CAFR - sdcera

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F I N A N C I A L / N O T E S T O T H E B A S I C F I N A N C I A L S T A T E M E N T S IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENT In 2007, SDCERA implemented the provisions of Governmental Accounting Standards Board (GASB) Statement No. 43, Financial Reporting for Post Employment Benefit Plans other than Pension Plans. GASB Statement No. 43 establishes uniform financial reporting standards for other post employment benefits (OPEB) plans. OPEB includes post employment healthcare, as well as other forms of post employment benefits when provided separately from a pension plan. Post employment healthcare benefits include medical, dental, vision, hearing, and other health-related benefits. SUMMARIZED PRIOR YEAR INFORMATION The accompanying financial statements include certain prior year summarized information. Such information does not include sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with SDCERA financial statements as of and for the year ended June 30, 2006, from which the summarized information was derived. 3. DEPOSITS AND INVESTMENTS SDCERA retains investment managers that specialize in the use of a particular asset class. Investment managers are subject to the guidelines and controls established in the SDCERA Investment Policy and contracts executed with the Board. SDCERA utilizes a third party as custodian over the plan assets. In March 2005 the Board of Retirement completed a comprehensive asset/liability study that resulted in a new asset allocation strategy. This strategy specified an asset allocation target of 24% Domestic Equity, 25% International Equity, 31% Fixed Income, 10% Real Estate, 5% Commodities and 5% Alternative Equity. In accordance with GASB Statement 40, Deposit and Investment Risk Disclosures, investment risk disclosure is required for: interest rate risk, credit risk (including custodial credit risk and concentrations of credit risk) and foreign currency risk. 28 COMPREHENSIVE ANNUAL FINANCIAL REPORT 2007
N O T E S T O T H E B A S I C F I N A N C I A L S T A T E M E N T S / F I N A N C I A L INTEREST RATE RISK SDCERA does not have a general policy to manage interest rate risk, but requires investment managers to diversify by issue, maturity, sector, coupon and geography. As of June 30, 2007, SDCERA had the following investments and maturities in the table below: (Amounts are in thousands) INTEREST RATE RISK Investment Maturities (in Years) Investment Type Fair Value Less than 1 1-5 6-10 More than 10 Asset and mortgage backed securities $ 345,803 $ - $ - $ - $ 345,803 Collateralized mortgage obligations 114,597 - 94 247 114,256 Commercial paper 2 - - - 2 Convertible Bonds 159,729 54,115 39,678 8,506 57,430 Corporate bonds 309,187 92,094 78,527 84,915 53,651 Emerging market debt securities 419,966 2,125 140,186 62,008 215,648 International bonds 614,852 36,077 278,556 191,855 108,364 International Governments 8,395 - 4,717 - 3,677 Managed Futures* 72,745 NA NA NA NA Private placements 31,873 1,177 7,952 13,987 8,756 Treasury inflation protected securities 250,171 3,073 72,859 103,227 71,012 US Treasuries 64,017 5,905 4,532 3,103 50,478 Total $ 2,391,337 $ 194,566 $ 627,101 $ 467,848 $ 1,029,077 * Investment maturities for Managed Futures are not available and are therefore not included in the subtotals by maturity. CREDIT RISK Fixed income managers are expected to adhere to the following guidelines as a means of limiting credit risk. Domestic Fixed Income managers are limited within their portfolios to no more than 5% exposure in any single security, with the exception of United States Treasury and government agencies. Global and Tips Fixed Income managers are limited to 10% of a single issuer. High Yield and Convertible Fixed Income managers limit is 8% exposure in any single security, with the exception of United States Treasury and government agencies. As of June 30, 2007, SDCERA has no single issuer that exceeds 5% of total fixed income investments. SDCERA’s investment guidelines address fixed income quality requirements by investment category. The overall weighted average investment grade held in domestic fixed income portfolios shall be no lower than AA by Standard & Poor’s and Fitch’s, and Aa by Moody’s. Domestic High Yield Fixed Income portfolios must have a weighted average quality of B/B+ or higher (Moody or Standard & Poor’s equivalent). The overall weighted average grading for the Global fixed income portfolio shall be A-/A3 or higher. The Convertibles Fixed Income portfolio must have an overall weighted average credit quality of B/B+ or higher. SDCERA has no policy for Emerging Market Fixed Income grading. COMPREHENSIVE ANNUAL FINANCIAL REPORT 2007 29
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