Summary annual financial report, year ended June 30, 2004 [2004]

Teachers Retirement System of Georgia
Summary Annual Financial Report
A Component Unit of the State of Georgia Year Ended June 30, 2004

Message from the Executive Director
2004 TRS Summary Report
I am pleased to present this Summary Financial Report for fiscal year 2004, written specifically with Teachers Retirement System of Georgia (TRS) members and retirees in mind. This report summarizes the more detailed 2004 Comprehensive Annual Financial Report (CAFR). The CAFR was prepared by TRS in conformity with generally accepted accounting principles and is available at the TRS office and at our website, www.TRSGA.com.
This report does not replace the CAFR, but includes important details to give you a basic understanding of our overall financial condition and investment performance. It also describes how our system works to serve our members and what benefits we offer.
I would also like to express my gratitude to the TRS Board of Trustees and everyone else who works diligently to assure that we achieve our mission through the continued successful operation and soundness of our retirement system.
Becoming the Model Retirement System
Our vision at TRS is to be the model retirement system--one that provides unparalleled service to its members. The best way to accomplish this is through efficient and effective processes supported by a competent, empowered staff and innovative technology. Everything we do--such as implementing new systems--revolves around this vision. Our commitment to excellence extends throughout TRS. It is essential that we build your retirement security and strive to exceed your expectations.
A Record of Success
Fiscal year 2004 included a number of initiatives and milestones. For example, the new pension administration system or "PASS" project, which began in fiscal year 2002, went "live" in June. PASS has allowed TRS to reengineer our business processes to be more efficient and effective. With the implementation of PASS, we are able to:
Access member accounts instantly
1

Message from the Executive Director
2004 TRS Summary Report
Increase efficiency in work processing Respond quickly to customer requests
Members benefit from an increase in the level of customer service they receive from TRS. The System also continues to enhance its website and is currently working to provide active members and retirees the ability to view and update account information online, as well as enabling employers with the ability to report member and employer contributions online. The TRS Call Center became operational this year and after its first year it was the proud recipient of the Call Center Team Award for Customer Service Excellence presented by the International Customer Service Association. TRS is extremely proud to have won this award and will continue to strive to be the provider of the best customer service available. I thank you for your continued partnership and support.

Jeffrey L. Ezell

M V The mission of the Teachers Retirement System of

I

Georgia is to provide exceptional service in the ad-
I ministration of pension benefits and related services

S S I O

to TRS members, retirees, and employers.
S TRS's vision is to be the model retirement system, proI viding comprehensive customer service to members,
retirees, and employers. This vision will be accom-
O plished by utilizing innovative, efficient, and effec-
tive processes supported by state of the art technol-

N N ogy and a fully trained, empowered, and motivated staff.

2

2004 Board of Trustees
2004 TRS Summary Report

TRS was created in 1943 by an act of the Georgia General Assembly to provide retirement security to those individuals who choose to dedicate their lives to educating the children of the state of Georgia. TRS is administered by a ten-member Board of Trustees. Members of the Board of Trustees as of December 1, 2004, are pictured below.

Dr. Sandra G. Gustavson

Mr. Russell W. Hinton

CHAIR Associate Dean for Faculty & Research
The University of Georgia Appointed by Board of Regents

VICE-CHAIR State Auditor
Ex-Officio

Mrs. Brenda B. Barrow Mr. Paul E. DeMersseman Dr. Virginia J. Dixon

Reading Recovery Teacher Leader
Effingham County Schools Appointed by Governor

Vice President Peachtree Planning
Corporation Appointed by Governor

Retired Educator Elected by Board of
Trustees

Mr. W. Daniel Ebersole Ms. MiMi Gudenrath Mr. Charles E. Sward

Director of Office of Treasury and Fiscal Services Ex-Officio

Director Elam Alexander Academy Appointed by Governor

Retired Businessman Elected by Board of
Trustees
3

Eligibility and Benefits at a Glance
2004 TRS Summary Report
Retirement Eligibility
You become eligible to receive retirement benefits once you are "vested" with TRS and terminate your TRS covered employment. Upon application and approval, you are eligible for a monthly benefit for the rest of your life and, if you select a survivorship option, your beneficiary would also receive lifetime benefits upon your death. Vesting occurs when you reach 10 years of service. The age at which retirement benefits begin depends on your length of service.
Length of Service for Full Retirement Benefits 10 or more years of service at age 60 30 years of service at any age
If you have between 25 and 30 years of service and have not reached the age of 60, you can retire with a reduced monthly benefit.
The Amount of Your Retirement Benefit
Under the Maximum Plan of Retirement, you receive a monthly benefit for life based on the following formula:
Your years of creditable service established with TRS x
2% multiplier x
Your average monthly salary for the highest two consecutive years of service =
Your initial monthly benefit You also have the option of selecting one of five different survivorship plans that allows you to leave a monthly lifetime benefit to one or more beneficiaries should they outlive you. You could, for example, leave a beneficiary 50% or 100% of your monthly benefit amount. If you select a survivorship plan, your monthly benefit is reduced based on actuarial factors, which take into consideration your age and the age(s) of your beneficiary(ies) at the time of your retirement.
Regardless of the plan you select, you also may elect the Partial LumpSum Option Plan (PLOP). In exchange for a permanently reduced monthly benefit, you can elect to receive a lump-sum distribution in addition to the monthly retirement benefit. The amount of the lump-
4

Eligibility and Benefits at a Glance
2004 TRS Summary Report
The Amount of Your Retirement Benefit cont.
sum distribution cannot exceed the sum of 36 monthly benefit payments under the Maximum Plan of Retirement. Your age, plan of retirement, and the amount of your PLOP distribution are used to determine the reduction in your monthly benefit. A PLOP distribution will be made as a single payment at the time the first monthly benefit is paid.
To help counter the effect of inflation, cost-of-living adjustments or "COLAs" are granted by TRS to increase your benefit. The current COLA is 1.5%, which you receive semi-annually in January and July of each year.
For more details on eligibility and benefits, please refer to the TRS Member's Guide, which is available through your employer or by visiting the TRS website at www.TRSGA.com.
A Benefit Comparison
Defined Benefit Plan vs. Defined Contribution Plan
TRS offers its members a "defined benefit plan." As the name implies, your final benefit is defined since it is based on a formula that includes your salary and length of service. You know in advance what your benefit will be regardless of any other factors, such as TRS investment performance. Also, your monthly benefit lasts your entire lifetime and can be increased through COLAs.
Many TRS employers also offer their employees a "defined contribution plan," such as a 403(b) or 457 plan. Participants in this type of plan determine in advance what dollar amount they wish to contribute to their accounts, hence the name "defined contribution plan." Participants do not know what their final benefit amount will be or how long the benefit will last since their account balances are subject to change as money is withdrawn and as investment performance goes up and down. As a result, benefits can run out if a member outlives the funds available. COLAs are not a feature of standard defined contribution plans.
Thus, defined contribution plans include considerably more uncertainty and investment risk when compared to defined benefit plans. Defined contribution plans do, however, have some advantages, such as shorter vesting periods and increased versatility because participants have more control over investment decisions. But this also means that you have to stay abreast of current market conditions and trends because you control the selection of funds in which your money is invested.
5

Eligibility and Benefits at a Glance
2004 TRS Summary Report

To give you a perspective on the value of the TRS defined benefit plan, consider the following examples, which use actual benefit calculations:
Ms. Smith is 60 years old with 30.444 years of creditable service and earns $4,312 per month. Assuming she retires now, her projected retirement benefit will be $2,705 per month.* If, on the other hand, she elected the maximum benefit with a $50,000 PLOP distribution, her projected retirement benefit will be $2,335 per month. If Ms. Smith had to provide either of these benefits on her own, she would need to have saved approximately $484,620 at retirement and would need to earn a 7.5% return on these savings each year for the rest of her life.
Mr. Jones is currently 33 years old with 9 years of creditable service and earns $3,916 per month. Assuming he retires at age 54 with 30 years of creditable service, and he receives a 3.75% annual salary increase, his projected monthly benefit will be $5,528* per month. If Mr. Jones had to provide this benefit on his own, he would need to have saved approximately $1,110,743 at retirement and would need to earn a 7.5% return on these savings each year for the rest of his life.
In both examples, the projected monthly retirement benefit is under the Maximum Plan of Retirement and is calculated using the benefit formula on the previous page.
*The projected monthly benefit includes a special 3% COLA on the first $37,500 in benefits for all participants retiring after July 1, 1990.

T R

The TRS strategic goals for FY 2004 are:
1. Develop a fully trained, empowered, and motivated staff that will provide exceptional customer service.

S

2. Payment of benefits and collection of employer contributions
will be made efficiently, timely, and accurately.

3. Information provided to customers will be timely, relevant, and

G O

accurate.
4. Relationships with members, retirees, and employers will be
enhanced.

A

5. TRS will continue to maximize the rate of return on our invest-

L

ments through the management of a prudent pension investment portfolio, with the desired long-term outcome to keep

S

TRS actuarially sound and provide superior retirement benefits to members and beneficiaries.

6

Membership and Benefit Statistics
2004 TRS Summary Report

Total Membership As of June 30, 2004
Members Active plan members ........................................... 208,927 Terminated members entitled to benefits.................... 47,411 Total ............................................................... 256,338 Retired Members ................................................. 61,590 Grand Total ....................................................... 317,928

TRS Average Monthly Benefits for Members Retiring FY 2004 and FY 2003

Years of Service at Retirement
10 - 15 16 - 20 21 - 25 26 - 30 Above 30 Total

Average Monthly Benefit

FY 04

FY 03

$1,405 $1,351 $1,895 $2,763 $3,557
$2,528

$ 784 $1,526 $1,859 $2,604 $3,463
$2,418

Number of Retirees

FY 04

FY 03

906 579 630 1,864 1,611
5,590

807 483 545 1,714 1,661
5,210

7

2004 Legislation
2004 TRS Summary Report
During the 2004 session, the Georgia General Assembly passed two pieces of legislation that were signed into law by the Governor that substantially impacted the System. These changes were effective July 1, 2004. First, a member may elect at retirement to receive a lump-sum distribution in exchange for a permanently reduced lifetime monthly benefit. The member's age and plan of retirement are used to determine the reduction in the benefit. The amount of the lump-sum distribution cannot exceed the sum of 36 monthly benefit payments that the member would have received if he or she had not elected the partial lump-sum option plan. Second, a member who retired on a service retirement as of December 31, 2003, may return to work as a classroom teacher, principal, superintendent, counselor, or librarian and continue receiving monthly retirement benefits. A member who retired as a principal cannot be re-employed as a principal at the same school where he or she was employed prior to retirement. Also, a member who retired as a superintendent cannot be re-employed as a superintendent for the school system in which he or she was employed prior to retirement.
8

Financial Information
2004 TRS Summary Report

Schedule of Plan Net Assets (dollars are in thousands)
This schedule shows TRS assets, which are primarily investments, and then deducts the system's liabilities, or debts. The final totals represent the financial resources available to pay pension benefits.

Assets Cash and receivables Investments, at fair value Capital assets Total assets
Liabilities Accounts payable and other
Net Assets Held in Trust for Pension Benefits

June 30,

2004

2003

$ 361,337 42,270,634 11,081 42,643,052

$ 360,598 38,923,340 6,459 39,290,397

54,974 $ 42,588,078

71,857 $ 39,218,540

Schedule of Changes in Plan Net Assets (dollars are in thousands)
This schedule shows TRS revenues (additions) and amounts paid out (deductions) by TRS.

Additions Employer contributions Member contributions Net investment income Total additions
Deductions Benefit payments Refunds of member contributions Administrative expenses, net Total deductions
Net Increase
Net Assets Held in Trust for Pension Benefits
Beginning of year End of year

Year Ended June 30,

2004

2003

$ 782,301 448,929
3,794,733 5,025,963

$ 768,673 438,998
1,669,768 2,877,439

1,598,467 42,580 15,378
1,656,425
3,369,538

1,434,640 40,883 14,804
1,490,327
1,387,112

39,218,540 $ 42,588,078

37,831,428 $ 39,218,540

9

Investments
2004 TRS Summary Report

TRS invests in a mix of investments, which is comprised of high quality stocks, bonds, short-term securities, and cash. This investment mix allows TRS to participate in rising markets, while keeping risk levels relatively low when markets are on the decline. A high quality, balanced fund has proven to be a successful strategy in both climbing and falling markets over a long period of time.
Conservation of capital and conservatism continue to be the principal guides in making investment decisions. By investing in a number of different asset categories and in a wide range of companies, which is a process called diversification, TRS is able to accomplish these investment objectives.

Growth of Investments (In Billions)

Ten Years Ending June 30, 2004

$45 $35 $25 $15

................

................

................

................

................

................

................

................

................

................

................

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Actual Investment Mix

For the Year Ending June 30, 2004

59% Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,120,626,000
39% Bonds . . . . . . . . . . . . . . $16,469,405,000
2% Short-term Securities & Cash . . . . . . . . . $998,047,000

10

Funding
2004 TRS Summary Report
Under the TRS defined benefit pension plan, your employer contributes an amount that, when combined with the employee contribution and the expected investment earnings, is sufficient to pay the benefits promised. Many variables must be considered and many projections and estimates must be made to determine the amount your employer contributes. Some projections and estimates include length of service, retirement age, life expectancy (mortality), vesting rates, salary increases, and future promotions. Economic variables also must be considered. Return on investments and inflation must be projected and included in the computation as well. Currently, the employer contribution rate is 9.24% of payroll.
An important way to measure the sufficiency of contributions to TRS and the overall financial soundness of a public retirement plan is to look at the relationship, over time, between the retirement plan's liabilities and its assets. One such measure of financial soundness is called the "funding ratio." This ratio measures the extent to which the actuarial accrued liability1 of the retirement system has been funded by comparing the liability against the actuarial value of assets2 held by the retirement system. (Actuarial accrued liability and actuarial value of assets are explained in the footnotes below.) The funding ratio is calculated by dividing the actuarial value of assets by the actuarial accrued liability. The higher the funding ratio, the more able we are to pay our current and future retirees.
As of June 30, 2003, the date of the most current calculation, the funding ratio for TRS was 101.1%. This means that based on the various assumptions, projections, and estimates used in the analysis of liabilities and assets, TRS had sufficient assets to pay for all benefits that had been earned by retirees and members. This indicates TRS is a well funded, financially sound retirement system.
1 Actuarial Accrued Liability Each year our actuary performs a study, called a valuation, to estimate the long-term costs of the retirement system. This long-term cost is called the actuarial accrued liability. To do a valuation, the actuary must calculate the amount of money the retirement system must have on hand today in order to pay all the retirement benefits earned to date for both retirees and active members. This calculation relies on many assumptions, projections, and estimates. The actuarial accrued liability as of June 30, 2003, the date of our last valuation, was $41.9 billion.
2 Actuarial Value of Assets For funding purposes, the financial condition of a pension fund should be viewed over the long-term. Therefore, we use an asset valuation method that includes
11

Funding
2004 TRS Summary Report

long-term factors. Market value would not be a good valuation method for funding purposes since it is based on what our assets could be sold for on a specific date, which is a value that can change significantly from day-to-day. Using true market value could introduce much volatility into the management of the pension fund, causing the employer contribution to increase or decrease significantly and frequently. The actuarial value of assets, on the other hand, is a more stable valuation method because it "smooths" out short-term market gains and losses over a five-year period. This technique produces an asset valuation that approximates market value but removes much of the volatility. With less volatility in the value of our assets, we can better predict long-term funding needs and ensure those needs are met while providing level funding rates for employers. The actuarial value of assets as of June 30, 2003, the date of our last valuation, was $42.4 billion.

...............................................

...............................................

Actuarial Assets & Liabilities (In Billions)

Actuarial Value of Assets Actuarial Accrued Liabilities

$45

$35

$25

$15

1998

Corresponding Funding Ratio

96.9%

1999 97.2%

2000 102.3%

2001 103.9%

2002 102.0%

2003 101.1%

...............................................

...............................................

This chart shows how the actuarial value of assets, actuarial accrued liabilities and funding have progressed over the last six fiscal years.

The Government Finance Officers Association of the United States and Canada (GFOA) has given an Award for Outstanding Achievement in Popular Annual Financial Reporting to the Teachers Retirement System of Georgia for its Popular Annual Financial Report for the fiscal year ended June 30, 2003. The Award for Outstanding Achievement in Popular Annual Financial Reporting is a prestigious national award recognizing conformance with the highest standards for preparation of state and local government popular reports.
An Award for Outstanding Achievement in Popular Annual Financial Reporting is valid for a period of one year only. We believe our current report continues to conform to the Popular Annual Financial Reporting requirements, and we are submitting it to GFOA.
12

Teachers Retirement System of Georgia
Teachers Retirement System of Georgia Two Northside 75, Suite 100 Atlanta, Georgia 30318-7901 www.TRSGA.com