H W

ANNUAL FINANCIAL REPORT

State Employes 'Retirement System
COMMONWEALTH of PENNSYLVANIA
Including the Report ofhiependent Accountants on Financial Statements
for the years ended December 31, 1995 and 1994
 COMHONWEALTHOF PENNSYEV+IA
s m EMPrnYtES' RETIREMENTBOARD
M NORTH TH fRD 8TRWT
k0.ECr%1143
HARRISBURG. PWSYLVANIA 171W-1147
PHONE HARRISBURO: (7 17) 78FS759
NICHOLAS J. MAlALE
CHAlRMAN

HonmbIe Tom Ridge, Governor

comm0nwea)th of Pmsyhtania

M e m h , Penasytvaaia Gemad Amembty

MembersI PenqIvania Sfate Braployes' Ratirement System

Dear Govermw Ridge, Legislators aad Members:

The Board of Trusteesof the Pennsyfvmia State Emjtloyes' Retirement SysteRn (SERS) is pleased to preuent
our AnnuaJh'nan~ialRqmton the SBRS Fund for oalendsr year 1995.

As chahnan of fho SERS Board, 1 am especially pleased to note that the Fund had a 25.3% totdl investment
rate of retum in I995 and e total mwketvaIue of$16.2 billion as of Dwember 31,1995. By romparkan, the
h d ' s annudid invastmetlt mte of return for fha past five years was 13.0.?, and tbe arm- investment
rateofreturnforthepast 10yearswas 11.4%.

These substantial re- h e &led SERS to main- fully-funded status since 1992. They also vdkhte
the Board's adherence to two key principles.

prudent managemmt of fund assets, and

ensuringpayment of h e f l pmmisad by the Commonwealth to SIBS m t k and
~ beaeficiacies,

Rest assured that the SEW Bard, M a a d 1will cmthue tci purwe prudent inve~tmentstrategim to assure
the solvency ofthe Fund and the qualiv o f gen9Eon-mhted wwiw te dl SERS membem.
 -- 199sAnnual Financial Report
I
Table of Contents

Board of Trustees
Admhi&&w Sappe$ Inv-ent consul^, General Service PWY&ZS
Mission Statement; Imwbmnt Policy
Investmem ObJectka

lhvestmeht Highlights
Investment Pro- Sutmmy
S m w0fASsetCh

Section 2: Pemsylvamia bvwtmenb

Seetion 3: Investment as16 Pmgmm Trends

Investment-Related Statistics: I980 through 19%
In's'estmmtPetformauce by AaHtt Glasses
Prudent Person; Projected Asset AlIocation: 1996 through 1999
Commissions Paid by SERS Domestic Separate Accormt Stock Advhn
Commissions Faid by SEW Menwtional Separate Aceormt Stock Advisors
Commissions Paid: 1995-1994 Comparison
Deferred Compensation Program
Member Demographics
Actuary's Opinion
Contribution Rates
Funded Status

S d o n 4: Repert ofhdepeedeatAccountants
Accountants' Letter and Repori
k Board (11 Trustees
Honorable Nicholas J. migle
Chairman

Honorable Antbay B. Andrezclrld Ckarles J. Lkbmb ($01996)

State Senator RetiredlMedw ancl
Civil Service Cmmissimr

Honorable Ghmn E.Andmmg

State SeMfor

Honornble Robert A Bihbender K; PanlMuenEh

Staie Secretmy of the Budget to Governor Ridge Budgetrnryst
Home M&Wity &poprMW
Committee I
I k m I 8 ' I 'I' I I I

Edward d. KeBer
&e&e Director, RFSCildE

Hentmble Cathahe Bakw Knoll

State Treasurer
 John Braslas
Executive Director

Dale & Emhart Peter M. Gilbert

Assist& l.m#w &repfor Chief Iwemnent oflscer

Fraacie J. Denlevy Joseph A Bmccia

Director of Ftnumtal A d m w g ~ t ErleaC. Basher u I

David J. Kalman
BaroIdEDMbar Karen N. Nicely
ww DfPne,:W~lel

Eea* s. Y d a 8 -
Information O@ar

Investment Consultants
- -
RogersCasey & Associates The Townsend Group
General Consultant Real Estate Consultant

Cambridge Associatea Hamilton Lane

Venture Capital and Alternative Inveshnents
Consultant 'I
8 -

General Service Providers

Hay/HoggEns Company, Inc. State Street Bank
Actuary Agent Bank and
Trust Accounting Services
 Missinn Statement
I. PLPa AdmhWratbn: To administer the mtimmt trenefita plan for state employes ami
in acconiance with Peansylvania Mtutes;

r provide effective services to all active and Fetired membws,

11. Member f k ~ f e s To

III.Mmagaemt elRt&IrementFnnd bwts To accumulate, mamge and &BWB tker&ement Fund

assets in lrccardance with fiduc'ky stan* and at a reasonable wst to Commonwealth taxpayers;
. . investment returns while exercisinga pNdetEt pg]~onhwent
N.Imtmtment Poky: Tb tlmmlmm
polioy. ..
L-
I - r - - 1

The State Employ0s' Retiremc@tBoard Boardopled a fonnal Statementof Investment Policy 1978.
It hab: been revised peri&dy, principally to refle~tad incapmi%&w l a t i v e changcsgowmhg
imestments. Tha purpose orthe -at is to f o r m a he Boaid's i n ~ c m t o b j ' e c t i mpolicies,
, and
ofFttnd:armb,andh ~ . t t F ( r : ~ ~ ~
,&&&qy&$&:q&~, ;efthe.

As B M e S , t h e E d will exercise tkat degree of judgment, &ill aad oars umkrtbe

c&ou~nstan0(~1 p r mwbich
farnilar with woh maaara, -ise
matters; ,'
he ~und'sweid hv&t
cycles, which.ex&the ~ ~ t uof
Board s e k s t~ meat &t objecthe w&l& acceptable risk pamWefs throllgh e mto a policy
, o f d h d f W h of^^ by-
I
~ persons of prudenw, discretion, a d intelligme, who are
the man&ement of their own itliwment
I , -
I
objei$iv@ t9 to provide a tW rate of return, over'fiil economic,
r oa.Wly divedied ~ ~ J class. The h
witbin each asset
.isb,w,&, d : e a a m km@otli~

An annual I n v m B h is prepared to control the a l l d o n offimds dudng the year among

Invealzmd aWms nnd categories of assets;

Guidelines are established for each categwy of ass& used by the Fund's invesbneot advisors to
provide a framework for monitoring quality, diversification, and liquidity; and

Where investment characteristics, including yield, risk, and liquidity, are equivalent, the Board's
policy favors investments which have a positive impact on the economy of Pennsylvania.
 -- --,-
'II Investment Objectives
To assure an adequatc accunmhtbn of reserves in the Fund at the least wst to the citizens of the
Commonwealth and to provide some protwfion against the m i o n of principal by inflation, the long-term
inwsbneat objectiv~pof the Fund, are:

Achieve and maintainthe State Employes' Retimuat Fusd in excess of Aamed Benefit
Liability;

Over the loag run, achieve a positiw real total rsts of return (with inaation measured by the
GDPlmplioit PriceDeflam);

Over the long m,d i v e an W u t e total rate of return not less tbaa the actuarial investmat
reZUrn amrnption;

Aehieve in Domestic Stocks a total return that exceeds the total retam ofthe Wilsbbe 5000 Index;

Aohieve in btexmtional Stod;s a total return that exoeeds the total return of the SERS Custom
International Stock I n k

Achi~veinthsFixsdInoomeassetclassatotal~thatmrcasdstheto~~of~SERS
Fixed Income Custom In-

Achieve in the Equity Real Fstate asset c h a total rchvn that exceeds the total return of the
NCREIF I n k ,

AEhieve in the Casb =set class a total mbm&at e d the total mhmon U.S.Tremq
Bins (90 days);

Achieve in &e Venbrre Capital asset class a total reftrm that deither the Ventmt E*onomios'
relevent V i e Year Median Rshnas or relevant retunur hdshed for ~~ pu?wwas by
SERS's Venture C a p i W ~ ~inwstments
v e oonsultant;
I
~&iew.intbe~veInvcstment~assetclsssa~~thatex~e~~~etretunur
for similar types of d t e r d v e investments or rebent returns frtmshed for h o h m m k purposes by
SEW'SVenturs C s p i t s y h a t i w Imreshnenhpwnsuht.

Total return includes &me and both naldand uim&iz;cd gab and losses and is wmputed on market
value. The Board seeksto meet these o b j d v w within aowptsble risk pmmetmthrough adhmnw to a
policy of &&cation of investment8 by type, industry, invastment manager style, and geographic
location.
I
 SECTION J
Investment Program Overview
and
Summary &sset Classes
 1995 Annual Financial Repart

Investment Highlights
The "fj-gg m e M e * of* me&q,@p?g' srym:@,m;fa*-,,**
*
diii-.$l@pSS.
Ofn.,&
11n!DRm as of-&
2;g ,.m.m@;raIB
31, lBS.'m qm&k rta.kemof~W.2.nriII"mn
- -. ~.
a:i,igga.~ f i '
s &a -, to h 6 1 e .*
m&,
~ ~

invm &.b 1% md jj,mMeomt &.-@'-@5@&3 &, wIoy& d'

emplw cQk&b&ions i d $2179.7 &lion paid.outfer bm&s and m h d s to @cipnh Based on the
madcetv&e 6 f @ ~ wof:&pt&bift 30,1995, W SERS Fmd is the 2@ Lar$eat . public pegsion fund i8 the ~

8 ..
n&m d - r & 39&Wng;

nL8' - 8 - J
*:#id
-
t3Wpm@pen*'tZplds.Y*

'
8 -,r

, l,~,,
8

8
8

l
-7m.8 8,

':
- 7 ' b

~ ~ ~ &-;
~ :a ;?*.
,the
~
I '.,

-
rate of reeUn

1
m -5641
Raiunl

¶ah(
44.4%
rDvu
Rnylr SERS F M return
~ over the lwt l ~ p e i r ,
Raiunl
RIhm &8yel#' and OIle-ym plhdS
 - -

..
~ R S ' 8 a s 9 e by$&e ~SERS ~ Board of Twkes. ' h e Board has adopted an Investment P o k I
-the hevi8bls of P e m l v d s lwmllent Code, w go--the inv-at of
SEX% z t g w b . The policy provides invwtm~ntobjmtires and guidelines, An ~nvestmentPlenis reviewed -
and updated amually for stratcglc ~ as for d
~asBBWell i ~ v nee& ~wit& ~en& i
1
asset o h .

SERS invssts in seven major asset classes and useo e d investment advisors with various investment
styles as a method to ensure overall Fund diversification. As o f Dscember 31, 1995, SERS's assd class
allocation was as follows: 57.7%stocks, 25.4% fixed income; 2.3% cash; 5.4%tactical asset allocation
(TAA); 7.4%real estate; 0.9% venture capital; and 1.096 alternative investments.

Vemhwe Copitel A ~ ~ ~ ~ ~ e
Real6.Ed. OM& Investment.
TAA 7.4% 1 --'
Ca8h 6.4%

-I

SERS Fnnd aeset allocation na of December 31,1995, by w e t c b and percentage

- r -
Asset a l l d o n is perhaps the most imporbmtinvestment decision of the Fund, accounting for as much as
90%of the Fund's return performance. Asset allocation policies b e a long-term fowa aad may take several
years to implsment fully.

MarLetvplme of SEiRS Band ecllet clnsses and lesg-term target on as ofDaeember 31,1995
(S in lamiom)

In- Sboks 1,82 1.4 11.3% 20.00!

Fied Ineptno 4,109.4 25.4% 22.3%
Casb Tf34.5 2.3% 1.@Yo
Taefi&.&W€ AlloWtijan 875;4. 5.4% 5.w
R~al 1,193.0 7.4% t.0:iW
Venture Capital 152.0 0.9%

I ~ 1 t 1 A h i s o rand
s P@@$"s
As of a b e r 3 1,1995, SERS had rstainod the services of84 external Inveshmt advisors, inclu&g:

12 domestic SO& bvement advisors

6 &&mawst& invGstment &wrs
lodxed &v-t advhF8
2 dinvestment&isom
1 tectioal asaret a l l d o n inv&maat advisor
I5reaIestatG~edadvisors
22 ventwe capital limited p a n n d p managing @ h d prltmi
16 d t d e hvashn81kt ~ W ~ Z U~X8U
I@ng g6Wid partnerS
Q

I n a d d ' ~ , ~ w d o m e s t&isors,
i c ~ ~intamatiorrpl:stecL- lrad oncfmed ineolse &isor
nara:~byffitheBollFdfYUtnalyetfbmled~thedtFd,6f~~.~af~~~l,l!%,SBtlS's84
im&mnt advisorsranaged 108 i n v ~ s 8 n e n t p x X & " l i ~inoludhg:
ts,

16 domestic stock portfolios

7 dock Wobos
1 1 f d incume pbnfolias
3 cash portfolios
1 tactical r naliocation portfolio
a realW e prtfblios
28 venture capirsl Iimimirad partnership interests
19 alternative in-t b i k dpwtmmhips

I n ~ f i e ~ b s a o o l r ~ fWi ed~ B ~ ~ Jt ~ ~ W o a e M i n ~ ~
h ~ t %y&,approvgd,b$@'~but not *&&&@
sad o ~ , s l ~ a t i y e .pgttpe&ip &e &of 1'995.
S e v d inmsbnant &Bisorsmanage.m~epvrtfoI'ifor SBB.
 I --
Asset AIlocatiQn as of Becember 31,1995

IatcInational Stocks
Fixed Inwme

-.-
Vcmwe Capital 182.0' 09%
AItemativ%In- 166.9 1.0%.
r Totalhrpd I $16.185.1 100.QEA I
I
BZWBanlays-~~ppti*-~~~(98rP500) 53,457'10
-
B1;W BanIdys F.q& Value Fund 548.3
BZW &clays- Extended EquCXyMarkt Fund 9563
Dorn~sticPawlw Stwkr Taal $4,7615

Dletfhc &Field Advisors, Inc. SBZ.3

Emenld Advisers,Ino. -PA 54.2
Mdian As@ Managemcut 201.9
Mellon Equity Associa& PA- 53.7
-
MeUon Equity Asmiam Special Equity w.3
Milla, Andwan & S h e d 368.5
Ncoberga & Baman 76.7
Pil* B&er & Assodams 346.0
Provident I n v m Ccuoscl 447.4
FWvident InWa Couoscl -Stellar F d 79.2
Slurdivant & Co.,Inc. 30.8
Trioily In-ent Mme&ment 463.0
Zwenbagen Capital 109
Domwiie Anfve Stmka Twl $21740.9
Dom31ic St& T & p % 5 r ]

-
BZW Bar~lays k o p c AWL
-
BZW Bralays R t S r m w Acct.
ZnrwMiond Pawive film& Told

B&4 Amvciatss wn - -
W i n Fund Mawgay small cap
-
Milla, Anderson & I J W ~ o r t
-
S e l i H e n d e n Co. Sman cap
TunpWlrwsshncDtCed-m
I&&ionrJ ActW ipoukr Totol
383.1
51&13.5
- 21.0%
86.4%
4.1%
16.9%
2.4%
9.796
Inter~1iomlSIO& Total SlJUl.4 1W.m 19.5% 11.3%
Donrrsric.andIntemanuf SlocS TetPl 59,324.9 100.0% 57.6%
 -

Fixed Income

mter.Aa- &S h m
I. P.mtp
smim Giatarm & Co.
Aeltw Cow F l r e d k o m e To14
C m F l r e d l n c ~T)o~&

0,Wo 0.0%
JohnHwock 3.6% 0.9%
W. b.HptfAWMaa-4 15.4% 3.9%
Mason R d &ate Advisors
TIXI&~crapanyofthe Wcst
A a f h~ i a & F L u d ~ ~ l ~ e ' T o t n l
Fiwd Income Total

27.1% '0.6%
PA St@ Tnswry (Sqmte:Acct. + STIP)* 729.h 1,6%
Cosh T@a/ 1C6.M 2.3%

Chtiwd onpage 6
-
mwm
L~uEamels
Lowb'&ntorpd&s
RAf Advim
*ate A m m Par@lJo5 Total

Adna-4rnlodRmds
Alex B m
cwlcrv cm-B
caponm ~operryl""aslors
-
Goldman Sachs W h M V & VI
Goldraan Sachs - WhitQlll v-s & VI-s

Tnut Compa~yof WWcst Fund VI-

PookdFwdPorq?dias Total

d
Vcnturc Capital**
W '
Advmt W
BaoBowm
CEOVeatwcFtmdSQn
m
Fairview CapM
F& Capita! I & U
GrotechPmrrsyhrsniaIU&N
FIcalthm Veatuns
KcysbncU$.IV
NEA VI
NEPAVentwnI&n
PNC vesimc QrQupI
Pimbwgb Seed Fund
P&t venm Pmmers
SpmutW
Stodr m i
StmrmitVtntPrcslV
TDH-I1 LhnW
WtshDn W d i o
zaestageC3piin
P i Ccpita1To&
 1995 Ainnwl Fimmial Report

Assst Afloc@tionEES of December 31,1995 (conliPrud)

-

Alternative @& We of TOM $4 of Total

Inyestmonte** &fEwwM A!&&L muLd
'uropcnn fund5 S7.1 4.2% 0.0%
9.3 5.6% 0.1%
BranWood Associates Buyout Fund 15.7 9.4% 0.1%
c % a m A oU~ 20.8 12.4% 0.1%
Code,HGMessy&SimmonsI&Il 14.7 8.8% 0.1%
Hellman & Fricdmm~IIam 32.1 19.3?? 0.2%
KatsO V 16.3 9.846 0.1%
LqRsmarLfV 2.9 1.7% 0.0%
hMhnDwborn 62 3.7% 0.0%
Murpby & Fauver 39 2.3% 0.0%
RR & 2Rcrmsylvania Fmd #I 0.3 0.1% 0.0%
Sehmdn-UKUI 17 3.4% 0.0%
~ r u scompany
t
AUenumwhmm T3tal
-
ofthe W& ~undV
I
32.1
msa9l
19.2%
100.0%
0.2%
1.o%

*Pemsyhuv,iaSmie l%mwy wrlwfar thc Short Twm Investment Pool (W)portion me ai EMnnd do not mPu.1 carh
~ d a i T r ~ a n v y b ~ S E R S i ~ & ~ . I ~ n g S ~ o d u ~ ' c Smp I r ~ =~$50.4.7
a r brdbgn
miJIion

" V e m capital and ~ltenwtveinvcsmunt nwrkcf whes am erftnaitw.

 Summ;~r.yof Doti~~.stic'
Stock l~lvest~nerlts
Domestic and intemat~nal&cks compairiethe
stock met clsss. SBtS's investment plan Domestic stocks had a $7,502.4 million market
diveifiw stook investmeats nud b a h w 6tock v a b , 46.4% of the total Fund's $16,185.1 million
management style. SBW contmcts with external market value, on December 31,1995.
investment advisors to manage portfolios.

pow
.,' '&Number
had con-
ofImvestmmt Advism
with 12 e x t d investment
Stpok invcshments em employed by the Fnnd ndvbmto metlsgc domeetic stock portfolios.
primarily because their ex@ec&
tgraile re4q Piw~&onaI Investment advisors for this area
preatirrmsvuw~in$atonwiaVRalized, I&@ -alSQapprovcdbytheSERSBcwnd.
pmierveand &ce the d v & e $the h d
over long paFiods of time. The &ck ~dt i
his Nkmbw ofInvestmaat Por$olios
tobenmagdonatotallgtinn W s . St@&
sER$ hiid 16 h a s t i c gtock pcdolios maaaged
invmenrs rrhd mpbes'i, bar not be uipibe$w,
publicly t d d SBG&S &at p n a v W B with by the 12 e&imdinvestmnt*rs. Five
eddhional pdbEos for this area were also
an equity inta?at in private.- m w (&*&%.,
common st+, p9ffarred sboek, (~~w.e&&le e ' Y * - .
preferrad,st~ck,cbnfwble M, etc.),
'8 ~
0
il
@
f;mP,I,,,
t
SEWS 1995 ~av~stmsnt pian targched Im As of December 31, 1995,68.3% of SEKS's
matual a l l d ~ : o f 3 6 . S W ~ ~ l a sWdommk
sts dom& stock aU&on ~6 in hge
StQCks,*.a:,
d o m d c & & $ w , ~
rnS'&%
&&&&,en of
bl.eaetnlent,of
. .. c;a~*w9esok ,and31.7% was in
m e d i d 4 ts@dMbn sbdi The
30.0% in m e d i m n l d caphlhtion sboak6. The portfolios witbin the domestic s&& area can be
plae also pmvided for a k h e e in value and classified by investment style: 16.1% value;
growfh invgatmeat styles. The 1995 plan tqeted 17.4% grow& and 66.5% core. SERS had 13
55.1% of d-&ic *stooks to be indexed. actively ;nansged portfolios (36.5% of domestic
stocks) and Ebtet passively managad index
portfolios (63.5% ofdomeadc stocks). The active
menegera m h owt superior investment
opportunities. The passively mmqed portfolios
provide b m d core diredcstion and are
designed to tFack the performance of the market at
a low cost.
 BZW Ewcbys OlobalIn-
Eqrri*.Inderr hmd P (SSP 500) large cap stoch - indexad wre $3,457.0
Qnip V&e Fund ~ecaprsluestockp- 348.3
indexed
ExtendadEquity Matket Fund medidsmall cap stooks - 956.2
Wibhf=4500) indexad uue

Fidelity Mhgement Trust Co.

Itidfan Asset Mauagement

$&P 500, risk canmtfled *I
I
LomPis, Saylea .Bt +.,, large urp value &xlm
, ,- .I -8
**
I
L
Lord, Abbea & Co.

lage cap d u e stocks -.

J.P. M&gm IuvesQnentManagement sstP 500, risk CmtrOIled

msdlWamallcap value stocks

rn-lsmd urp growth

m k s

Provident I n m e a t colmsel (PIC)

PIC Stellar Fund

lmge osp value stocks

TOW nm.4
Z l c ~ u t a m L s l u t d ~ w ~ l h . n t a h a g m ~ a n l l n B * @*r*5 ~~ lnr~r d v o s n o t ~ f o r ~ k t a g b n t n o l p t
nrEedat the end ef1995. Numbers may nor d d w to .-P
&-..--.'..--:- cr--l-..--J .
,-a
rement Syster
Summary u l lnternutionul Stock lnvestrnel~ts
International a d domestic stacks comprise the
stack asset class. SERS's investment plan
divmifies stock inmtmmts and batancas $€ock
rnamgemnt styles. SEW wnhcts wifh &end
&w&ent advisors to manage portfolios.
Policy
Stock iw&ments are employed by the Fmd
primarily be-their expected laqe return
premiums v-mus inflation will if raalizsd,help
[preserveand e n b the real value of the Fund
mer long period@o f h e . The stock asset class is
ta bema0a$edwatotdretum baais. SERS's
11995 Investment Plan targeted an eventual
.dl&u of 20.0% of assets to i n b -
stooks, with a tafgeted investment of 80.0% of
ibtemational stock to large eapitdIzatl oa stack
stmtegies atxi 20.p~ to &aii;m!smal~
capitalization stock stmtegie.
M~l~kes
VsJw
Intwzdonrtl tl& had a $1,821.4 million market
value, 11.3% of the total Fund's $16,185.1 million
market value, on December 31,1995.
N d r of Inv8stmmt A ~ m
SERS had contracts with s i x external inveslment
advisors to manage iqtemcttional stock portfolios.
Seven additional investment a d v i m for this area
were approvedby the Board.
Number of lnvestnemt PorYbJios
SERS had swen intemaEion&lstock partfofios
managed by the six extend investmbt advisors.
Eight additional portfolios for this area Were also
apapP"ed by the Board.
3Srpm of investmentP6.tSob
As of December 31.1995,77.6% of S W ' s
international stock dlo&ion was in large
capitahtion s t o o k ~and ~ 224%
, was in
medidsmall m pi tab ti on stock Stnategies.
SERS had five actively managed i n t e d o n a l
portfofios &ndone in&x porrfolio.
 J
W#k l e y s Global Invantors
AushatiaaadNew Zealand A W a and New Zeaiand .stocks -
Wxed
Emope Eumpe stodol - indexed
*~--t Bmpe and Pacific Basiestocks

-( -.I 8
'-

8
1

88
I, F;:;- .
'.-C
intmational mcic&&~ cap sto& 268.2

I Miller, Andetson & Shmenl

I J.P. MOW f n m h e n t m s n t Japan-

I Scottish Widows h v s t m a h%ba$amBBt Bucopa stocks

infernational mediwn/small cup stack
**

139.7
II
I TCW Asset Msneg@neM Asia ex Jepm stocks **
I
t TeOsl
* I A & gntZk und oakh that the man&# hud mB9
JCfor hwiinent. **M& vdzw no1 t&lulfbr ~ e
Sf,%21.4
r hired
x but nat y8t
finded at the snd&199JJ Nvnbars nGnot&&~.to *riding.
SEES'SInvestmentplan d i v d e s fixed income
inmsbneots andbalances fbred h e m e
managemeat styles. S W s practice is to contract
with extend investment advisors to matage
por$olios.
PoIScy
FW income investmen$.cuaernploydby the
kagw they m
Fund primprimarily e as a h d g
against disintlation an&a deflation, &it p e r a l
ability to pmduee c-t 'inwwin zhC f&tm 6f
periodic p p m a sad be0ausa.d
inve&fments.bolpdivemi@ thvovarall F W .The
&x.edineame asset class is to be managed on a
total rstirm bids. S W s 1995 Investment Plan
targeted at-evmtual allaeadono f%5~% ofon@sef$
to the f b i income asaetclass.Ofthis amo0mt,
75.0°? wesbargetd t o a c t i ~ e ~ ~aad25.0% es,
HrRet Y a w
Fixad income had a $4,109.4 miIlimmarket
value, 25.4% of the totalFund's $14185.1 million
market value, on Ihember 3 1, 1995.
Nunrber of lnv-t Advisors
SBRS had contract$with 10 Bxtarnal investment
advisors to manage portfolios within the 6xed
income asset claw ss of Deoember 3 1,1995. One
additional investment advisor for this ama was
also approved by the SERS Board ofTmstees.
Nrrndier of Investnrenl Porsfoliios
SERSBadatotalofI1~witfiintheAxed
income asset class. One addiional portfolio for
thisareawusalsonppmvedbythesERSBoanlof
Trustees. I

to passive &gies, The wet cl& is f ~ h e r

c l a s s 1 6 d : a c c ot~o core and specialty
strat- with 75.890 tothe care
~tgmentand 25.0bh to the specWty xgment
Specialty strate+ include:
whole-loan morrgages;
high yieldhpecial.
privmplacamcnts.
Tbe fmed lnoome as& class is divided into core
and spscialty segments. Core portEo1ios utilize a
broad army of fixed income securities. Specialty
portfolios focus on w 6 i l - M sectom and
and oppommistlc strategies within the f b d inoome
market.
Core:SEW had four e e l y mmapd
core bond portfolios witb a market vahae of
$1,952.1 milliotl(47.5W o f f i d income) and one
passively managed core bond portfolio with a
market value of $898.9 million (21.9% of fhGed
income).
Sltceidly: h d one whole-loan
mo-e portfolio with a market value of $458.6
million (11.2% of fixed income), time high
yield/special credits portfolios with a market value,
of $651.7 million (15.8% of fixed income), and
two private placement porttblios with a market
value of $148.2 million (3.6% of fixed income).
- - -- ----

*Market Value
of Portfouo as or
rmit;labwac mawber 3&* m,
tlvchnwt Advbor In-nt SQIc (Smillions)

Cole

P.Q. Corbin Asset Mamgmeat d v e domestic fixed income

F i Fragcb W s & Wetts eaive internationalfixed income

domestic - indexed
Mellon End A m 89ll.9
I
J.P. Morgan Investmsbt Management active domestic 5 x 4 hame - - 506.7

SmahGmhm&Co. active domestic 5 x 4 in- 9.1

I
Cigna Investments PAprivamplacom

W.R Huffket M a n m t Mpb yield bonds

Legg Msmn ~~ Advbm msWdal and oommerci-al

m'=@%P
T r u s l ~ y , oWest f ~ wedits
S p t o i a I C d b b d IIb
 PsnnsWania Stab Emalows' Retirement Svsiem

S3BS's Investment Plan d i ~ e ~ f icash

es M m h value
investments and balances cash nmag~mentstyles. Cash had a $364.5 million market value, 23% of
It is 5lk9'spraetice to conttact with external the total P d s $16.1 85.1 million market value
investment advisors to maqage portfolios. on December 3 1, 1995.

Policy N d e r of Invesfmsat AGvSsors

Cash investments an employed by the Fund to
ptovide for SERS's liquidity needs and to
accumul* funds for future permanent
investment. The cash atset clam is to be menaged
on a total raturn basis, with the weptim that
tempomy i n v d e n t s may a l t d v e l y be
evaluatad on a yield-to-maturity basis &en their
extremely shortmatnrilies. SWS's 1995
Inv-ent Pian targeted an eventual d o a t i o n of
I .O% of assets to the casb asset cfm.
SERS had a contract with one exteFnal investment
advisor to magage a portfolio within the cash asset:
ctass. SEW also dljzes the Pamylvasia State
T m u r y Reparbnentto mansge two cash
accounts.
N u d e r of I n v e s ~ nPorEfhs
f
sE& bad three portfolios within the cash asset
class: one managed by the e%kmdadvisor, and
two managed by the Pennsylvania Sate Treesury
Department.

Typcs ofIme&mmt PortfaEios

SERS had one actively managed, short-duration
f d income portfolio with a merket of
$98.8 million (27.1% of cash). Ona combined
basis, the two postfolios managed by the
Pcnasylvania State Treasury Depdment had a
market value of $265.7 &n (72.9% of cash).
'hamy also man- ex- oacrh &cns held
by other SERS mvesttnertt a d v i m in other asset
classes. In the aggregate,T-ry managed
$504.7 million on behalf of and SEW'S
extend investment advisors as of D a m t r e r 3 1,
1995. I
L 8
I
hrkel Vake of Po*
Cwh cis of Defembs 31,1995
Investment Mvisot Investment style (S mmtoB1)'
Payden 4% Rygel Short duration 6xed h o m e $98.8

PA State Treasury merit

I . Separate Account

Short-Tenn Investment
Poolb"
Short &on fixad income

Short term 6xed mcome and money market

illSTUmentS
164.5

TOM
'Numbers na), not
$364.5
due to roundkg. **Mwkstwlw dows not include cmh nninfaned in rke Short-Term Im.wtmenf Pool (STLP)
1
by SIB5 b ofher e r r e d inwstmnt advisors.
16
 I,
llStpas44- $@@&bS
8

The BZW Bardays $&+band7W3a TAA Fund is

Wpmd t~ o f f e r eE&e&
~~ bw..wst&wwd
~ % ~ ~ ~ ~
, d i v & ~ ~ t k e * . ~ W
incornwad a#m m . @e Rmgl iawstr,in
fbm of B ~ ' B % M1Uaatjue.kk.
F c ~
.
r,,
-

prop*~~isuswltoesl$hlbpband 8 ,

a d j ~ s t t B e ~ ~ @ & i m g m g ~ ~ . ~
The mix will v ~ a s ~ a a d q j tmatkt a l
conditions ch&. Under equilibdnm cmditiw,
hE n h a n d 7OI30 TAA Fmd will have 30:0%
afaswts invested in the E q u i Index Fund, 30.0%
of i n v d Im tk Long Term Income Fmd,
and O.O?k in the Cwh Fund.As of m m k r 3.1,
1995, the gotual asset mix of&e Fund was 70.0%
stock, 10.0%bonds, gsd 20.w w h .
 S u m n ~ a ~of~Real
y E.vtrcte Investments
Market V d w
estate investmw SDd balaBaeS red estate Red &ate h d a $1,193.0 million &et value,
m-ent StYIes. fn acimhm with fhep W 7.4%of d~etotrJ.Fund's $16,185.1 million market
SEW ea&ac& with &emd i w a h e n t m m value, on W b e r 3 1,1995.
to manalaa ~ b s .
N W e r of lnw&ment Advisors
Pg3icy SERS had contracts with 15 extermrl investment
Eqnityreaal e m idnrwltssaoamylong- advisors to mamge d estate portf~liosas of
U W dn i* d-&.dus'to&+-W' December 31,1995.
codetion W&I! i&&oa, p r o v i d e a a . . ~ ~
in~ ~ ~ p m 5 1 l l o
hedge and d i v d w h n ~ ~ w i t h the N H m of 11~~6s- P o ~ $ B ~ ~ s
dueto~low~Wi$h~sodbonds,
It is expeead tbattbe loqg-ram to%! mtm
SERS had investments in 23 real estate portfolios
managed by t&e 15 extarnal investmentadvim.
(moome ad.-*> f o r d erftrrte win hll
baw& sf(iCtgaa~.,meqaity
real ei?tateasset c k is maaged en a tod return lJpes e f h v ~ t ~ o i i o s
basis. SEBS's 1995 Iav-1 Pkm tqot:ed an As of b r n h 31,1995, the c o ~ i t i o ofthe
n
eyen~:*tiinofl@.~ ofmto.*e real e w e p o d o h WW as foUows:
MPLit)l led &te~888ef 0bE. LIn- BNI 80% equity ownership, 20%equity-
ma&-po&*fuea,kw- ad oriented mm@gfS;
s e ~ a w o t m t ~ Ii3V@$tiie t 0 ~ ~ ~ ~ 38.6%pooled fun&, 61.4%separate
pp&88&f&tly or ~(r-a, ~eoolui*,
-0 q&y repl,=,@&,fio &&&&g 20.0%office, 8.9%industrialI 38.0%
pmvide for d E - i m , by tmnweti~n retail, 22.0?! residential, 6.0%
-, m,
property 8eograghic location, hsteYmotel, 6.Wo other,
2O.Wh PennsyIvania, 25.0%East (ex&
and dewlopmeutb. Of SERS'sequity mal
PA), 19.0%West,18.0%South, 18.0%
Midwest
( John Haw& A p ~ ~ h Puad
ne 09-30-86 &W W i W d 125
I

ITCWMVI mw4 oppmtosistrc ~quiwand debt 52.2

I
TW
K 3 r s m y nor ad$&
-- -

to r&g.
- -- - - - - SlJ93.0 I
Venture capital is the k a t d i of young,
relatively small, rapidly gowing c o m p n k that
do not have aama to public &qai@or dBM-
oriented instihltional funding. S
FW invests
capital as a limited p w in wmtars capital
limited pattlwrships established for the m e of
investhg in aud managing veotrrw capital
companies.
Policy
SERS's 1995 InvestmentPlan taq@d an
ev~ntllalallooatioa of 2.0% of assets to the
venture capital asset class.
Hhry
Act 1984-95, effective in 1984, specifred that
SERS may invwt up to 1.0% of Fund assets in
venture capital by acquiring axpity or debtand
equity interests in a bsines that is @qmtedto
grow substantidy in the futtue. Act 1991-23,
effmtive in 1991, specified that SERS may invest
up to 2.0% of the Fund in ventore capital.
Furthermore, Act 1994-29, e%&ve in 1994,
enabled SBRS to inveat -ding to ''pmd&t
person" standards,and fwher sweified that an
'investmat in venture capital bjSEW may be
made only ifthe investment js$wonabIy likely to
enhance the general welfare afthe
C o m m o a d and its citizens.
SERS's venture capital investments had a $152.0
million market value, 0.9% of the total Fund's
S16,185.1 million market value, on December 3 1,
1995. In addition, SERS had $190.1 million in
outaaRaing obligations to fimdvcnhue capital
pmmdiips that represented 1.1% afthe total
FundatDecember31,1995. Thdore,the
combined market value of SERS's actual venture
capital inveslmnts and f&m obligations to fand
such investments equaled $342.1 million, or
approxhnstely 2.0% of the total Fund,as of
December31,1995.
Naunber of Limdded P~artnerslrips
SEW bas made comnbm to 28 venture
q h l limited pattnerships.As of December 31,
1995, SIBS bad paid in capital as a limited
partner in 26 ofthose partnerships. Paid-in capital
represents b d s hat have been drsmdown by
the veature @Mist and are d l y available for
investmcmt.
VenfweCa#WProgrffm
SERS's 28 venture capitallimited partaerships are
committed to indude Pennsylvania-based
campagiss as a part of their venture investme&
focus. The intent is to make v&ure capital
inv-ts in companies either headquartered in
Pennsylvania or hat provide employmeat for
Pennsylvania citieens. As of December 3 1,1995,
SERSasvahlre capital limitad prinerships had
made approximately 35.0% of their investments in
Pennsyl~da-basedcompanies since inception. In
addition,venture capital managers backed by
SERS have bested over $129 million in
Pennsylvania-based start-up companies shoe the
SERs jmgram began in 1985. SERS has
committed $360.5 million out of a total
partnership caphl pool (all iaveskm inthese
W)of $2,695.8 plillion. Given that SERS
effeotively owns 14.0% of this pool, the s W e
mount of capital invested in Pennsylvania-basad
companies iudieatesthe e f f d v e use of
leve~agingadditional sources of capital. A major
component of the venture capital program is to
diversify axupany investments across industries.
 .ISMAnnual Financial Report
was well divedied acmsa the foHowing indastrp categories:
Aa of Deaember 31,1995, the progr~m

29% computer related i h b + e a 36% heolth-cme related imhwies 15% biotechnoIogv

8% talecommunicatibm 7% finoneialsavices 4% coiasumer products
3Oh indusiri57products 2% elmtrohicpmducfs 2% reslawants
2% retoiling 1% media services t% others

The venture program's financing stage focus varies: 18 ofthe limited partnerships have a diversitled
fmancing stage focus; fow are focused on middle- and later-stage financing, five are focused on seed and
early-stage financing, and one intends to make diversitied stage f m c i n g available to minority-owned
enterprises.

Venture Capital Comm'tted,Drawn and DisfriQutedas of December 31,1995

In the chart below, Capital Committed represents SERS's capital committed to a venture capital limited
partnership; Capital Drawn is tbat portion of SERS's capital commitments that was drawn or taken down by
the venture capitalist and is readily available for investment; Market Value of Distributions shows the value
of the distributionsrnade from each limited partnership to SERS at the time of the transaction.

Finanoing SERS Capital Capital Market Value of

Venme Cog&d stage Initial Committed Drawa Dbtributlons
Ljmited Partnership (S millions) ($ millions)
APAlFostin $20.0 $38.3
Advent V I l Diversified
Bachow III Diversified
CEO VenNras s Div€&i6ed
CEO Ventures I1 Diiersified
Edison Ventures III Diversified
Fainiew Capital Minority
Fostin Capital Diversified
Fostin Capital Il Diversified
Gmtech PA III Diversified
Grotech PA IV Diversified
Healtheare Venture III Diversified
Keystone II Middlehter
Keystone N MiddleILater
NEA VI EarlyLnter
NEPA Venture Seed/Early
NEPA Venture 11 Y-
PIA Fund Diversified
PNC Ventures I
Pittsburgh Seed Fund Seed
Point Venture Partners Diverssed
Polaris Venture Partners Early S$ge
RR&Z Private Equity Fuod Diversified
Sproutcapital Vn Diversified
Summit Ventures N Later
TDH-n Diversified
Weston Presidio Diversified
Zem Stage Capital II Seed

Total $380.5
'Cvmm.ihnl ripproved by the SERS Board of Trustees at the December 1995 meehng.
$190.4 S1OZ.O 1
Pennsylvania State Employes' Retlmment System
I
Summary of Alternative Investments
SERS's alternative investment program has
cdmmitmentpto 11 lev^ buyout (LBO)
partnership inwshnata, four European venture
c a p w v a t e equity partnenhip inveshkm~ts,one
special s i t p a t i o n s / ftrnd
~ wership
twoplvtner&,+~;lYestin&@n&,,in~*
and om~pattnershipthat specializars in private
equity Ehuyaut invastmmb ,whileincorpat&g an
E w l O ~ ew k Plail ( E ~ O P ) ' ~ : ~
LBOs invo1ve aequbbg wmpgnies Usioe;
borrowed funds. U d y the rargstcompmy's
assetss~nreasseeurityforloenstakenwtbythe
aquh-TIxe~~~ystheIomsfpOBlcash
flow afthe acqubd company.SERS invests as a
lmW p b e r in LBO prbmmMps fmad for
the pmgase of providing funds, d y in the
form of equity interests, f~rorthaacqaisitiOn of
compmies, Special s i t n a t i o n s l ~ ~ g
investments operate under a philosophy of
flexlaiility to adapt to market fluctuatio89 and
opportunities that exist from the deIeven@ng of
dew-laden companies. Investments are usually
made in succ~sdblcompanies that cany high debt
levels and seek to toeverage fof a variety of
reasons. Dtieveqing is often used in an attempt
to avoid a major re&uctdng or bmkqtcy.
Inve&ntents are ~ 9 f l d"White
y squirenor friendly
"iuRnanw blockn in nature. A whiG squh invasts
in companies that couId benefit fbm the cepital
and pmsence of a b a n d supportive
shareholder. Investing in the secondary
partue~shipmdet invoives acquiting Qterests in
&shed b o u t and private eqttity funds by
purchamg existing l i m i i @p @om
at an op-e time in-theireconomic lives and
at digoatmts frmn their net asset d u e s .
Secondary transaoticms,through the timbg of
their inmmtments, b e tfie benet of raducsd risk
for the asset class, witJ~outa reduction m the
upside retarn. SERS b also a l i t e d partner ie
four European-based ventare capital lidted
partnerships focused on private equity investing in
F a c e , Germany aad the United Kingdom (U.K.).
Unlikeventwe capital investing in the U.S.,
venture investing in Europe is private equity in
nature, tends to occwr at a much later stage and
cwm- on lowar ~ 0 1 o g iyn m e s .
PoEicy
SERS's 1995 IavesCment P h tacpted an
evmtual allocation of 3.0% of assets to the
dkmative investmmts asset class.
Market Vdm3
SERB'S alternative hesfmmts p m g m had a
$166.9 rnillien marlcet value, or 1 . m of the total
Fund's $l6,185.1 million market value, on
December31,1995. Intotal, SERS had
comuitted to i n v d $463.5 million ia the
alternative inve$tments asset class.
The altem&ve investments program has
c o n r m w to 11 buyout-orignted partnenhips.
One is Pennsylvania f m e d ; two me Midwest
f w d one is f w d in the West,two are
global in nature; and fwe are natioqally fooused.
Most are
. on small-to-medium
. focused
capit&&m companies. Oely "fibndJy"
acquisitions IS pursued. AU deals are nowhostile
and privately negotkted. Most are nmanction
and complet5d with present management in p b .
SWS's @sM0llSir-g
partnerships are nationaIly focused and c m invest
in small-ta-kge apitalization companies.
SERS's acfpWon/buyoIrt partnemhip utilizes an
ESOP strategy and makes only friendly
ucquisitim supported by a broad group of the
company's v e n t who invariably
participak in the equity investment. Owne&p is
M ar expanded to other employes in the
. .
orgmm&m t&ough the implementation of an
ESOP m, which gives e m p l o p a sense of
ownership and a financial stake in their company.
~RsLEuropan venturecapid &I-- The partnc9sBip is national in foow. Shilady,
0 0 of private
~ equity ~investment in SEM ha9 mother investment, also in c(btmmd
campatlies based in the W.K. and Eumpe. The four &bt,butviews~opporkd~£wgainarin~
partner&@ fams on theUX., France, Gemmy appreciation of the ddltinstrament W a n d dot
and & r m a ~ couotties. - ~ All four ftmds the henversion into an &ty position.
plan to take advantage of changes OWXU'&$
wahin Rtsrope, inc111diithe elimination of a SERS hss also oommitterito two patth&pthat
numbar of fmde Wers in the Elaogaan invest in s e c o a d a r ) l ~The
~ .partndp
ecommic oommMity, the mmifi&on of
( . ~ I & w Y sad the disinteatatron ofthe fo-
s o v i & i h l i o n . ~ i-g~ V ~ ~ && bIdinp.
I ~ e ~ t s o f ~~
s small, ~apidlygrowing c~m@es that
~ u s e on p u m h m are two-&Id: 1) They enablethe sell&
do n o t h ames to traditional sources of lkai*&~~to$aia~uidityhaeoahenvise
wpital. EBRS leas comtaitrsd to a
~~ in dbtwwd debt ni@
-
~~ by
that illiquid hvestment. ( M ithe d i n g Lhnited
pttm n d K@ty fix op-economic
investing 511 debt o b l i OffinrntGiaIly ms0ne.X snd 2) the h e r of a seoondrny position
~ ~ ~ w i t h a v i t w t o w a r d can w d l y pudmse the investment h t n a
coflvdng debt into equity. Debt is cwvepted into m&v&ed m h st a s m d i m $$om net
equity in order to obt& aa equlry oriented &um. mvalw.

AJtemdw Im#tmwts Gem,Dmvri a d D & M k W !4s 31,1995

in the &&beiow, Capita1 CommWd rqm&s down by the @pwtm a d d i y available
SERS's oapital c6mmltbed to eeoh limited for investment;DWW
i amis the d u e of
~;C~~DrawnisttrepoFtionof dibutiions d e each limited p t ~ e r d @
SIBS'S capital c o m a dra7wfl or $ken to SERS.

APAXGomumV~ 0-Y 1BOI91 5.0 3.6 2.0

~ n ~ c a p i an r l ~1o8sl ma94 40.0 9.2 0.0
Breatamod Buyout Fund wioml llR1188 10.0 10.0 12
C m s m l I National & PA 3/30/94 40.0 228 1.6
Clapzoa, Dubilim & Rice V National 5BB3 50.0 0.6 0.0
C & , ~ & ~ a n s Mid*& PA 9128189 10.0 9.4 U.6
Code, H u u w y & Simmow U Midwest& PA 7/12/94 20.0 8.7 0.1
EIplltaa31 Bt Fitcdarne U Nstionsl 1/7/92 25.0 24.6 6.0
HeUmsn & Fdednm Kl National M4B5 50.0 128 0.0
K c l s o ~ ~ ~ . Nati~nal&PA
V lR6/94 40.0 23.9 3.5
LsodmeigEsrdty~N Socon~Ifai*i 21‘2w5 30.5 4.0 1.O
L a a ~ ~ SecenWw
~ V l&'N96 24.0 0.0 0.0
~~ Nati~ml 2/W/P3 15.0 8.8 1.J
Murphy & Fauucr N W 1W11/88 5.0 5.0 1.4
OEMop~mdbFd c)btmwd Debt * 24.0 0.0 0.0
RastZ PAFundbl PA 3/W88 10.0 10.0 18.1
S M ~ vat- U I C ~ UK sR9/s9 10.0 k9 9.4
Scsmda Vmthuw UK IV UK P 15.0 0.0 0.0
TCWSpWCdiV N W 8PU191 35.0 29.8 0.0
TOW $463.5 $996.6 5593
Conm~msnt$,p&& s tk DcvMnber 1995 mew.
& S E R S ~ o f T n w c a b ar
23
SECTION 2
Pennsylvania Investments
Members of the SWS Board, employes of SEW
and agsnts of the Board stand in a kidwhy
relationship to themembers of SERS regarding
the inv-ah arid dhhsemmb of the mnd.
Subject to ~ c t i o r r on
s ittvesgnm ca&d in
theRehment Code and the Fiscal Code, the
Board bas exclusive mtrel and mmanagimmt of
the Fund and fpU power to hest its assets. The
Board adopted a f d Statanent of Investment
Poiicy in f979t~8tbasbeenrevised to d e e f and
incorporate subsequent legislative changes
governing investments. Whare inwstment
charactetistics inoluding yield, risk, and liquidii
are equivalent, the Board's policy favors
investments that hsva b p o s - h &pact on the
SERS has two Pennsylvania stock portfolios that
increaga exposure to "in-&ate"c o q m d o n ~ .
SBRS's Penmyhrania aWk univase is comprised
of 553 publicly-Wed corporations Wat: 1 ) name
their headquarters as Pamylvania and have
P a u s y b d clllfloyea or opetatiopetatiorrs;or 2) have
Pennsyhnnia-based employmentexceeding 25%
of total corporate emp~oylamtE m d d Advieen,
IEU., 6-aa;f ~mn011~ q n i tAS+OS~~ES
~r
of P i i d actlselymml@ptvuwes far SEaS
hrvatsd iq.lolms @f the P w h r a & Private
Placement SeparateAwunt designed by the
Pennsylvania MERITE Council i d mimged by
Cigna This account was aaeted to p v i d e long-
tenn, fkod-rste loans to established Pcnnsyfvmia
firms that do not have access to the public bond
economy of Psrmsylvlania SBRS's inveatmcmt
-portfolios have always had substantial
inv- in P~~ %ins, &Q some large
natimuJfuJasarebabukadmtheWW
~ e w i a ed w g 6
1
in01aiing1-
Atlastio, fZitc Aid, W d p d ! o w , Sun,Bobm &
Rsea and & J. Re'mIt1 W o o , SEE43 has
hvestedin pwtfoBos desigsed to emphasize
investments in Panrwlvania As of December 3 1,
1995, SEaS had $1,675.6d l h , or
approximately 6.6% of SERS's total Fund,
i n v d m Pennsylvania Of this amount,SERS
had placed $627.9 million in portfolios specially
designed for P ~ y i v a n i investments.
a
from our Pennsyivania slook usivem. The market
value of SEWSPennsyivania stuck portfolios
was $107.911dlionas o f ~ b e r 3 1 , 1 9 3 5 .
In addition to the Pennsylvauia equity portfolios,
SERS also bad $304.6 &ion investad in 'the 553
Pennsylvania stock &me companies as of
December 3 1,1995.llae.se stocks were held in
SERS's index- aod in ~~s actively
mansged ~ 0 U o s .
residential pqptim) as of December 31,1995,
Tbc rssidenfial m@nent of thisportfalio is
~omp.dsedO ~ C WB
-S O ~ ~ ~
di&buted solely in Pennsylvania 6 &rdance
wilh SERS's policy to Originate 1 W of all
comprised ofoomp&tiverate mortgages on
various m b i h l , mtail, aprtment, and office
c0~1pIexwwithin P ~ I v m hhg g W n ,
,$m-tai
e&@@m=&r,
& mmon;a
*~W.M&
~ ?
& Ih k 8 ~ ~ i b l l i ~
@& =- .. . :zs,.w* & ; ~ # & & , ~ s
C O m . i ~ . m o w B +E0'& Pennsytvaaiiri may have on the looal w n o m y . Additionall
~
& l@fj%~fa]l&,=&,&I~~ S~hs;d . . . >:,
-@$i.@j;$ dm K
~
..
~
. .
B@wim& b1&3&5@fi~ly*&&.&& as of D m e m b 3 1,19%, in coqwate s h t i e s
as :ofmber ? 1 , 1 9 3 5 , ' ~ ~~ammercial
~4~.
. . is?&d P - I v a n i a - w co~tpLi$s;thtm
P*.'& n -
~ i t e j thp ~d by^ = , ~ @ srna * & ~ p s O-afl,,-
~ i & d e l J ~ ~ m ~ m o i r t g a l b emgwEea
~ b d pU&fbB(*i.
d-y ernplop.0~6~5,m ~m
figure
!
-

doxrs ngt, h m m , *into 8ccomf&oseh

SEaS is one ofthe k ~ i n v .in m&e Short- sad 4),lWbMmortgage-backed

s6ata agefl~ies~,
Term'~nv~i$itPMji it!fi@jmnqed tnanag~d&e se&rMea baEked by 1 W s under
PennsylvaniaSfatb Treasary bepwtkerii~he PennSylvwia's ?om- p r o p . The
STIP bw significant hol&gs of 1) w t i t l i s of H d program is & i d to meomage
d e p ~ s j issued
t by Pemsylv@ttia-based tinagoial. brais aarner&ipwithin the Comm~nwealtbby
instilttt4ons, 23 shod-tew notes and commemial mkhg rno@gapsw&ebIe to Iewer, modera@.
paper.i&md by Pimsyfvsn- campmi% 3) and m i d d t e - b m e , P ~ h . &households.
notes m d obligationsof selected ELwhrmia

Real Esfmk 1
tqm inve&q&dy
%3%8 hirtie hof J%=anber 31.1995, @8ER8 realestate
P e e n s y I v + . d . d:.e&&.ntarket in poWoo8~,.$7P~tcr~hvestments
198,74S&WQW&& @t&W WOmpm& k a 6b646&93 -.:f& efa@~~.~&il,
a d raal!pstab~oIjq w a
g e d,hy hob!, ?~wm?ntt .Wwmw?mm. w@
HeitmaaRMB Advisory Coqmr&m.aid RAI market value;d*i.-entstoEated.$455,Q
A&-, h
q,TG&a tkwa maaegets have milIion, of whieh SkRfPs ownership sh&e wnk
commiW to invest approximately 504% and $18.2
loo%, mpeetivdy, of thdw initid a l ' i ~ i o in
n
PennsylVmia prapsrties.

T h e S E R s ~ ~ p r ~ ~ ~ o m a r i t t d( # il i ~ ~ f W ? s c e .by d . ~ . ~ ~
$3,;780;5Miilbno 28,~& -1 Pmmyhmb*a&t F m k h Ekbmhip]. SERS,
funds..As apantafitti fQorig, 6b pwgam hgds jn cob-.* *Pwk&,putv~io
pd*thsa.caat barn-*we to , & j h , l&&Jy& , m - e < (pgGGJ@),
&..%M~&. inin-- ,&, o te w a@ ABMo~.:l%Ql@- VeI?ture
Pennsylvgni*Qr fneemplw P0my1vtmip C.apitalPPad'iti 14RWwitfi a c o w & of36a0.0
citizens. Thew par&ershipm diversified mwg mitlian fram find. Tke parhership of Alan
Yari~u.sgeographic regions and financing stages PatFicof AssociakiRostin Capital manages

this venture capital fund with offices in
Philadelphia and P&&ur&.During 1992, SERS
and PmRScommitted $30.0 million each to
create the B/A Fund (formerly lreown as the
APAIFostin Pennsylvania Venture Capital Fund
II),whicb will continue the focus on Pennsylvania
venture capital investing.
A key aspect of the SERS venture capital propan
is the athaction of national funds into
Pennsylvania i n v m S . Alan Patriwf
Associa*' expertise as the lead isvestor in the
majority oftheir investments continues to provide
&y&+nai witb a flow of venture c a p i i
money from numerous out-ofstate funds and
investors. The .pr- . of Pennsylvania within tbe
n a t i 4 vmWe capita) wmmunlty should reap
substantial rewards in futureyears for both
Pennsylvania and the SERS Fund. As of
December 3 1, 1995, SERS's venture capital
partnerships have attracted over $340 million of
out-of-state funds to f"mancetheir 8 0 h venture
companies based in Pennsylvania. After more
than 10 yeam ofveatrrre investing, the SERS
venture pragram coatinues to enhance the pa01 of
venture mpital availabIe to Ilennsyivanbbased
cmpniei by -a larger d o n d venture
capital funds into the state. Committed capital and
managerial talent of these organizations wuld
substantially increase business c d o n and job
opportunities throughout Pennsylvania. These
In 1988, SERS invested $10 million with lU&Z
PeMsylvania Fmd #1, a Pittsburgh-based buyont
group that inwsted in uon-hostib, '%endly,''
privately ~ e @ p t h Anon-auction
, deals comp1eted
with present management in place. Tha LBO fund
focuses on sumell-to-mediumcapitalbation
companies @tween $5 million and $100 million)
within a 600-mile radius ofwestern Pennsylvania.
Since inception, RR&Z has returned over $18
million to SERS and has successfully exited four
of its t h e mvestmeats. Based on RRgcZ's
1995 Annual Financial Report
national finns also bring investment capital
IVSeNeS to PBnnSylvania and provide a signiftcant
oppormnity for SERS to leverage its venture
capital dollars while promoting economic growth.
SERS has been active in seed and wly-stage
financing of Pennsylvania-based companies.
SERS's investment in the NePA Venture Fund
has, during its 1 I-year history, provided
investments in 26 Permsylvaaia-based, ~ o i o g y
oriented start-up companies. SERS's commitment
to NEPA Venhm Fund 11will enable NEPA to
cover the Pittsburgh area in addition to eastern
Pennsylvania. The god of NEPA Ventare Fund If
is to invest over the next five years in up to five
(itart-upcompanies in the Pingbwgb area.
The limited partnerships funded by SERS have
made investments in 70 Pennsylvania companies
currently active within their portfolio sa of
D-ber 31, 1995. The Pennsylvania portfolio
companies, plus non-PennsyIvania-based
companies currently active in S E W Sportfolio,
employ approximately 4,300 Pennsylvanians and
anticipate a 1996 pay011 of approximately $1 60
million. As of December 31,1995, $190.4 million
of the $380.5 million committed to venture capital
parknetship foM1.s had beea drawn down for
investment by the partnerships, and $102 million.
had been returned to SIBS.
pedmsnce, SERS committed S O million in
1995 to the RIZBtZ Private Equity Fund, a
adnutation ofthe strategy developed in
Pennsylvania Pun$ #l. SERS's s e m h for fvad
managers witbin alternative investments includes
a focus on Pennsyld-based companies.
SEI(Srsc r m n o ~ ttos this assetclass include
Charterhowe Eqnity Partners and Kefso
Investment Aaooietes, whioh have made
Pennsylvania a pat of their focus by investingin
Pennsylvmia-ba6ed wmpmim.
Investment Program Trends
I Investment-Related Statistics: 1980 through 1995
I

A ~ l l pTOW
l
# of Fund Rate of
Invstment # of # of Return
Yearbd ~V~ Advimrs Portfok Co~wuhnts (nstofpa)
1980 s%=%~,000 3 3 3 5.3%
 Investment Performance by Asset Classes

fa-lrPl,-:
S ~ : C * 8 l o r n ~ S l o c k ~ ~

* US.r#wmlyBills

TM'&&y d d r , m k

.Albl.o.tkre lavesbaentb

' , I 8
 r m - 4995 Annual Financial P---&

Y I-udentPerson
m&ms;Boerd'.~ i
~ , S v ~ . ~ e r i q h p m d b y h ~ ~ ~ ' ~ ~ f i e t & & i n ~ i t
pmk* &Ils~lidated%hltBs, doh 593 l(@..Baaofiaedt 6f6be v a ~ ~
h A& f996
y mmpI& by l?ogw&w& the Smfj&vestment Q&.e Btaff
29 & a s l s b s e q e n t ~ . ~ a b i I i tstudy
a~the.Wndatioq. of SBRS's Atlnual Five Yaw Iav&ment Ph.Wit.%pruben( gersw,j,e&n&-i
SER5 is able to p w e ahadea array o f i n y s s t m m . o p p o that
~ &ee the ability to a&mt
-rates of returnwhile mai&&h@ dsk &.amaptablelwols. Studies @ W e n by SaRS have
6 e m m t e d that the pnrdmt ~applicatlon.o~tIiiiiapaaded inwstMmtauthoritydrin mIt inamare
efficient pmtfoiio that better s c - & ~ , d s o f ~ d .

- - I

Projected Asset Allocation: 1996 through 1999

SEW%annual Investment Plan covm a paiod of five years. Tbe Fund's asset alldon shtegy evolves
daring this thneframe to achieve the lang-term tiv- for each assst wary. The plauned evoluticm ofthe
as& allooation itrategy is rerlected in titetabk below.

Stocks 56.5% 56.5% 56.5% 56.5%

Fixed Income 25.3% 24.0% 23.0% 22.5%
Cash 1.O% 1.O% 1.O% 1.OYo
Tactical Asset Allocation** 5.0% 5.0% 5.00/0 5.Wo
Real Estate 9.0% 9.5% 9.8% 10.0%
Venture Capital 1.5% 1.8% 2.0% 2.0%
A b m a h Investments 1.7% 2.2% 2.7% 3.a
100.wo lt00.Ph 100.0% 100.Ph
*&wee: S E W 8 I995dnmal Fhw Year k r v a m h t PCan *%!"A n o d g a d t l a n Lr 7 6 sf& and 30% b d . N&x m y no^
add Ehur to rounding,
 -
--

=
--

Isstiaet rnFW'.&l
r
u.
T** C. Z . m m @ e
eitrrtroacirors,
CS F
irst Beaten Factpet DptaSyHee
~ d tLynch
l LamrdFm,
&@maloO sachs Soaa*~MGwrqr
LobmanBrothers Frank h s e U Go.
Jeff* €4 Co. Ftkimmck &Co.

.c-
II
~Wbrktgsrctie

C a p ' i hstihrtioed Services &vaned A.asocietes

Damd4um L ~ & J ~ I. P.Iwrmgm s w w i t b
sdkuup~g,Bh Dean Wi~ReythM
Ntlubergm Br ?&mml N ~ F ~
R o m n Stsphefls Howard Weil
Roc~Sendities OoI& W u t g lestiMMnalSe?
W.R Lazsrd &,Lr+idJaw Trinity SePnrities
YodESeies ~~Diaporation
Brodm Capital KaW V0Voc)rbfs& co.
'M-aySeemities IBtarsBate%Imm
WilsbimA~,ci&a JameyMontgomery Securities
N&tWW,&mlities .Gnmtal&Company
%Owen 82Co. ~ l e ~ ~ s
Mne Webber bgg Masoh WOMWdkh
Alex & o w & ~JJM Emt&Co,
P m . ms d 6 s . Blafr, W3liam 0 Co.
Sfulfwd c. l3falmIn MIlOn,Rbad& Compsny
Execution Services WweIs, Arnold.&H+on
Jones & AssociateB 1Prirtgewg
&,,&&?B&W & ~ o n i iw.Baird C Co>
Auasnat OewcdK4dIe w
Oppe&eimar & Co. anto or^-a
tC
- Gewides Jackson Partnas & AssoQiates
Stsn.&iard& Poor's,Swmities Rlcke, Anthony I R L Day
w e n & eompsny Raymend James & Associstas
s.a. w-& company, H e h Till-
Fidelity C@d Marketa we-h,Pcek & Cirew
Alphaw-t McDonald 8t Co.
J. Stdbltcir A&l Nacer
Wheat Pi@ Wsudties DaviS,'Mcddel&Regetlstein
F0x.F'ittKeltan -
R o b i i Krrmptirey Cu.
UBSswBities B o s t O O ~ W
rtaulBton Ressnroh compady Wedbush hnmgazl semities
KefdeBmyeth & woo% awlsrBrotm:E49)
Tofnl I h e k (143,)
 Commissions Paid by SEARSInRerdnal Sqmate Accolrnt Stock Advisors
c - a ~ xw 199s
to C I ~ S * B~Y)~B*B:
~

M d l Lywb ~rodeutia~~eitnaies
James capel BSN Sociedad Devalm
BZW S d t i e s Dai lchi Sectdies
Credit Lyonnais Inverh4exico
NatWest Psnmw Gordon , ,, ., a '
Morgan Stanley Ni&o Secudties
saringswxities Bain kuritieS t- - - -
UES SecuMEs Asia Equa/
-
KLeinwon l b m n Acciwes Y Valom
6. G. Wmburg & Co. Potter Warburg Securities
warbugi%mlritias JeBes & Co.
Smith N m Corn smith Barney
Lehrmtn Brothers RBC Dominion %xitias . .-
Robert Fleming & Co. ' FOXP& Kelt~~ ,.
N o m m SaEiYilies PT Makindo Indmssia
Bear Stearns CIBClWood Gundy
Saiomon Brothers Exane Paris
Jardine Flemiag New Japan Sea&es
Marx Cas8aave & Co. McIntosh & Co.
B~rcIqsTrust & Banking Albert E Sharp P Co.
Crosby semritiw BIidge Tladimg
Garauitia Svenska Intermtionel
Societe G a u d e M q & e Bank Sydney
Fledgeling Securities Tiedemam Secudks
Pictot & Company Sohroder f+mdties, Inc.
Hoare Govett %yo S d t i e s
W. I. Caw Rand International
Peregrine Werage Morgan CtFenfeU
CS First Boston Indeval
Swiss Bwlc Rowan Darlington & Co.
Med Berg WorIdsec InternationalSecurities
Wertheim & Co. Bank Vontabel
Fiba Nordic Semrities Enskilda Secwith
Hyundai Secllritios I+. Lmdon Fonds
Cheuvrm de Vmeux JuUm Baar Semities
Paribas Pacific Equity Ltd
Daiwa %mities Kim Eag Securities
Arnhold & S. B l e i c h m h Carnegie
J. P. Morgan M e t
Ord m elt Other Broktas (80)
G. K. Gob Total WDkm (162)
]Total Oomm~ions
 mia "-to Emplom' ReiYr---' "
L -. . l
, CcItesiom Paid by SERS Sparnte Ac--dt Stock Advimw
0 (%Udtg &~kCtlSj1985rE994 C Q ~ & O J ~
t
I

Total Co- $9,369,836.93 $6,579,28%.99

Tha SERS 1994AmDcd Fina?wid Repart li&cd dome& c o ~ a nonly. s As of ow 1995 report, SEW is
W p both domestic and i n t m m h d crommisarions md total commbi10~8paid mning the &dar year.
Doane@io, international and total commissions tbr calendar year 1994 are provided here for oo~lpsrieon.
 t~ i3.W.Board the Hiring of MWar, Anderson & Slimad (MAS)
Act 1987-8,i
responsibi~to &fab&aad-
. a IRC tomeneggaaactivebondpoolof~.~
Section 457 Deferred .fbmpnac3nnhgrat&for portim of @ Stable Value Frmd &ed
c p ~ ~ d ~ 0fflWE3..d
d f h empi-. %I€& iniial W e r of over $40 million Brom the
this program, p&cip&s volmtm to b d d AUL pool ofrissets. All fuhwe contribariom
retiremeat win@byeatd&&iiga p d o n of the'! wiUbe~tothispaol.
salary q o m g m n invcdmmt qtiolls. 'l%s W g Wvidian Capital Managamentto
opfioasm U.S. S h t T@~I Money Market, U.S. provide a gwmnted cnditing rate for esch
Aggrepb MdI*,Ea_bBncred U.S. Ta&d prteronbBeMASactivebondpL
AS& A I I ~ O U.S.B , ~~&&mket (smili to Contin& w of AUL to manage .the balance
mid-cup], B ~ & p i t y k(itemitiond
l ~ of the Wle Value Fund's asaete. The
~tocks),U.S. Saok Mesand U.S. StrtbleValue Board%efforf to rednw credit risk exposure
m. will continue with periadic W f e r s of AUG
managed asset# into the active bond pool.
199saigbcsM,ts
Effective M y 1,1W5,as a result of research Growl'h qf&eBagrssre 1991-1895
pmentedti3theBoar$.&eExo&SdB~ Duringtheperiodfrom&c~fl,1991,
AMuii product m
,w,&&&&,
k..
-

. .~ .~ - &KQIJ&theend of 1995, Defend Chi@&

triptad in value %m
cb& Two -p&;&&&&& ks over $305 million.
estabiished d the r c m w fm,,* were 22,500
Stable Val= hmd op&m tfbprmankdthetotal
encompwsed the heoUdlq s@p:
 Member Demographics
Total Active Former Employes
&S d v m
81rn
sops
80,690
80,492
76340
74JU
am
71,316
69,515

m 'r.
Number of S m members, 1987 h g h 1995

P r 6 ~ ~Emplo$es
I f ~as ofBcem8er
~ 31,1995
A- Age: 4636
&w%&+af&arvi~,e 14.17
S u t ~ bAmuiUuots
~r
9.2995
AweWge Pension
Supe~tion s9ma
Early Re*
Dis&fed'Amui~m
' ..
L :slla,t%
Beneficiaries BE Survivor ARB* 79.1
H~y~Huggi~Cwnplrny~
lnc.
~ ~ ~ a ~ , ~ C * u l t e n t s !
,~ '
K'garw; I i : r n W mmurki R P

wmm w .. L

_ I I _ . _ _ . I . .
A n ~ ~ ~ l a s t p e O m ~ a $ o f D e c a a b s 1995to r 3 1 ,
~ a o s u a r i s l ~ u n d a t h e P ~ S t s t e ~ R e ( i r e m e o t
Systean. Ths out,i n i n - a . d , '
a WrfiiF$, m my reilech the applicable p r o h of tbe St&
~ m p k p ' ~ . C a d eTke-. ,&
basis for
&ied
detaminia
eof
ths-mtobed\iy't3rs
PenmyhanIa State Emplo@ Retiimmmmt System
I
Contribution Rates
As ooted ekewhere in thiB report, SERS's ifdependent aotaary HayMuugginsCompany, t&
hlv-ts have p r
odm an mdhd 10-year Commonwealth's totalemployer d b u u t i o n rate
invsstment rate of raturn of +11.4% aftep.fees, ao was as high as 18.87% of p l l in 1981. Dne in
anmekd fivsyear investment rate of return of parttothesn~investmentretumsachieved
+13.0% after fees, and a +25,3%total investmeat in 1995 and based on the 1995 AcnuPiol Report,
rate of rehirn after fees for the year ended tbs actnalemployer Mbutim eate in 1995 was
December 3 1,1995. As reported in the auuual reduoed from tbi 1994 rate of 1027%of paymu
Actnarial Reporfs produced for SERS by to 7.69%of payroll. ' - '

1011
10s
leo
199
1%

*The totdemplloysr G& is h actual w#rCbntion mie dwhg the awxading$adalyesr. flm iwtancr, the 1995 rnte qC7.69% wtH
be themplqve?canfribunonratefi@nOtyem 1996-1997.80m:SIBS 1993 Achwial RtporS R&iYt@3tw C -
.
Annually,the SERS oonsulting a~tueryperforms
an actuarial valuation, determining, among other
things, the funded status of the benefit plan. In
1992, for the first time, the actuarial value of
assets exceeded the actuarial w m e d liability,
meaning the plan attained fully-funded status,
with adequate reserves set aside for past service
liabilities.
AnOthw~~~statusadopted~tha
acGoantiag d aotuarial profkwiionols messurss
the market d m of assDts agaiard,tke projeFtsd
benefit obligation (PBO). The PBO is calodatd
in oonfomance with the re@rwm€s of
Stamneat No. 5 of the Governmental Aoco-
Standards Board (GMB). Thssa re&mm@
detail digol- stsndds for public pension
q w s . Under this mathod of calculation, SEW
w ~ 1a1 1 ~ % f ~ n ~ a s o f ~ b e r 3 1 , 1 9 9 S . T h e
mxnt W r y of the'fimdsd Wmi according to
the GAS3 methodology is depicrsd below.
 ECTION
Report of Independent Accountants
 Coopem & Lybrand L.L.P.

apofessionsl-sewicesfam

REPORT ON'INDEPENDENT ACCOUNTANTS

Board of Trustees
Commonwealthof Pennsylvania
State Employes' Retirement System:

We have audited the statemenis of net assets available for beaefits of the C o m m o d t h of Pennsylvania State
Employes' Retirement System (System) as of December 31,1995and 1994and therelated statements of c h w in
net assets available for benefits for the years then ended. These financial statements are the responsibility of the
System's management. Our responsibilityisto orpress an opinion on these finanoialstatementsbased on our audits.

We umducted our audits in accordance with generally accepted auditing standanls.Those standardsrequirethat we
plan and pefform the audit to obtainreasonableass- about whether t h e h i a l statements areemof matpaial
mhtatement. An audit includes examining,on a tagt basis, evidence supportingthe amounts and d i s c l m in the
financialdateaents.An audit also includes awessing the acumtingprinciileswd and sigrdfkmt estimakw made by
managemmt as well as evaluating the overall financial statemente o n . We believathat our auditsprovide a
masonableLmsii for our opinion.

Inouropinimqthebcial~entcccC~~vepresentfair~, indmaluial mpe&,thetinancialstatus ofthe

Commonwealthof P-lvania State Employes' Refbmeat System as of December 31,1995 and 1994, and the
changes in itsfinancial~trttusforthe years then ended in canformilywitfig d y acGepted ~ ~ ~ ) m principles.
ting

As explained inNote2, thefbocial statements include investmentsin real estate,mor@ageloans andvmtuFecapital

valned at $1,976,676,000 and $1,862,652,000 as of December 31,1995 and 1994, respectively(appr0Ximately 12%
and 14% of net assets as of Ihember 31,1995 and 1994, respectively), whose values have been estimated by the
Board ofTiustees, in the h c e of redly -able market values. We have reviewed the prooedures used in
arriviiat the estimatedvaluesof such investmentsand have lnspectedunderlyingdocumMon, and,in the circnm-
stances, we bebelievethe prooedures are reasonable and thedocmentation appropriate.However, beeme of the inher-
en~uncertaintyofv;luation,thoseestimatedvaluffimaydiffer~~hmthevalues thatwouldhavebeenused
hadareadymadcetforthesecuritiescxisted,dthedifferencm couldbemeterid

Our audits- condncted forthe pwp9e of fonniag an opinion on the basic finanoial stakmmrts taken as awhole.
The SupplementaryI n f o d o n is p m t e d in aewrdance with SManentNo. 5 of the Gov-ental Accounting
StandardsBoard for p3nposesof additional-is and is not a required part of thebasic financid staterneats. Such
informationfor theyears 1986through 1995has beensubjectedto the a u d i t i n g ~ u rapplied a in the audits of the
basic finaucial statementsand, in our opinion, is fairly stated, in dmaterialrespectr, in inlationtothe basic finanoial
statememtaken as a whole. We previously audited and expressedunqnalified opinim on the basic financialstate
mmts for the years 1988 through 1994. Such infarmaton for the years 1986 and 1987 has been subjected to the
anditiagprocedures.~pplied in the &of thebasictinancial~entswhichwma u d ' i by other auditors,whose
reports thereon expmsed unqual16ed opinions, and, in their opinion, such information is fairly stated in all material
mp&s in relathoto& Lmsii financial statementstakenasawhole.

One South Market Square

I-Imwm&P@ansylv&
May 31, I996
 IB4
(000's omitted)
ASSETS

Investments at fair vahe:

United StatssGovernment S B C W ~
C o p W e d foreign band@ a d notes
Commonand prefened sf&q induding
oo1Mve trust funds
Te~invpAtmedfs
Mortgage lonns
wtxftate
Van- capital

Total ~ v e s ~ n t s

CoDEributIns receivable:
Empw-
Employes
A d hvedment inconuta d o h receivables
cash

Total assets

Accounta payable and accrued expews

Due to brokm

T d liabilities
s Note ;3
C o ~ o i e(see

NET ASSETS AVMIABLE ROB

The accompaoyiag notes are a0 integral part ofthe fbancial statea~ents.

43
 Retiment System

STA- OF CB[ANOELS M NET AsSEi% AVAILABLE F O R BENEFITS

fop the yata endcd Demukr34 l995lad l994

m.3 1P94
(000's omitted)

ABDFilONS!
Investmest incbme:
Nst.qpdatiot~(-Won) ia fair d u e
OfiInWmm
In-
Divkdmds
Qttm

Total additions

Total d&&ons

Net- available for b a d & at beghkgof yWr

Net assexeavailablefor benefits at end of year

The accompayhgnotesare an integral p r t of the h e f i n a n c i a l &%t@mWs.

4a
 -

I NOTES TO FINANCLU, STATEMENTS

1. Description of the System:

The State Employes' Retirement S- (System) is the adrnlnistrator of a cost-sharing multiple

employer dimnent system estabhhd by the Commonw& of Pennsylvania (Commonwsalth) to
provide pension b o n e for employes of state governmeat and csrtain independent agencies. At
December 31, 1995, there were 109 partioipating state and independent %encies. The System is
wnsidenxi pat ofthe Gmmonwsalth of Penmyivania fhmcial reporting entity and h included in the
Commomvdth'a finanoial reports as a pension trust find.

Membmhip in the System is mandatory for most state employes. Members end employas of the
Gmed Assembly, oextain elected or qepinted oftid& in thc executive h c h , d e q q t heads and
certain employes in the fieid of eduoation are not ~equked,but are given the option to parti~ijmte. At
Dewmber31.1995 ami 1994, System membership Mnsia&d of:

R e t i l w s ~ ~ f i ~ w c u r r e a t t y w c ~ ~ ~ ~ a a d
tkmainataaemployaseatitled to bemeMs but not yet
meivingthem

Total membeas

The System provides retimnent, death, and disability bandits. RBtiremoat benefits vest after 10 years
of c d i sewice. ~ p l o y e s w h atage60,orwitb35
o ~ years of service ifuederage 60, are
e n W to a IIO@ annual retinmat benefit. Members of the lsgishm cszd certain employes
~1858- in MOW d q po~a0119an ratin:fiMIbmfrts at sge 50.
The general annual bemerit is 2% of the member's bigbest threeyear average salary t i m years ~ c
service. Members of the legfslatore who were members of the System before March 1, 1974 ru
entitled to a benefit of 7.5% of final average salary for each year of legislative senrloe. State police ru
d w l to a a t qua1 to a pmwmtage of their hightlst mual salary, excluding their year (
m h e n t . i'b benefit is 75% of dary For 25 or mote years of m i c e and 50% of saieFy for 20-2
yeam ofservice.
c o w e m p j i i are r@'nd# c o n t r i i ta @e System afarate of$% of their gross pay. A hi&(
eonttibation mk of 18.75% is required of members of ttre GtWral .=biy in o f f h ~@i6r to Marc
1,1974.Judges and diiictjuStiees have the option of el-g qw2cial fnembephip qb9e8 req-g
cod&x&mof 10;0% d 7.5?A,m p c i v e & , . ~ ~ . l eQ m ~&eW of ifsafry 'into gtate t?&pbymmf
The ~0ntri-m &. in,an ipdivf$wrlly 5Ct~.&d Wi,rtpr is &o e d t d wil
mtwgst, calculated y a r b l y to yield 4% -per anrwm, m mandated by Wtc. Aco\1~1d&d etnp10)
wntri-ns and &ijh ;ham& @ $2,499,485$0@ a d $2,353,9a0,000 (

December 31, 19!?5 and 1994, respectiveiy, vest inm~diatelyandace retuFned to the mploye upa
termination of service if the employe is liot eligible for other beae8ts.

Participating agency wntributitms me also by statr$e and are based upan an actuarial!
determined pwntage of gross pay th& is necessary to provide the SSystem with gssets sufficient 1
meet the bSnefits fo be paid to System participants.

According to the r m m t code, dl obligations of the Systam will be assumed by the CMnmonweall
should the systarn terminate.

TBa W c i d statemenfs tiri3 prepared wfng the ai%mal Miof

Fj~mfd Amwting S&&# B w d ~ o . : 5 5* , b & g
~~ q i e r the pvisioils I
& R e p & g 6yDefhted Bes&t pen&
Plans." The System f o m m $tafem@ts No. 3, '&ipo&& with FmsneM In&otl~, h d m m
(Inchidbg Repwch&eAgreemm~),and Reverse Rtpmh,A,greements." and No. 5, "Disclosure I
Pension Infomation by Pnblic Employee R-nt Systems sad SWte and Local Government
Emglofits," of the G a v e ~ e n t aAccounting
l Stamla& Baard (GASB) for reporting and disolo~
purposes
 Use of Eatimptee:

The prepaxtion of financial statements in conformity with g e n d y accepted accounting principles

q u i r e s management to make signiffcrmt estimares and ammpfiohs thiit affect the raped amounts
of assets and liabilities nnd di8~Ioswesof eontingent assets and liabilities at the date of the fhncial
sbtements snd the rqwted ginoM;[B of revenue and arpanses during the reporting period. These
sigoificant estimates in~lutkthe aectrmlllated plan W t s a d matket values of Investments. A d d
I'EsuI;[B could difirtlom those estimates.

Plan contrib~&onsand the actusrial present value of aecumalated plan benefits are prepared based an
carteta assumptihs pertaining to &zest rates, inflation and employee demographics, all of
whieh are subject to ehmge. h e b uncertainties inhemnt in the estimatiws and at+eumpdonsprocess,
it is at least reasonably possible that chnges in b e estimates a d wswmptions in the near term m l d
b v e a meterid impact on the financial mtements.

Valuation of Inveafmen$l:

The System records its investments at fair value which is determined d&m&y %I e d inveslment
type. Marketable securities, which consist primarily of debt and equity securities, are stated
prioeiplly at ma&& v&e. Seeu&ba traded on a d o n d swwities exchange we vdhed at the last
rqxxted sales price on the Lsst day of bussless of 4 plaa year. Sdties wbi& wcm, not traded on
the Lest day of &e plan year or wwhith were n a treded on a &ml sdcurificrs exchange sre vained by
the m p t i v e W maagw or 0th~Wid parties 'bssed on similar securities wies. Tmprary
ittvesdmm are valued at cast, whl& appmxhatas market value.
.. . -
The fair value of die particlpatiotl m e d by the SyPtem in the coIkh%etrust fimds was based on
quoted redemp&m value on tha- last k i n a s day of the yam.

Mortgsge loaas are valued by tke mortgage advims using a biscamtd cash flaw m a . Venture
clrpital pods are s W x j at faif values afi detmuised pringipdly by q e , @hem1pdumers of the
venture capitd Eu&.nnd meeprd by tlm ,mspe&ve valWhn can-. Thc,vaI&ion eonunittees
consiatr v&6lis &torn hluding finimclal conitititm, cipemthg rewlts aid the nstnre of the
investment
2. Signibcaat Awunthg Policies, continued:

Real e&x@ investmats are strrbd at estimated fair market valne based on an agataisal rego* prepare
by an bdepmdemt real estate qqmk (rnedwr ofthe Am& h&We&Real IWte AgpraisrrS)
This estim&ed fair ntartrt value is determined in wwdarw with the policies d produrea of th
Ameaiean ImtiWte of Real EXate Appraisers. This e d m t d fair d e t value does not neceasaril
rapresent the price at which the investment vodd sell since mmht p c k s of rsal estate iwes8neal
are determined by negotiation betareen a willing buyer and seller. As a result, actual sales price ma
differ from the fair markat vake mtimates. Management believes that this &&netedWmarket vdu
is a reasonable approximation of market price.

he System pmenta in'the statements ef c h g w in net assets fa ben* the nc

a p p i s t h (&pciation) in the fair vdpe of its inve@menf$ which wmists of the realized gains c
l o s e and the unrealirwl appachtion (dqmcSm) on those kwsbnmts. h l b d @ins or losses a
sales of invhents are detemined on a specific idenW~gti~1 or average cast basis, depending apo
the type of investment.

Ths ammt ahcm w 'wW f i t o M ~ ~isna,#a&&d

'~
. disc- -oftha -1
v ~ ~ . . o f p o bur&@,
n s , ~ -:f@r* &b& efaRsjW.srdeFy ,&&&&$d a,
'
i ~ . 1 * n r r d t 0 f m y ~ ~ h t r ld % 0 .- r * l m r h (
p+$sd -,.& 3 intended, an en w ~, n
ig
~ .. Mi,to %Wake the asssjagnerit of tl!
SptwBm'$ l%n&tlg,staiusand pmpea d . ba&%wd&&.mm @a%! fo paqr hen*
snd b atlow f o r a e p ~ o o m p a r i s O nof th'i dara&g ptbk @ye mhment systems. Tt
p e q 5 i o n ~ t o ~ i s ~ b a s e Gd$BL3mwmtNo. d o n 5;m4 is i d e j m h t 6 f &
&d fimdIng & wmrmine -*&,the &s&m a ~ . ~ ~ h . N ~ 4 .

T h e . ~ ~ . ~ , & ~ ~ ~ ~ - n M 1 ~ ~ ~ f g h d aat-31,1% l v ? r l ~ ~ l l
,1.~m. :.a&&d ,@stm@w 4,Made(ti).B &e f m t m m the invaWwU (
prseent ,d of 8.5% &., 9.25% p@ .%e co$npmdd %M@~s in 1995 8Rd 199;
-&y, @) projeetad &33% sad LO% ger year -
ded m y 195
iw,m@vety, (D] additional proj-d i n e m of app-ly 3.5% aad 2.7% :
1995 ,and 1994, respectively, attributable to tnerit/prdon, and (d) w post-ement benei
im:remmi
 -- 1905 Annual Financial Report

3. Ehndhg Status and Progreq continued:

Tbe peasion ,bmdtobligation etl3emnbet 31 1995;aod 1994 is as fbfallow:
-1' 8 , 8 8

rn
(ooO*s 0~miW)
Pension bmefit&l&&n:
.
lwreF&and l3em&mw. currsntay-,bene
and tsemipated ~ ~ . ~ ~ but
t ~ ' b e n ~
not yet receiving tham

c m + a d l p w :' - -- 1 - 7 1 1 1 1

Aecnmalated employe wafributions and credited

iateFest . J- C

RmpIqer-fhamd, vested I 8

Emp~-fb-4nonvesced
..
Total p m h benefit obliptiion
Net awes a 4 l e for beme% at* va1w

r 8 8 '-, r 'rr- 8 .

A cornp%ra@ve 10-year summary of the pension benefit &ligation, wbi& tiow ken oaloulated in
r2O&mmw
~ ~ -
,. -
*
the l.eq-6 Of @Of,@ f@temnf
mon,foUop13mgthe @bb to the fmng~ialstatemantsants 5, ia plemtd
This Morntation is p
.mpplewentary
d for pmpom
m.
of &ond an+& ofthe System's progress in B G C U I U SUeAcieslt ~ to pay bendlts:whhen
~ W ~ass&
i pension benefit obligation mdet GMB -men*
dUb. The c a l c ~ , @@f& No. 5 '&bs frMl the
aahaiI&m .FS@& mudm Fioaochl Ammtia$ : S t r r a w Baard (PAS$) S h t a u a No.. 35 of the
aotil&al pmmt value of plan bawfit~prinoipthb bgr the oonsiddon of fatnre d a r y
*
-8 and d a n 8.5% a d 9.25% w+umed rate of mtwn w invwents in 19515 and 1994,
re~peotrndI~~
3. Fuading Stptna and Bmgresa, contirmed:

The significaht actuarial &om used in the valustiom efthe aotustialJnerwmt value of accumulated
plan benefits ~ d e FASB
r SMementNo. 35 as: of December 31,1995 and 1994 are as follows:

MoFatIily:
Supemnuation (normal retirement) Current Retirees, Beneficiaries and S u r ~ h
and early retirement The 1971 Group Amuity MoNllity Table, set back
6yearsforfemrrlea

Current and Future Employes:

The 1983 Group Annuity Mort&& Table

Modifications of the Federal Mf

fi Disability
Mortality Table
Assumed *of retmn on
investments 7.25% and 7.75% in 1995 and 1994, raspectiveiy

Tbe a~umnkbdplan benefit information a! December 31,1995 aad 1994 is a8 follom:

1981 1Pe4
(000's omitted)
Actuarial present vahm of ~ccumnlatcrdplan b m d b
Vestadbenefits:
P d c i f s n t s w t l y recem'ipaymrmts
ottrerpticipants
I NOTES TO FINANCIAL SrATmmxm, colltbued I'

Actuarial present value afa~cumufatadplan beeebtF

at January 1

&weas(decmm) duriag they$ar ~b.utab1eto:

Pessa(ge0ftime and other-
Change in p b p v k h m
-C in &&I
Ir6aestqates
Mortality tables

plan benefits
Actwkd preseotvaloaof ~ocmulafed
@-kt31

oliaoge t&ng the Iar- $crqse in cost m 1995: was tile e k g e in the
actuslial $ss~mpt5@11
demd&rephica%iwtion tiofrom~h 1972 Group ~
--
t MmWity -
y Table ( G M 41) to the 1983
Gtoup ATHI& .M&diQ T&b: (GAM 89) faP eueRint and futura e(npi~&W: to re8.e CO@&&~
mc&li@ilnpmwa mc6em-71t & l 6 , 0 0 ~ @& p p l y f O r : ~ y n a a t b

on April 29, 1994 and, amorg othe~dthgs, provided a Bost of Living adjosBnent (COLA) to annuitants
with an e M v e date o f ~ c oont or ptiot to June 30,1992. The COLA provides for an &iional
a&&.,@,#&@ o-:f ldfy$,
e t ~ % . $ : b e / e b a m d a n d q t s . o fTheApt:&o,p~oridesfora
~i
mon&Iylongevity suppkanent for members with 20 erxtiim years of d 6 e vith a date of'mthment

The System W i n g policy provides for periodic member contributions at statutory rates and employer
contributions at actuarially determined rates (exprassed as a pemtage of annual gross pay) that are
suftkiezzt to acemolabe BBseta to pay befits wben b.All required mntriWo119wwe made for the
yeam 1995 and 1994.
Employer m u t r i i o n ratas are detemhed using the entry age normal aetardal wst d o d , with
amortiation of the unMdsd wtuartal liability and of supplemental annwik d i n g from aost of
lhhg and other adjusments over 20-year perids. Thee rates are computed based upon actuarial
v f l d o n s on tbe C-onwealth's fiscal yaar of June 30; therefme the employer cmtribufion rates in
&ect for the Sy&em's year end of December 3 1 reflect a blended aver* of the rates as calculated.
The blended conttibufion &es were as follows:

Emplopr normal cost

Arnorthtbn of uDfUDded actuerial asset
Amolthation of8upplemd muMes

Total employw cost

'Ilia make-up of enSjdoy&r 00.g re&& the System's assumption$, prhmti& a they relate to
&BS--B, future.sdalluy incresses and acts 0flegis1eb-m~themby r d o d q the corn*
o ~ w t a l ~ p i o ycost
er

S'i#hatttstractd ehaqgpbave g c e d M ~ m ~ & r q h 1995skdy~ftbaeQlarial

experience of SERS. These n@& the . a c h t e d t a l ~ ~ tb :fmmpuk emp10yBt''s
significant strudural change wss to move to a flat s t d rate
coattiburion requhmqnts. The m ~ $
;of- &-'a:m. %p r i WV*
~ M M besgs ~ l . ii~estmegt
& WWWMto bt 9.9%
'~thFough2 W m d tfied.g&ed *,ti, 6% afbr 2815 whiahwss @wht to tlie 935B/ainveshnent
mtarn Musad h &e pmj& h~&:obB@on cabuWa fa 1%. The,oMge t@ the fl@trate of
8,mwill $&ce e r @&jfe@& fw tfie : ~ ~ i j d ~ fl@
t & yeer
s b&&g July 1,
1996.
5. Investments:
As provided by statute, the System'8 Board of T ~ s t e e (Board)
s has exclusive control and management
responsibility of System funds and full power to invest the fuods. In exercising its fiduciary
respmdbility to System membership, the Board is governed by the "prudent person'' & which
q u i m the exa~iseof due oare in estabLiskg investment policy, and has adopted fts Statement of
Investment Policy to farmally docux~entinvestment objectives and r q x d b i l i t k . TI@ policy, as
well as appli~alr6state law, defines permissible inv- of t h ~
Sytsra, ~~ all &vestment
typ&heldintheportfolioatDccember31, 1 9 9 f i a n d 1 9 9 4 t t n d 8 t a l l h d ~ t h e ~ .

The bvestmetl$ of fbe S y & m at h m b e r 3 1,1995 and 1994 have been e&qpmmd to iadicate the
level of risk a m e d by the System, in accordance wiih GASB Statement No. 3. In aceordance with a
wntnwhd re!&tmship between the Comrnonwealtb's Treasury Department and a custodial agent,
substantially all securities subject to categorization arc held in book entry form in a unique account so
as to be idenflied at d l times as the possession of the Commonwealth; all such invGstmeRta, as well as
certain securities held in physical form at the CommonwedWs Treasury Department, the statutory
custodian of tht Fwd, are reflected in Category 1, which is defiaed as sectxiti05 insured or registered,
or held by tbe Syetam or its agent in the f$ystem's name. GASB Statemexit No. 3 provides for
Category 2 and 3 iweshnents, whbh reflect a higher Eisk. The System hw no bo&&p of these types
at bcembsr 31,195 and 1994. Certaia investments have not Mca@g&d Mawe d e s are
not used is widcaw of the investment. The inveslments not c a t q m k d i d & owPosghip inkrests
in collective &tist h d ~mortgage
, loans, real eetate ilnd ventun capital pools.
 NOTES TO FINANCIAL STATEMENTS, Conthued

5. Investments, continued

catesory 1:
Udited Skates Gove4ament securities
Colpate bonds and notes
Common and preferred stoeks
Intermtianal wemities

Not Cateporized:
ImgsPraeFRsheldby bFoker/dealers under rev*
~ ~

~h:af3t=ments:
URited Staw Goverment mwities
*m bands and ncm
'Commonandpre%md h k s
bknmthddies
Collective Bustaad r n ~ h d s
Mortgage loans
Real Fatite
VenhvecapM

Total investments

The Sy-m's investments are managed by vadow fund -gem. At December 31,1995 and 1994.
respffitively, two eMernaI iqvestment advisory 5 m s managed approxhtely 47.5% and 44% of the
System's total investment @olio assets. Most of these assets consist ofcollective trusts and mutual
funds and are passively managed in nature. The allocations to these two i w M advisory firms m
l l l y consistent with the System's Annual Five Year Investment Plan and Statement af Investment
Policy. Because the System's assets are invested in a variety of fuanoial instraments, the related
values as presented in the financial statements are sdbject to various market fluctuations which include
changes in the equity mdets, interest rate environmentrmd the general economic conditions.

The System's inveetments in real egtate are concentnded principally in office, -WwiAat, retail, and
residential projects. Appmhately $199,014,000 and $190,290,000 of the real esttlte portfolio is
located la Pennsylvania as of December 3 1,1995 a d 1994, mspeotively. The System's Fetuamu1gmal
estate inwstments are not concentrated in aaiy one geographic area or indwhy.
The @ c m b . a ~ & &1g - p
-, wheFeby certain .W.$&&& t0 an
indepsPdent ~ ~ e d d a a int ewbange
~ for CQW eqqai to st 1- PW df tbmarkst value of
s e .d s on l a trey-
corn-
~

w&wmB r e p 6 . w e n & ) . As.tfK S y h rqms&s only one of several

the d v p rom and, ,@ by
the ct~-@d 9ge&k.in mc-bggige '&f ,-ern ~ m i & s .is nd sp&f&eUy i&mtiWle by agency, the
~ t owhteral
~ . d o e s a & l w a F d t h e - d f ~ o h ~ o l l a t e r a l , o r t h s ~ ~ ~ ~ U 1reftrm
via cepmcheBe of m q& l w ~ . Set388 tqdw to% however, are *ad on the
*
Sptmi's % ~ ~ O i a l sn$ $sue 'k
. e h i f f . 4ic4w-y in the summy tS irwahmt risk.
$m
ew
-
.
. jts tqjo~ureto credit ri& du@ to br~kinldoala
;'..
by having the
GUyI&ial+ M zeqthd COW meets iW%of r e Uaetnb ofsecdies
on imB . e fjmhas mt -&4 9ny kcism due to &it riak on. e I e . ' a c t i v i t y
dim isnplemenMm of the pragrtmL

meid g 0-y
~ .. involve -m c&it expome. ?&a policy of the
8- ia ,to ts (b. m g d m q e o ~
gedb1~ end? n de g p d Y . r In the
em- b e@ @ j& tlis e o w m a@ :@gwbted
wdof
atb =Offie,s~cbs -m@Sp. ~ p o cd ~ ~~ m w r ~ h ~
ad n t o n k d d P d j d ddly Tbe sra dewelaped based on the
o w in&,- apd o@sr ~ i d m i t i o n ssuch
, as the l~n.gthand legal
m mofthe. brpe of qWe@ladvanced, ,antihlskwicd v o indicatoss.
~

The System uses financial in@nnmnfs heludig forwevd exchasge contm& torn- markat
v m .T h ~ ~ : the : ~ ~e p , ~: r i ~s k e~ P , @tri,I
to ,: m ~sy~- ~ ~ ~ ~
Pw.

-
6*S ystem,$wwm , :~. ~-w '&ge*&w a : & j d i a g s of
d a fmfc debt -d -=a, which mc~amtedto qipahatary. m.2- 1 mi $16
man at D&+i&& 3 1,195 @a,, mp~&ely. .Asz d t &&em stmtqieq ttw&yderi~ e&m
e c o a w hedges Celatiag to spe&ic foreign gseou&y pidt@tm. Those
forward m
desi&p@d
f l m 6 @ , 0- :mdt i , l
to m' eqoWUQ .d
a'@&an#
lK&Jw * fmm fomig5 w (
o m
which hedge f0I'd$n s€xGtI&e~
fabe

as i n d Such:~ am~mtseffsdvely o@& p h . 9 9nd on the faieIgn currency

B ~ are-.
B which The System does aot center into bnkd GonBaEts on a spe~ulatkeb a s .
I NOTES TO FMANCW STATEMENTS, Continued

5. Investments, continued:
At~ber31,1995,tbeSystslnhadwn~maturing~~gbMaroh27,1996tup~hsseord
foreign cwmncy as follows:

Deu&Madc
FmchFnmc
SaaedisbKKnea
Japanese Yen
Other

Deu$chc Mark
Fr8nchFnmc
sw*Kroner
BT*
SWhtQ
(WsOmiW
Sell at
BootRate -
Net (Payable)

Jqamm Yen
Olbsr

Them were u n d i d gains of spproxlmaDe)y$3.9 million and $1.2 million, and -gate
m m u b d losses of appcmimately $0.6 million and $1.3 d l h for &we forward contracts at
Deoember 31,1995 and 1994, mpedvely.

The System*s investmimts. lnelvding investments bought, sold, @ well as held during the yesl
appreciatd (depciated) in fair value by $2,761,871,000 and 8(749,290,000) in 1995 and 1994
respectively.
 Isas Annual FinWal Report

- - --

-
- ----

~
-mm$TO ~
-
A N % S T ~ -,~a&&
I
5. Investments, con@~ued: I' I _I I _

3hfair v & o f M M . i a V m W 5
rep~esetlt % more
~ of tfie &s&.m'snetassets available for
benefits Wrrs fUUow8:
l s la4
~OBO:s on&ted)
Wdls F q p Nikko .frlw3mtAdpiis@:*
-
m , I a ; d e x R @ P 160,197$4& 13.1,531J91).& in
1995 and 1994 ,,respeotively $3,?56,%4 $2,064,180
7Ot30Enhsnced U.S.Tactical Asset Allocation Fund -
4$,763,~,and48,985,87.6 in l B 5 and
lW4,zaq1&irely $ 8j'5,397 S 706,476
ExreaW &l&
1@4$,703 unh is 1.995d 1W4,-1y
-
MwlCe~Fugd 1~5JO4,05Qawl
$ 956246 $ 76632%'

a
h mmmi&eaon prognm. As a IW&, &a Sy%tem realid savings of qpmxhstsly
$587,000 on oosscllting, aelviaoly. m d other expwbrw. At December 3L, 1995 sod 15% the

for Eutme expenditures.

6. Income Taxes:
Mawgemmt believea the System meets the tiefimitim of a GovemmW Plan and in the System's
s the Internal Rwenue
c o m m u n i ~ with (WS) bas been tFeatad as a qwdiiied plan. T h d w ,
the System has not requested a detedmtion letter h m the IRS reIatiug to the s t - oftbe Systefn
under the I n k d Revenue Code.

The Systsm is involved in various law& which, if settled advmsly, would not have a m a k d effed
on the hancial stataneats inmatw&ementysopinion. However, the hdki& ~ a s e sinvolve legal ic3snes
that,i f e x t e m d e d t o t h e ~ m ~ , m y ~ i n s ~ a t ~ t o . t h e S yIfs suchanevent
tem.
were to wur, the additional w e wodd @ m e r e d by the System &rough adjustments to the
employer mntribmion I&.
Now kwAa as B m Barclays.
Several new a c w ~ & ~ ~pnrnomcements
g were issued wht& the System will be rsquired to adopt ova
the next few years as follows: Statement of Governmental Accounting Sta&d@ Board (OASB) 25

(&b&ve for the year endinj

December 31,1936).

GASB 25 e&&li&e~a fimncisl reporting f r g m d for defined be& pension plans tha
distinguishes between two ategoffes of information: (a) current financial information about pka~
aase'ts and financial activities and (b) aetnarially debmined Mbrmetion, fiom a long-tern
pempeetive, h u t the funded statup of ther plan a ~ the
d progress being made in accumulafhg sufficien
assets to pay benefits when due.

OASB 27 &&li- for the mwmment mwgnition .ddisplay of pensior

st@&r&
expendid- and rdstad Wi~itks,&, note ~ Q and reqvited
~ suppiernemu!
,
,*,$- &=&,, w*,aaf 1 ~gcwwm
1 mpbyets.

GASB 28 &tablishm a c o o ~ and g i'hwial reporting 8tandards for d t i m lending W c t i o n s .

In theBBm&ms, go^^^ m* mtns& their 4 h . b 4
fM ~Ilatemlwbjch msy be w h or s e c w i h and b 1 ~ 1 a@% y to f e t i h &ti ~ U a t e dfor thc
s a m e ~ w k i e inthe
s fi~tme.SeoUriti& I&~dingttandw d d o be~noordrrd in the balance shee
wiBthe offhase ~ & b n reported
s as~ x . p a n d ' i o,mpema.
r
I . .

-
CmQ-m,@g-m.m
*&a,mYE&*

-
mm-- - - p~

-- - ~
e
~ -&
., - ~
- . .-. I
~,,*t'm-
@,-&- , ,
' . ... . . .
.. .
&iMk:aa,

(3 1 t4) (a
Unfimded(Win
-of)-.
U M ( r n & ~
Net Ass& edira &,(,&,w a as 8henrsgeof
Pi& Available &@$ punded @
-. I*. , , c d-1 f.&
~. *
,
~~~dwu
..
Y- f r- f(iV2) - ~ . .~.,

1986 $ 7,120 $ B',w~ 1:0l1.9:ek $ (136)' $2,518 (54)%

19117 $ 7,367 $ $73~. W.F% $ 17 '$2,663 0!6 #
1988 $ 8,312 $ ,e.g: 100.7% $ (55) 52,779 (2.0Yu
19S9 $ 9,785 3 g,.% 111.4% 3(1,003) $2,99$ @33j?o/o
1990 % 9,B.W X 9.535 1@.7% $ (350) $3,197 (J 0.9)"h
1991 $11$45 $TO+$ 11.4.1 46 $(f147S) SS,~l2@ (#Tj)y&
1992 %1&443 $H,M 111,7~% $(l,'~7) ,'@,3SS @@:9)46
1993 $13.701 S1.1,FM 115..6% ,$(1,847) $3,%, (52,l)N
1994 $13,330 $l3,172 l(X1.2% S (1.581 .$3,714 (43)"Jo
1995 $16,345 $14,7$.7 110.8% .$(1,398] $3,816 (41.9)%

Analysis of the &Uar w a r n of aet avaibbia ~ % e n @ t s obfi@W , ~ ~ ~ dknded

((LS- in df) pewion trenefW ~b@g&w in mliairin ,k;gaieh&@.. B@SW& t& net Wdls
atrs;mle far mefib @ a m w of the pnslpnsl@ beaefit &li@on provides one h&&on of the
~ p t e mhdiag
'~ Status 033 s &is. ~rfw
the sJwtere is bwbniug:t i ~ c k d f y ' ~ y* ~. 0 t ~ ~ 1 l y
Ule p b T & in *w C d :k ~ j i s QQ s h&t d l c 0 V d .@#dl@I%
&- by -E &a ahfadded (m. in e&ae& ?@ m i o n bansf& obtigation as 8
p.- ofamld MU: w-@b &&& for @ -:,of m&@a.afid .,* ob'
* eSystcm,clpraw
is p s i o n knefi$&-n & a t 1 & th& w
to pay- when
i:$l)e -
tb
b. c3mdl.y, wsen:
&W6Vw2
* b , ~BSSdlg aya in w w of penaiw;t"?&t:obli&& &ljhfgher h,*, pemdag0, :&~.stmger:&@
plan.

* RtReds investment valuation at fair vah~%(NOW2).

59
 I Bl@W8nV&NU
C O M N f O ~ T l iOR
STATE EMPLOY&' R E
- WS'I'EM

-
RevenueabySgcl~pMtP;IoOg)W~
(in tboWaJld8 of tlo@w)
nt Deoember 31,19%

Employer Contributiom
Fid hployer Investment asaPmmlnpof
Year chnt&&d[ncomeg* TPtal

* Contributions were made inacoordancawith aotparially detgrmined contribution rep-.

** Include8 rnrealized and unreal- appreciation (depre&i@ in fair valse of hvestmen@and is net of
inv-t expense.

Refunds of
F i Beastit Employe Ahiiislratbre
Ysrr i!8nma Euraenses

*+*In 1991,6,700 members eieotedearly retirementresulting in aocelem&i pension benefitsprincipaliy in 1992

 Q
P R m D ON REGYCLeD PAPER