RD434 - Virginia Retirement System Comprehensive Annual Financial Report for the Year Ended June 30, 2009


Executive Summary:
Fiscal year 2009 was a difficult year for the economy and the financial markets. As a long-term investor, the Virginia Retirement System (VRS) maintains significant exposure to equity, credit and real estate investments, and all suffered significant losses in market value last year. Over more than 40 years in the investment business, I have never witnessed a market decline like the one we experienced following the collapse of Lehman Brothers in September 2008.

The VRS portfolio experienced a -21.1% return on its investment portfolio for fiscal year 2009, ending the year with $42.6 billion in assets. The three-year annualized return was -3.2%, and the five-year annualized return was 2.7%. These returns compare to the intermediate term policy benchmark returns of -20.1%, -3.6% and 2.0%, respectively, for the last one-, three- and five-year periods.

The fund’s fixed income portfolio produced a 4.6% return, while the public equity program produced a -28.0% return. The real estate return was -28.3%. The fund’s private equity program experienced a -21.8% return, and the credit strategies program had a -7.7% return. As of June 30, 2009, the portfolio included $18.0 billion in public equity, $10.9 billion in fixed income, $6.1 billion in credit strategies, $3.7 billion in real estate and $3.6 billion in private equity.

Unfortunately, the market decline has significantly affected the funded status of the VRS retirement plans. For example, in FY 2008, the funded status for the state employee and teacher plans was 88.0% and 79.8%, respectively. In FY 2009, after recognizing only one-fifth of last year’s market losses, their funded status declined to 84.0% and 76.1%, respectively. Unless the market stages a significant recovery, full recognition of the FY 2009 losses would cause the funded status of these plans to fall further in the next four years to about 60%.

Restoring the funded status of the VRS plans is a major priority for the Board in FY 2010 and beyond. Yet state and local government budgets, already stretched to meet revenue shortfalls, are not positioned to absorb the kind of increased employer contribution rates that will be required. Consequently, we believe the Governor and General Assembly also must look to plan design changes as part of a long-term solution. The study conducted by the Joint Legislative Audit and Review Commission (JLARC) in October 2008 is a good starting point in the search for solutions.

The Board continues to be confident in the ability of VRS to provide superior investment management, benefit administration and customer service. Our investment and administrative teams are highly skilled and dedicated to the mission of VRS and are backed by the Board’s unwavering commitment to responsible governance. By the first quarter following the close of the fiscal year, the portfolio had regained substantial assets, with a closing balance on September 30, 2009 of $46.9 billion and a fiscal year-to-date return of 10.3%. We recognize, however, that although the VRS investment program is sound, investment returns alone will not address the plans’ funding issues. Therefore, we look forward to working with you toward creating long-term solutions that will ensure the future financial security of VRS’ members, retirees and beneficiaries.