartmentDeborah BacharachGeneral Counsel

Medical BoardAdministrative

Law Judges

Internal Audit DivisionThomas I. Gigliotti

Chief Internal Affair

Legislation & ResearchJ. Howard Pleines

Director Legislation

Human ResourcesDavid C. Jordan

Director

InvestmentsCarol Boykin, CFA

Chief Investment Officer

Fixed IncomeTracey Ray, CFA

Deputy Chief Invest. Officer

EquitiesArthur M. Lynch, Jr., CFA

Deputy Chief Invest. Officer

External ManagedEquities

John F. Greenberg, CFADirector

Alternative InvestmentsLawrence J. Bach

Director

Risk ManagementVictoria Willard, CFA

Director

AdministrationMargaret A. Bury

Retirement Administrator

AdministrationVacant

Deputy RetirementAdministrator

Office ServicesJackie Cole

Director

Member RelationsRich Gawrych

Director

Benefits ProcessingJ. Barry Schaub

Director

Data ControlHarvey Raltzyk, CPA

Director

FinanceRicky L. Harrison, CPAChief Financial Officer

Information SystemsGary Scribner

Information Systems Officer

Financial Accounting Operations

Arthur D. Broadwick, CPADeputy Chief Financial Officer

Systems DevelopmentBrian Wayson

Director

General AccountingMelody Countess, CPA

Director

Technical ServicesCalvin Kiser

Director

Investment AccountingPatricia Wild

Director

Program Cost & AnalysisJeanette T. Abramson

Director


Introduction

Equity Investment Managers

Abbott Capital Management, LLC Dimensional Fund Advisors, Inc. Progress Investment Management CompanyBoston, Massachusetts Santa Monica, California San Francisco, California

Advent Capital Management The Edgar Lomax Company Relational Investors, LLCNew York, New York Springfield, Virginia San Diego, California

Bank of Ireland Asset Management Limited GEM Capital Management, Inc. Robert W. Torray & Co., Inc.Dublin, Ireland New York, New York Bethesda, Maryland

Adams Street Partners, LLC Greenway Partners, L.P. State Street Global AdvisorsChicago, Illinois New York, New York Boston, Massachusetts

Brown Capital Management, Inc. Harbor International Fund T. Rowe Price Associates, Inc.Baltimore, Maryland Toledo, Ohio Baltimore, Maryland

Brown Investment Advisory & Harbour Vest Partners, LLC Templeton Investment Counsel, Inc.Trust Company Boston, Massachusetts Fort Lauderdale, FloridaBaltimore, Maryland

J. & W. Seligman & Co., Inc. Trust Company of the WestCapital Guardian Trust Company New York, New York Los Angeles, CaliforniaWashington, D.C.

Legg Mason Capital Management, Inc. Zurich Scudder InvestmentsChapman Capital Management, Inc. Baltimore, Maryland New York, New YorkBaltimore, Maryland

Maryland Venture Capital TrustCredit Suisse Asset Management, LLC Baltimore, MarylandNew York, New York

Consulting, Professional and Investment Management Services

Independent Actuary Global Custodial Bank Asset & Income Verification Services

Milliman USA State Street Bank and Trust Company Financial Control Systems, Inc.Baltimore, Maryland Boston, Massachusetts Chadds Ford, Pennsylvania

Independent Auditor Security Lending Real Estate Investment Managers

Office of Legislative Audits State Street Bank and Trust Company AEW Captial Management, L.P.Baltimore, Maryland Boston, Massachusetts Boston, Massachusetts

Hearing Officers Fixed Income Investment Managers J.P. Morgan Investment Management, Inc.New York, New York

Office of Administrative Hearings Fountain Capital Management, LLCBaltimore, Maryland Overland Park, Kansas LaSalle Investment Management, Inc.

Baltimore, MarylandMedical Board Lazard Asset Management

New York, New York LaSalle Investment ManagementJohn J. Fahey, M.D. Securities, L.P.Norman Freeman, Jr., M.D. Morgan Stanley Dean Witter Baltimore, MarylandArthur Hildreth, M.D. Investment ManagementBruce Z. Kohrn, M.D. West Conshohocken, Pennsylvania Lubert-Adler Management, Inc.William B. Russell, M.D. Philadelphia, PennsylvaniaClaudia Thomas, M.D. Pacific Investment Management CompanyAlfred Wiedman, M.D. Newport Beach, California Sentinel Real Estate Corporation

New York, New YorkOperational Banking Services Standish, Ayer & Wood, Inc.

Boston, Massachusetts TimesSquare Real Estate InvestorsAllfirst Financial, Inc. Hartford, ConnecticutBaltimore, Maryland W.R. Huff Asset Management Co., LLC

Morristown, New JerseyThe Harbor Bank of MarylandBaltimore, Maryland


Introduction


Introduction

Mission Statement

The Board of Trustees of the State Retirement and Pension System ofMaryland (System) is charged with the fiduciary responsibility for

administering the survivor, disability and retirement benefits of theSystem’s participants, and to ensure that sufficient assets are available tofund the benefits when due. To accomplish this mission the System hasestablished the following key goals:

• To prudently invest System assets in a well diversified manner to optimize long-term returns, while controlling risk through excellence inexecution of the investment objectives and strategies of the System.

• To effectively communicate with all retirement plan participants toinform them about the benefits provided by the System, and to educatethem about planning and preparing for all aspects of their future retirement.

• To accurately and timely pay retirement allowances provided by State pension law to the System’s retirees and their beneficiaries.

• To implement an automated, comprehensive and integrated pension administration and electronic document management system.

• To efficiently collect the required employer and member contributions necessary to fund the System.


Introduction

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In Memoriam: Frank P. Casula...In Memoriam: Frank P. Casula March 28, 1920 to October 21, 2001...

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