This is the second installment of a two-part story. Read the first installment here.
Incorporating a View from Outside
After changes for the next year have been discussed and approved, the legwork begins, usually in late fall. This means welcoming into the mix a group of external auditors. PERA has internal auditors, but bringing in a truly outside perspective helps ensure the information in the CAFR is rigorously checked and, consequently, accurate to a high degree of certainty.
The word “audit” might conjure up IRS dread for some, but auditors are a routine presence in accounting departments in organizations like PERA. “In the fall, the auditors do what they call walkthroughs,” Maninger said. “They do deep dives into our processes, meeting with the Investments, Benefits, and other departments to see how they do their work. For example, they might follow the contracting and funding of a new private equity investment through every step until the wire goes out the door.”
In addition to analyzing the ways in which work gets done, they do a significant amount of statistical analysis of the mountains of data PERA keeps, looking for any anomalies. Say the auditors analyze monthly benefit payments. PERA sends out more than 100,000 checks of varied amounts every month. You’d expect the last digit of each check amount to be evenly distributed—about the same number of checks ending in a twos (e.g. $975.72) as eights (e.g. $1,000.68). However, if thirty percent of all checks ended in a two instead of the expected ten percent, the auditors would likely flag this as an anomaly and look into it further.
An anomaly doesn’t indicate that something is wrong, just that something could be. After investigating, they might discover an error or a process that needs improvement. “Our goal is to make the CAFR as accurate and as complete as we can possibly make it,” Maninger said. “We have a lot of information to share with members, and this information affects lives.”
Putting it All Together
The structure for the CAFR is usually in place by the end of the year. When January 1 rolls around, final returns start rolling in. Some of these returns are available immediately. Global equity and fixed income, for example, have prices that are readily available on any given day. Anyone can track the prices of PERA’s top holdings in Global equity at the end of 2019—Apple, Microsoft, and Amazon—on a daily basis.
But returns in other asset classes may take until early April to receive and record. PERA owns companies that aren’t publicly traded in its private equity asset class. Determining the value of these companies takes a much longer time, as it requires a detailed financial analysis to come up with an informed price as opposed to watching for a stock ticker run across the screen on CNBC. This is one reason the CAFR isn’t released until June.
Another reason is that actuaries assess PERA’s demographic information—how many people are starting jobs and leaving them, beginning retirement and passing away, along with an array of other data points. This information is critical as PERA must chart the course for decades into the future.
Once these pieces are finalized and everyone, including the external auditors, signs off, the CAFR is sent to the Board of Trustees. They review it and, with a vote, they approve and release the report to the public.
Where to Start
The CAFR is unlikely to be a choice for a book club or a beach anytime soon. But, like the view from a window several stories up, it contains the best perspective on all things PERA. Reading only a few pages can help lead to a much better understanding of how PERA works and where it’s going.
“If someone is going to read anything at all in the CAFR, they should read the Letter of Transmittal,” Maninger said. “Ron [Baker, PERA’s Executive Director] works hard to communicate the most important parts of the CAFR in that letter.” The letter in the 2019 CAFR is found on page 3.
“If you’re interested in any changes or updates from past year, the section called Management’s Discussion and Analysis (page 29) will explain variances from one year to another,” she added
For those interested in PERA’s investments, Neugebauer said the Schedule of Investment Results (page 127) is the best place to see how PERA’s investments have done recently compared to their benchmarks.
Shelton said page 136 should be of interest to those who are saving and investing for retirement. “We have a number of options available for those who participate in 401k, 457, and DC plans, from investing in specific asset classes or using one of the Target Retirement Date Funds,” she said. “From my perspective, page 136 is important because it highlights the variety of options participants have and what the returns were for the most recent year. If they want to read more, descriptions of the investment options are on page 134.”
Meant to be Used
If you’re looking for a book to check out at your library, one method might be to look for the book that has tattered pages, dog-ears, and coffee stains. A book’s battered paper doubles as a public record of the value it’s brought to others.
That’s how Maninger, Neugebauer, and Shelton, view the CAFR. It’s not a yearbook, meant to commemorate a year that was: It’s a useful publication, meant to be picked up. “I have a copy at home,” Neugebauer said. “And in my office at work I have every copy going back to 1980.”
But the importance of the CAFR is perhaps best illustrated by a small action Shelton took months ago: “When we found out that we were starting to work remotely in March, I thought we were just going to be offsite for a week or two. But just in case, I grabbed my CAFR as I was going out the door.”
Global equityA type of investment that includes publicly traded stocks in companies based in the United States and abroad.Global equityA type of investment that includes publicly traded stocks in companies based in the United States and abroad.Asset classesA category of similar investments. Common asset classes include global equity (such as publicly traded stocks), real estate, and cash.Private equityA type of investment in which investors purchase shares of a company that is not traded on a public stock exchange.Fixed incomeA type of investment that pays investors a fixed rate of interest over a set period of time. Bonds are a common type of fixed income investment.BenchmarkA tool used to measure performance. For example, an investor can use a stock index as a benchmark to measure his/her own investment performance compared to the market as a whole.Asset classA category of similar investments. Common asset classes include global equity (such as publicly traded stocks), real estate, and cash.Asset classA category of similar investments. Common asset classes include global equity (such as publicly traded stocks), real estate, and cash.
