Teachers Retirement System of Georgia, comprehensive annual financial report, fiscal year ended June 30, 2005

Teachers Retirement System of Georgia
COMPREHENSIVE ANNUAL
FINANCIAL REPORT
A Component Unit of The State of Georgia
Providing a Future you can depend on
FISCAL YEAR ENDED JUNE 30, 2005

Teachers Retirement System of Georgia
COMPREHENSIVE ANNUAL FINANCIAL REPORT
A COMPONENT UNIT OF THE STATE OF GEORGIA FISCAL YEAR ENDED JUNE 30, 2005
Jeffrey L. Ezell Executive Director Teachers Retirement System
of Georgia Two Northside 75, Suite 100 Atlanta, Georgia 30318-7901
www.TRSGA.com (404) 352-6500 (800) 352-0650

INTRODUCTORY Section

TABLE OF CONTENTS
INTRODUCTORY SECTION
Certificate of Achievement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Board of Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Letter of Transmittal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Your Retirement System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 System Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Administrative Staff and Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Summary of Plan Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

FINANCIAL SECTION
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Management's Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Basic Financial Statements:
Statements of Plan Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Statements of Changes in Plan Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Required Supplementary Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Additional Information - Administrative Expenses . . . . . . . . . . . . . . . . . . . . . . . . 29

INVESTMENT SECTION
Investment Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Time-Weighted Rates of Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Asset Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Portfolio Detail Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

ACTUARIAL SECTION
Actuary's Certification Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Summary of Actuarial Assumptions and Methods. . . . . . . . . . . . . . . . . . . . . . . . . 35 Actuarial Valuation Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

STATISTICAL SECTION
Member Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Benefit Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Revenues and Expenses Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Retired Members by Type of Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Participating Employers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

2 Teachers Retirement System of Georgia

CERTIFICATE OF ACHIEVEMENT
2005 Comprehensive Annual Financial Report 3

INTRODUCTORY Section

BOARD OF TRUSTEES

*Dr. Sandra G. Gustavson CHAIR
Associate Dean for Faculty & Research Terry College of Business The University of Georgia
339 Brooks Hall Athens, Georgia 30602

*Mr. Russell W. Hinton VICE-CHAIR State Auditor
254 Washington Street, S.W. Suite 214
Atlanta, Georgia 30334

Mrs. Brenda B. Barrow Reading Recovery Teacher Leader
Effingham County Schools Guyton Elementary School 719 Central Blvd., P.O. Box 9
Guyton, Georgia 31312

*Mr. Paul E. DeMersseman Vice President
Peachtree Planning Corporation P.O. Box 5457
Athens, Georgia 30604

Dr. Virginia J. Dixon Retired Educator 2415 Carver Drive
Fort Valley, Georgia 31030

*Mr. W. Daniel Ebersole Director
Office of Treasury & Fiscal Services Suite 1202, West Tower, Floyd Bldg.
Atlanta, Georgia 30334

*Ms. MiMi Gudenrath Director
Elam Alexander Academy 3769 Ridge Ave.
Macon, Georgia 31204

*Mr. Charles E. Sward Retired Businessman 1837 Cedar Canyon Drive Atlanta, Georgia 30345

* Investment Committee Member Board composition as of November 1, 2005.

4 Teachers Retirement System of Georgia

LETTER OF TRANSMITTAL

Jeffrey L. Ezell
Executive Director

December 10, 2005
Board of Trustees Teachers Retirement System of Georgia Atlanta, Georgia

I am pleased to present the Comprehensive Annual Financial Report of the Teachers Retirement System of Georgia (the "System") for the fiscal year ended June 30, 2005. Responsibility for both the accuracy of the data, and completeness and fairness of the presentation, including all disclosures, rests with the management of the System. To the best of our knowledge and belief, the enclosed data is accurate in all material respects and is reported in a manner designed to present fairly the financial position and results of operations of the System. I trust that you will find this report helpful in understanding your retirement system.
The ComprehensiveAnnual Financial Report is presented in five sections: (1) the Introductory Section includes this letter of transmittal, principal officials, consultants and advisors, and a summary of plan provisions; (2) the Financial Section includes the auditors' report, management's discussion and analysis, the financial statements, and required supplementary information; (3) the Investment Section includes a report on investment activity, investment policies, investment results, and various investment schedules; (4) the Actuarial Section includes the actuary's certification letter and actuarial assumptions, methods, and valuation data; and (5) the Statistical Section includes selected retirement data and other significant data pertaining to the System presented on a multi-year basis.
Certificate of Achievement
The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the Teachers Retirement System of Georgia for its Comprehensive Annual Financial Report for the fiscal year ended June 30, 2004. This was the seventeenth consecutive year that the System has achieved this prestigious award.
In order to be awarded a Certificate of Achievement, a government unit must publish an easily readable and efficiently organized Comprehensive Annual Financial Report.

This report must satisfy both generally accepted accounting principles and applicable legal requirements.
A Certificate of Achievement is valid for a period of one year only. We believe our current Comprehensive Annual Financial Report continues to meet the Certificate of Achievement Program's requirements, and we are submitting it to the GFOA to determine its eligibility for another certificate.
History and Overview
The System 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. A summary of the System's benefits is provided on pages 11-13 of this report.
As the largest public retirement system in the State of Georgia and the 25th largest retirement system in the United States, the System pays out over $1.8 billion in benefits per year.
The System is administered by a ten-member Board of Trustees. The Executive Director and over 135 employees are responsible for the administration and operations of the System, which serves more than 200,000 active members, 66,000 retirees and 375 employers.
Legislation
During the 2005 session, the Georgia General Assembly passed three pieces of legislation that were signed into law by the Governor that substantially impacted the System. Unless otherwise noted, these changes were effective July 1, 2005.
First, large retirement systems may invest in Exchange Traded Funds (ETF's). An ETF allows TRS to buy and sell baskets of stocks representing an index just as it would an individual company stock. This provides the advantages of increased liquidity and efficient trading for these groups of stocks. This legislation does not change what the System can invest in, but allows a different way to accomplish it.

2005 Comprehensive Annual Financial Report 5

INTRODUCTORY Section

LETTER OF TRANSMITTAL

Legislation cont.
Second, terms within Title 47 were clarified to ensure that the State's public retirement systems are in compliance with the Federal Internal Revenue Code and corresponding regulations. The System already complies with these IRS requirements.
Third, a member who retired on a service retirement, prior to December 31, 2003, is allowed to return to work and continue receiving retirement benefits. Local school systems can now employ a retiree as a full-time improvement specialist in addition to a full-time classroom teacher, principal, superintendent, counselor or librarian. RESAs can also employ a retiree as a full-time improvement specialist.
Financial Information
The management of the System is charged with the responsibility of maintaining a sound system of internal accounting controls. The objectives of such a system are to provide management with reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, that transactions are executed in accordance with management's authorizations, and that they are recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. Even though there are inherent limitations in any system of internal control, the management of the System makes every effort to ensure that through systematic reporting and internal reviews, errors or fraud are quickly detected and corrected.
Please refer to Management's Discussion and Analysis starting on page 15 of this report for an overview of the financial status of the System including a summary of the System Net Assets, Changes in Net Assets, and Asset Allocations.
INVESTMENTS -- The System has continued to invest in a mix of high-quality bonds and stocks as it historically has done. These types of investments have allowed the System to participate in rising markets, while moderating the risks on the downside. New funds continue to be invested in high-quality securities. A high quality balanced fund has proven to be a successful strategy in a variety of markets over a long period of time.

The System's investment rate of return in fiscal year 2005 was 7.9%, with an 8.5% return for equities and a 7.1% return for fixed income.
As in previous years, maintaining quality was a primary goal and was successfully met. "Conservation of Capital" and "Conservatism" continues to be the principal guides in investment decisions. The System continued to use a diversified portfolio to accomplish these objectives. In summary, the investment status of the System is excellent.
FUNDING -- The System's funding policy provides for employer contributions at rates that, expressed as a percentage of annual covered payroll, are sufficient to provide resources to pay benefits when due.
A useful indicator of the funded status of a retirement system is the relationship between the actuarial value of assets and the actuarial accrued liabilities. The greater the level of funding, the larger the ratio of the actuarial value of assets to the actuarial accrued liabilities.
The System continues to remain strong as evidenced by the ratio of the actuarial value of assets to the actuarial accrued liabilities. This ratio changed from 101.1% in the fiscal year ended June 30, 2003, to 100.9% in the fiscal year ended June 30, 2004.
The ultimate test of the financial soundness of a retirement system is its ability to pay all promised benefits when due. I am proud to say that through the continued wisdom and the support of Governor Sonny Perdue and the General Assembly of the State of Georgia, the System has been and continues to be funded on an actuarially sound basis, thus providing the membership the comfort and security they expect from their retirement system.
Initiatives
Fiscal year 2005 included a number of initiatives and milestones. As a continuation of our effort to improve the services that we provide to our members, the System introduced its new online member and retiree account management desktops. With the launch of these new self-service desktops, members and retirees can view and manage their accounts online via a secure internet connection, from anywhere at anytime.

6 Teachers Retirement System of Georgia

LETTER OF TRANSMITTAL

In addition, employers now report member and employer contributions online via the new employer desktop, eliminating the previous manual, paper-based reporting process. With this new online desktop, the System has realized a 75% reduction in the processing time of the monthly reports and a 97% increase in the accuracy rate of the mathematical calculations required in the reporting process.
Since the launch of our new pension administration system (PASS) in June 2004, we have realized many significant changes that have increased the level of customer service we provide, for example: 1) the elimination of manual, paper-based calculations in the business units allowing us to provide retirement benefits in a more timely manner; 2) our electronic file cabinet contains all information pertaining to a member's account in an electronic format; 3) we have instant access to a member's file while the member is on the telephone; 4) we can provide immediate service rather than calling the member back once we locate a paper file; and 5) our workflow system allows us to electronically route and track all work throughout the System which makes it easier to research previous requests, questions, and issues.
The System is pleased to announce a new initiative aimed at expanding the educational and counseling opportunities we provide our active members, retirees, and employers. This program will include new member orientation, mid-career, pre-retirement and retirement seminars, as well as benefit fairs and individual counseling sessions across the State. Our goal is to partner with our members and employers and provide them with more opportunities to learn about their retirement benefits and encourage them to use the resources we have available to make their retirement as beneficial and easy as possible.
Other Information
INDEPENDENT AUDIT -- The Board of Trustees requires an annual audit of the financial statements of the System by independent, certified public accountants. The accounting firm of KPMG LLP was selected by the Board. The independent auditors' report on the statements of plan net assets and the related statements of changes in plan net assets is included in the Financial Section of this report.
ACKNOWLEDGMENTS -- The compilation of this report reflects the combined effort of the staff under the leadership of the Board of Trustees. It is intended to provide complete and reliable information as a basis for making management decisions, as a means of determining compliance with legal provisions, and as a means for determining responsible stewardship of the assets contributed by the System's members, their employers, and the State of Georgia.

Copies of this report may be obtained by contacting the System, or may be downloaded from the System's website.
I would like to take this opportunity to express my gratitude to Governor Sonny Perdue, members of the Georgia General Assembly, the staff, the advisors, and to the many people who have worked so diligently to ensure the successful operation of the System. Sincerely,
Jeffrey L. Ezell Executive Director

2005 Comprehensive Annual Financial Report 7

INTRODUCTORY Section

YOUR RETIREMENT SYSTEM

Financial Highlights
Member Contributions Employer Contributions Net Increase in Fair Value
of Investments Interest and Dividend Income Benefits Paid to Retired Members Member Withdrawals Interest Credited to Member
Contributions

June 30,

2005

2004

$ 464,931,000 $ 815,693,000

$ 448,929,000 $ 782,301,000

$ 2,172,591,000 $ 1,146,655,000 $ 1,799,478,000 $ 50,491,000

$ 2,882,187,000 $ 948,105,000 $ 1,598,467,000 $ 42,580,000

$ 196,964,000

$ 188,530,000

% Change + 3.6 + 4.3
- 24.6 + 20.9 + 12.6 + 18.6
+ 4.5

Statistical Highlights
Active Membership Members Leaving the System Retired Members Average Monthly Annuity

203,252 8,518 66,282
$ 2,262

208,927 7,805
61,590 $ 2,163

- 2.7 + 9.1 + 7.6 + 4.6

8 Teachers Retirement System of Georgia

Growth of Total System Assets (in billions)

SYSTEM ASSETS

$50

40 Equities
30

20

10

Fixed Income

Other 2000 2001 2002 2003 2004 2005

Total System Assets at June 30 (in thousands)

Equities Fixed Income Other(1) Total System Assets

2000 $25,288,274
15,642,757 879,233
$41,810,264

2001 $22,309,783 16,379,674
976,595
$39,666,052

2002 $20,142,071 16,446,346
1,248,540
$37,836,957

2003 $20,058,758 17,961,576
1,270,063
$39,290,397

2004 $25,120,626 16,469,405
1,053,021
$42,643,052

2005 $27,121,761 17,075,215
1,160,906
$45,357,882

(1) Includes receivables, cash, short-term securities, mortgage loans, and capital assets, net.

2005 Comprehensive Annual Financial Report 9

INTRODUCTORY Section

ADMINISTRATIVE STAFF & ORGANIZATION

Jeffrey L. Ezell Executive Director

Stephen J. Boyers Chief Financial Officer

Charles W. Cary, Jr. Chief Investment Officer
Investment Services

Diann F. Green Director
Retirement Services

Lisa M. Hajj Director
Communications

M. Cathy Hart Director
Member Services

Dina N. Jones Director
Employer Services

J. Gregory McQueen Director
Information Technology

Tonia T. Morris Director
Human Resources

Charles P. Warren Director
Contact Management

Consulting Services
Actuary Mellon Human Resources
& Investor Solutions
Auditor KPMG LLP
Medical Advisors Gordon J. Azar, M.D.
Atlanta, Georgia Arthur S. Booth, Jr., M.D.
Atlanta, Georgia Joseph W. Stubbs, M.D.
Albany, Georgia
10 Teachers Retirement System of Georgia

Investment Advisors
Albritton Capital Management Atlanta Capital Management Oak Associates, ltd. Sands Capital Management Evergreen Investments State Street Global Advisors Montag & Caldwell EARNEST Partners NCM Capital Management Group Synovus Investment Advisors Trusco Capital Management Barrow, Hanley, McWhinney & Strauss Cooke & Bieler Crawford Investment Counsel Hotchkis and Wiley Capital Management Janus Institutional Asset Management

SUMMARY OF PLAN PROVISIONS

Purpose
The Teachers Retirement System of Georgia (the "System") was established in 1943 by an act of the Georgia General Assembly for the purpose of providing retirement allowances and other benefits for teachers of this state. The System has the power and privileges of a corporation, and the right to bring and defend actions.
The major objectives of the System are (1) to timely pay monthly benefits due retirees, (2) to soundly invest retirement funds to insure adequate financing for future benefits due and for other obligations of the System, (3) to provide statewide counseling services for System members, (4) to accurately account for the status and contributions of all active and inactive members, and (5) to process refunds due terminated members.
Administration
State statutes provide that the administration of the System be vested in a ten-member Board of Trustees comprised as follows:
Ex officio members:
the State Auditor,
the Director of the Office of Treasury and Fiscal Services,
Governor's appointees:
two active members of the System who are classroom teachers and not employees of the Board of Regents,
one active member of the System who is a public school administrator,
one active member of the System who is not an employee of the Board of Regents,
one member to be selected by the Governor,
Board of Regents appointee:
one active member of the System who is an employee of the Board of Regents,
Trustee appointees:
one member who has retired under the System,
one individual who is a citizen of the state, not a member of the System and experienced in the investment of money.
A complete listing of the current Board of Trustees is included on page 4 of this report.
Management of the System is the responsibility of the Executive Director who is appointed by the Board and serves at its pleasure. On behalf of the Board, the Executive Director is responsible for the proper operation of the System, engag-

ing such actuarial and other services as shall be necessary to transact business, and paying expenses necessary for operations. A listing of the administrative staff is included on page 10 of this report.
Membership
All personnel in covered positions of the state's public school systems, technical colleges, RESA units and all colleges and universities comprising the University System of Georgia who are employed one-half time or more, except those professors and principal administrators electing to participate in the Board of Regents of the University System of Georgia Optional Retirement Plan, are required to be members of the System as a condition of employment.
Eligibility
Service Retirement Active members may retire and elect to receive monthly
retirement benefits after one of the following conditions: 1) completion of 10 years of creditable service and attainment of age 60, or 2) completion of 25 years of creditable service.
Disability Retirement Members are eligible to apply for monthly retirement
benefits under the disability provision of the law if they are an active member, have at least 10 years of creditable service, and are permanently disabled.

2005 Comprehensive Annual Financial Report 11

INTRODUCTORY Section

SUMMARY OF PLAN PROVISIONS

The Formula
Normal Retirement
Any member who has at least 30 years of creditable service or who has at least 10 years of creditable service and has attained age 60 will receive a benefit calculated by using the percentage of salary formula. Simply stated, two percent (2%) is multiplied by the member's years of creditable service established with the System, including partial years (not to exceed 40 years). The product is then multiplied by the average monthly salary for the two highest consecutive membership years of service. The resulting product is the monthly retirement benefit under the maximum plan of retirement.
Early Retirement
Any member who has not reached the age of 60 and has between 25 and 30 years of creditable service will receive a reduced benefit. The benefit will be calculated using the percentage of salary formula explained above. It will then be reduced by the lessor of 1/12 of 7% for each month the member is below age 60, or 7% for each year or fraction thereof the member has less than 30 years of creditable service. The resulting product is the monthly retirement benefit under the maximum plan of retirement.
Disability Retirement
Disability retirement benefits are also calculated using the percentage of salary formula explained above. The resulting product is the monthly disability retirement benefit under the maximum plan. There is no age requirement for disability retirement.

Plan A - Maximum Plan of Retirement
This plan produces the largest possible monthly benefit payable to the member only during his or her lifetime. There are no survivorship benefits under this plan.
Plan B - Optional Plans of Retirement
Upon retirement, a member of the System may elect one of six optional plans that provide survivorship benefits. The election of an optional form of payment is made upon application for retirement and it becomes irrevocable upon distribution of the first benefit check. The six options are as follows:
Option 1
The retiring member accepts a relatively small reduction from the maximum monthly benefit in order to guarantee to the estate, beneficiary or beneficiaries named on the retirement application, a lump-sum refund of any remaining portion of member contributions and interest.
Option 2
This plan offers the retiring member a reduced monthly benefit, based on the ages of the member and the beneficiary, payable for life. It further provides a guarantee to the surviving named beneficiary that, at the death of the retired member, the beneficiary will receive the same basic monthly retirement allowance the member received at the date of retirement plus any costof-living increases the member received up to the time of death.

12 Teachers Retirement System of Georgia

SUMMARY OF PLAN PROVISIONS

Option 2 Pop-Up
Any member may elect a reduced retirement allowance to be designated "Option 2 Pop-Up" with the provision that if the beneficiary dies prior to the retiree that the basic benefit payable to the retiree shall increase to an amount as though the retiree had not selected an optional plan of retirement.
Option 3
This plan of retirement offers a reduced monthly benefit that is based on the ages of the member and the beneficiary. The resulting benefit is paid to the retired member for life, with the guarantee to the surviving named beneficiary that at the time of the retired member's death, the beneficiary will receive a payment for life of one-half of the initial monthly benefit received by the member at the time of retirement plus one-half of any cost-of-living increases the member received up to the time of death.
Option 3 Pop-Up
Any member may elect a reduced retirement allowance to be designated "Option 3 Pop-Up" with the provision that if the beneficiary dies prior to the retiree, the basic benefit payable to the retiree shall increase to an amount as though the retiree had not selected an optional plan of retirement.
Option 4
This plan allows the retiring member to select a specific monthly amount other than provided for in the other options, which will be paid for life following a retiree's death to the living beneficiary. The beneficiary would also receive a prorata share of any cost-of-living increases the member received up until the time of death, or the benefit will be divided among the beneficiaries in accordance with the percentage or specific dollar designations made by the member at the time of retirement. One major difference in this plan is that the retiring member may actually elect that following his or her death, a certain amount of money can be paid monthly to a beneficiary rather than a percentage.
Partial Lump-Sum Option Plan
TRS offers a Partial Lump-Sum Option Plan (PLOP) at retirement. In exchange for a permanently reduced lifetime benefit, a member may elect to receive a lump-sum distribution in addition to a monthly retirement benefit. The age of the member and plan of retirement are used to determine the reduction in the benefit.

A member is eligible to participate in the Partial LumpSum Option Plan if he or she meets the following criteria. A member must:
have 30 years of creditable service or 10 years of creditable service and attain age 60 (not early retirement).
not retire with disability benefits.
At retirement, a member may elect a lump-sum distribution in an amount between 1 and 36 months of his or her normal monthly retirement benefit. This amount will be calculated under Plan A - Maximum Plan of Retirement and will be rounded up and down to be a multiple of $1,000. If a PLOP distribution is elected, the monthly benefit is actuarially reduced to reflect the value of the PLOP distribution. The combination of both the PLOP distribution and the reduced benefit are the same actuarial value as the unreduced normal benefit alone.
Financing the System
The funds to finance the System come from member contributions, currently 5% of annual salary; employer contributions, currently 9.24% of annual salary; and investment income.

2005 Comprehensive Annual Financial Report 13

FINANCIAL INDEPENDENT AUDITORS' REPORT
Section

KPMG LLP Suite 2000 303 Peachtree Street, NE Atlanta, GA 30308 www.kpmg.com
The Board of Trustees Teachers Retirement System of Georgia:
We have audited the accompanying statements of plan net assets of Teachers Retirement System of Georgia (the System), a component unit of the State of Georgia, as of June 30, 2005 and 2004, and the related statements of changes in plan net assets for the years then ended. These financial statements are the responsibility of the System's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the System's internal control over financial reporting.Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial status of the System as of June 30, 2005 and 2004, and the changes in financial status for the year then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed in note B, the System adopted the provisions of Governmental Accounting
14 Teachers Retirement System of Georgia

Standards Board Statement No. 40, Deposits and Investment Risk Disclosures during 2005.
In accordance with Government Auditing Standards, we have also issued our report dated September 30, 2005 on our consideration of the System's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audits.
The management's discussion and analysis and the required supplementary schedules listed in the table of contents are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States ofAmerica. We have applied certain limited procedures, which consisted principally of inquiries of management, regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.
Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The introductory, investment, actuarial, and statistical sections are presented for purposes of additional analysis and is not a required part of the basic financial statements. This additional information is the responsibility of the System's management. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects when considered in relation to the basic financial statements taken as a whole. The introductory, investment, actuarial, and statistical sections have not been subjected to the auditing procedures applied by us in the audit of the basic financial statements and, accordingly, we express no opinion on them.
September 30, 2005

MANAGEMENT'S DISCUSSION & ANALYSIS

This section provides a discussion and analysis of the financial performance of the Teachers Retirement System of Georgia (the "System") for the years ended June 30, 2005 and 2004. The discussion and analysis of the System's financial performance is within the context of the accompanying financial statements and disclosures following this section.
Financial Highlights
The following highlights are discussed in more detail later in this analysis.
At June 30, 2005, the System's assets exceeded its liabilities by $45.3 billion (reported as "net assets") as compared to the net assets of $42.6 billion at June 30, 2004, representing an increase of $2.7 billion. At June 30, 2004, the System's assets exceeded its liabilities by $42.6 billion, as compared to the net assets of $39.2 billion at June 30, 2003, representing an increase of $3.4 billion.
Contributions from members increased by $16.0 million or 3.6% from $448.9 million in 2004 to $464.9 million in 2005. Contributions by employers increased by $33.4 million or 4.3% from $782.3 million in 2004 to $815.7 million in 2005. Contributions from members increased by $10 million or 2.3% from $439.0 million in 2003 to $448.9 million in 2004. Contributions by employers increased by $13.6 million or 1.8% from $768.7 million in 2003 to $782.3 million in 2004. These increases are due to increases in membership and higher average payrolls during each of the fiscal years ended June 30, 2005 and 2004.
Pension benefits paid to retirees and beneficiaries for the years ended June 30, 2005 and 2004 were $1.8 billion and $1.6 billion, representing increases of 12.6% and 11.4%, respectively. This is due to increases in the number of retirees and beneficiaries receiving benefit payments and postretirement benefit adjustments.
Overview of the Financial Statements
The basic financial statements include: (1) the statements of plan net assets, (2) the statements of changes in plan net assets, and (3) notes to the financial statements. The System also includes in this report additional information to supplement the basic financial statements.
The System prepares its financial statements on an accrual basis in accordance with accounting principles generally accepted in the United States of America promulgated by the GovernmentalAccounting Standards Board.These statements provide information about the System's overall financial status.
In addition, the System presents two required supplementary schedules, which provide historical trend

information about the plan's funding. The two schedules include: (1) a schedule of funding progress, and (2) a schedule of employer contributions.
The Statements of Plan Net Assets The Statement of Plan Net Assets is the statement of
financial position, presenting information that includes all of the System's assets and liabilities, with the balance reported as and representing the Net Assets Held in Trust for Pension Benefits. The investments of the System in this statement are presented at fair value. These statements are presented on page 19.
The Statements of Changes in Plan Net Assets The Statement of Changes in Plan Net Assets reports how
the System's net assets changed during the fiscal year. The additions and the deductions to net assets are summarized in this statement. The additions include contributions and investment income, which includes the net increase in the fair value of investments. The deductions include benefit payments, refunds of member contributions, and administrative expenses. These statements are presented on page 20.
Notes to the Financial Statements The accompanying notes to the financial statements
provide information essential to a full understanding of the System's financial statements. The notes to the financial statements begin on page 21 of this report.
Required Supplementary Schedules A brief explanation of the two required schedules found
beginning on page 27 of this report follows:
Schedule of Funding Progress This schedule includes historical trend information for the
last six consecutive fiscal years about the actuarially funded status of the plan from a long-term, ongoing plan perspective, and the progress made in accumulating sufficient assets to pay benefits when due.
Schedule of Employer Contributions This schedule presents historical trend information for
the last six consecutive fiscal years about the annual required contributions of employers and the contributions made by employers in relation to the requirement.

2005 Comprehensive Annual Financial Report 15

FINANCIAL MANAGEMENT'S DISCUSSION & ANALYSIS
Section

Financial Analysis of the System
A summary of the System's net assets is as follows:

Assets:
Cash and receivables Investments Capital assets, net
Total assets

Net Assets (in thousands)

June 30,

2005

2004

2003

2005

2004

Amount Percentage Amount Percentage Change Change Change Change

$ 406,080 44,935,545
16,257
45,357,882

$ 361,337 42,266,890
14,825
42,643,052

$ 360,598 $ 44,743

38,919,596 2,668,655

10,203

1,432

39,290,397 2,714,830

12.4 % 6.3 % 9.7 %
6.4 %

$

739

3,347,294

4,622

3,352,655

0.2 % 8.6 % 45.3 %
8.5 %

Liabilities:
Due to brokers and accounts payable
Net Assets

79,202

54,974

71,857

24,228 44.1 %

(16,883) (23.5) %

$ 45,278,680 $ 42,588,078 $ 39,218,540 $ 2,690,602

6.3 % $ 3,369,538

8.6 %

As indicated above, the $2.7 billion and $3.4 billion increases in net assets in 2005 and 2004, respectively, are principally related to the increase in the fair value of investments. The increase in investments is analyzed below.

The following table presents the investment allocation at June 30, 2005, 2004, and 2003:

Asset Allocation at June 30 (in percentages)

2005

2004

2003

Equities Fixed income Short-term securities

60.4 % 38.0 % 1.6 %

59.4 % 39.0 % 1.6 %

51.5 % 46.2 % 2.3 %

Asset Allocation at June 30 (in thousands)
Equities Fixed income Short-term securities

$ 27,121,761 17,075,215 738,569

$ 25,120,626 16,469,405 676,859

$ 20,058,758 17,961,576 899,262

$ 44,935,545 $ 42,266,890 $ 38,919,596

16 Teachers Retirement System of Georgia

MANAGEMENT'S DISCUSSION & ANALYSIS

Asset Allocation at June 30 cont.
The total investment portfolio increased $2.7 billion from June 30, 2004, which was due primarily to the increase in the fair value of equity investments.
The total investment portfolio increased $3.3 billion from June 30, 2003, which was due primarily to the increase in the fair value of equity investments.
The investment rate of return in fiscal year 2005 was 7.9%, with 8.5% return for equities and 7.1% return for fixed income compared to an investment rate of return in fiscal year 2004 of 9.9%, with 20.0% return for equities and (1.4)% return for fixed income. The five-year annualized rate of return on investments at June 30, 2005, was 2.5% with (1.4)% return on equities and 7.8% return on fixed income.
The investment rate of return in fiscal year 2004 was 9.9%, with 20.0% return for equities and (1.4)% return for fixed income compared to an investment rate of return in fiscal year 2003 of 4.6%, with (2.1)% return for equities and 12.8% return for fixed income. The five-year annualized rate of return on investments at June 30, 2004, was 2.4%, with (1.6%) return on equities and 7.7% return on fixed income.
A summary of the changes in System's net assets for the years ended June 30, 2005, 2004, and 2003 are as follows:

Changes in Net Assets (in thousands)
June 30,

Additions:

2005

2004

2003

Member Contributions $ 464,931

Employer Contributions

815,693

$ 448,929 782,301

$ 438,998 768,673

Net investment income

(loss)

3,279,505

3,794,733

1,669,768

2005

2004

Amount Percentage Amount Percentage Change Change Change Change

$ 16,002 33,392

3.6 % $ 9,931

4.3 %

13,628

2.3 % 1.8 %

(515,228) (13.6) % 2,124,965 127.3 %

Total additions

4,560,129

5,025,963

2,877,439 (465,834) (9.3) % 2,148,524 74.7 %

Deductions:
Benefit payments Refunds Administration
Total deductions

1,799,478 50,491 19,558
1,869,527

1,598,467 42,580 15,378
1,656,425

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

201,011 7,911 4,180
213,102

12.6 % 18.6 % 27.2 %
12.9 %

163,827 1,697 574
166,098

11.4 % 4.2 % 3.9 %
11.1 %

Net increase in plan net assets

$ 2,690,602 $ 3,369,538 $ 1,387,112 $ (678,936) (20.1) % $ 1,982,426 142.9 %

2005 Comprehensive Annual Financial Report 17

FINANCIAL Section

MANAGEMENT'S DISCUSSION & ANALYSIS

Additions
The System accumulates resources needed to fund benefits through contributions and returns on invested funds. Member contributions increased 2.3% and 3.6% in 2004 and 2005, respectively, primarily because of increased membership and a higher average payroll in both years. Employer contributions likewise increased 1.8% and 4.3% in 2004 and 2005, respectively, also as a result of increased membership and a higher average payroll. The employer contribution rate remained constant at 9.24% for 2004 and 2005. The employer contribution rate was recommended by the actuary and approved by the System's Board of Trustees. The net investment income is a result of solid investment returns.
Deductions
Deductions increased 11.1% in 2004 and 12.9% in 2005, primarily because of the 11.4% and 12.6% increase in benefit payments resulting from an increase in the number of retirees and beneficiaries receiving benefit payments from 57,692 in 2003 to 61,590 in 2004 to 66,282 in 2005 and postretirement benefit increases in both years.

Funding Status
The schedule of funding progress and schedule of employer contributions provide information regarding how the plan is performing and funded from an actuarial perspective. The information is based upon actuarial valuations conducted by certified actuaries. The funding ratio, which is presented on the schedule of funding progress, indicates the ratio between the actuarial value of assets and the actuarial accrued liabilities. The higher this ratio, the better funded the System is from an actuarial perspective.
The June 30, 2004, actuarial valuation, which is the latest valuation available, indicates that the actuarial value of assets was $44.6 billion and that the actuarial accrued liability was $44.2 billion. This results in a funding ratio of 100.9%. The June 30, 2003, actuarial valuation indicated that the actuarial value of assets was $42.4 billion and that the actuarial accrued liability was $41.9 billion. This results in a funding ratio of 101.1%.
The System continues to be in a strong financial position as evidenced by the funding ratio.

18 Teachers Retirement System of Georgia

STATEMENTS OF PLAN NET ASSETS
June 30, 2005 and 2004 (in thousands)

Assets
Cash Receivables:
Interest and dividends Due from brokers for securities sold Member and employer contributions Due from Fulton County School Employees Pension Fund

2005
$ 2,138
222,521 35,101 102,081 44,239

2004
$ 6,204
184,772 26,121 96,889 47,351

Total receivables

403,942

355,133

Investments - at fair value: Short-term Obligations of the U.S. Government and its agencies, corporate, and other bonds Common stocks

738,569
17,075,215 27,121,761

676,859
16,469,405 25,120,626

Total investments
Capital Assets, net

44,935,545 16,257

42,266,890 14,825

Total assets

45,357,882

42,643,052

Liabilities
Due to brokers for securities purchased Accounts payable and other
Total liabilities

71,674 7,528
79,202

53,246 1,728
54,974

Net Assets Held in Trust for Pension Benefits
(A Schedule of Funding Progress is presented on page 27.)
See accompanying notes to financial statements.

$ 45,278,680

$ 42,588,078

2005 Comprehensive Annual Financial Report 19

FINANCIAL Section

STATEMENTS OF CHANGES IN PLAN NET ASSETS
For the Years Ended June 30, 2005 and 2004 (in thousands)

Net Assets Held in Trust for Pension Benefits - Beginning of year
Additions:
Contributions: Employer Member
Investment income: Net increase in fair value of investments Interest, dividends, and other
Total
Less investment expense
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 - End of year

2005 $ 42,588,078

2004 $ 39,218,540

815,693 464,931
2,172,591 1,146,655 3,319,246
39,741 3,279,505 4,560,129
1,799,478 50,491 19,558
1,869,527 2,690,602
$ 45,278,680

782,301 448,929
2,882,187 948,105
3,830,292 35,559
3,794,733 5,025,963
1,598,467 42,580 15,378
1,656,425 3,369,538
$ 42,588,078

See accompanying notes to financial statements.

20 Teachers Retirement System of Georgia

NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2005 and 2004

A. Plan Description:
Teachers Retirement System of Georgia (the "System") was created in 1943 by an act of the Georgia Legislature (the Act) to provide retirement benefits for teachers who qualify under the Act. The System is administered as a costsharing, multiple-employer plan as defined in Governmental Accounting Standards Board (GASB) Statement No. 25. On October 25, 1996, the Board of Trustees created the Supplemental Retirement Benefit Plan of the Georgia Teachers (SRBP). SRBP was established as a qualified governmental excess benefit plan in accordance with Section 415 of the Internal Revenue Code (IRC 415) as a portion of the System. The purpose of SRBP is to provide retirement benefits to employees covered by the System whose benefits are otherwise limited by IRC 415. Although the System is a component unit of the state of Georgia's financial reporting entity, it is accountable for its own fiscal matters and presentation of its separate financial statements. A Board of Trustees comprised of active and retired members and ex-officio state employees is ultimately responsible for the administration of the System.
In evaluating how to define the System for financial reporting purposes, the management of the System has considered all potential component units. The decision to include a potential component unit in the reporting entity is made by applying the criteria set forth by GASB Statement No.14. The concept underlying the definition of the reporting entity is that elected officials are accountable. The decision to include a potential component unit in the reporting entity is also made by applying specific criteria as outlined in GASB No. 39, including consideration of the nature and significance of the relationship of potential component units. Based on those criteria, the System has not included any other entities in its reporting entity.
Eligibility and Membership: All teachers in the state public schools, the University
System of Georgia (except those professors and principal administrators electing to participate in an optional retirement plan), and certain other designated employees in educationalrelated work are eligible for membership.

As of June 30, 2005, participation in the System is as follows:

Retirees and beneficiaries currently receiving benefits
Terminated employees entitled to benefits but not yet receiving benefits
Active plan members

66,282
60,517 203,252

Total Employers

330,051 375

Retirement Benefits: The System provides service retirement, disability
retirement, and survivor's benefits. Title 47 of the Official Code of Georgia assigns the authority to establish and amend the provisions of the System to the State Legislature. A member is eligible for normal service retirement after 30 years of creditable service, regardless of age, or after 10 years of service and attainment of age 60. A member is eligible for early retirement after 25 years of creditable service.
Normal retirement (pension) benefits paid to members are equal to 2% of the average of the member's two highest paid consecutive years of service multiplied by the number of years of creditable service up to 40 years. Early retirement benefits are reduced by the lesser of one-twelfth of 7% for each month the member is below age 60, or by 7% for each year or fraction thereof by which the member has less than 30 years of service. It is also assumed that certain cost-of-living adjustments, based on the Consumer Price Index, will be made in future years. Retirement benefits are payable monthly for life. Options are available for distribution of the member's monthly pension at a reduced rate to a designated beneficiary on the member's death.

Death and Disability Benefits: Retirement benefits also include death and disability
benefits.
A disabled member is entitled to receive a benefit based on the member's creditable service (minimum of ten years of service) and compensation up to the time of disability.
The death benefit is the amount that would be payable to the member's beneficiary had the member retired on the date of death on a service retirement allowance and chosen a 100% survivorship option. The benefit is based on the member's creditable service (minimum of ten years of service) and compensation up to the date of death.

Contributions: The System is funded by member and employer
contributions as adopted and amended by the Board of Trustees.
Contributions required for fiscal year 2005 were based on the June 30, 2003, actuarial valuation as follows:

Member:

5.00 %

Employer:

Normal

9.65 %

Unfunded accrued liability (0.56) %

Expenses

0.15 %

Total

9.24 %

2005 Comprehensive Annual Financial Report 21

FINANCIAL Section

NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2005 and 2004

A. Plan Description:
Contributions (continued): Members become fully vested after ten
years of service. If a member terminates with less than ten years of service, no vesting of employer contributions occurs, but the member's contributions may be refunded with interest. Member contributions with accumulated interest are reported as net assets held for trust benefits.
SRBP: Beginning July 1, 1997, all members and
retired former members in the System are eligible to participate in this plan whenever their benefits under the System exceed the limitation on benefits imposed by IRC 415. At June 30, 2005 and 2004, there were 21 and 17 members, respectively, eligible to participate in this portion of the System. Employer contributions of $202,000 and $139,000 and retirement payments of $202,000 and $139,000 under the SRBP are included in the statement of changes in plan net assets for the years ended June 30, 2005 and 2004, respectively.
B. Summary of Significant Accounting Policies and Plan Asset Matters:
Basis of Accounting: The System's financial statements are
prepared on the accrual basis of accounting. Contributions from the employers and the members are recognized as additions when due pursuant to formal commitments as well as statutory or contractual requirements. Retirement and refund payments are recognized as deductions when due and payable.
During fiscal year 2005, the System adopted the provisions of GASB Statement No. 40, Deposit and Investment Risk Disclosures. This pronouncement requires additional disclosures presented in these notes, but has no impact on the System's net assets. These disclosures address common deposit and investment risks related to credit risk, concentration of credit risk, interest rate risk, and foreign currency risk. Included as an element of interest rate risk, Statement No. 40 requires disclosures of investments that have fair values that are highly sensitive to changes in interest rates.
22 Teachers Retirement System of Georgia

Investments: Investments are reported at fair value. Short-
term investments are reported at cost, which approximates fair value. Securities traded on a national or international exchange are valued at the last reported sales price. No investment in any one organization, except the U.S. Government, represents 5% or more of the net assets available for pension benefits. There are no investments in, loans to, or leases with parties related to the System.
Capital Assets: Capital assets are stated at cost less
accumulated depreciation. Depreciation on capital assets is computed using the straight-line method over estimated useful lives of three to forty years. Depreciation expense is included in administrative expenses. Maintenance and repairs are charged to administrative expenses when incurred. When assets are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the statements of changes in plan net assets in the period of disposal.
Use of Estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of plan net assets and changes therein. Actual results could differ from those estimates. The System utilizes various investment instruments. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the financial statements.
C. Investment Program:
The System maintains sufficient cash to meet its immediate liquidity needs. Cash not immediately needed is invested in either shortterm or long-term investment securities as directed by the Board of Trustees. All investments are held by agent custodial banks in the name of the System.

NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2005 and 2004

C. Investment Program (continued):
Cash: Cash balances are fully insured through the Federal Deposit
Insurance Corporation, an agency of the U.S. Government. Fiduciary accounts, such as those of the System, are granted $100,000 of insurance coverage per participant in the System. Temporary cash on hand not committed for a specific purpose is invested overnight.
Investments: State statutes authorize the System to invest in a variety
of short-term and long-term securities as follows:
a) Short-Term: Short-term investments are authorized in the following
instruments:
Repurchase and reverse repurchase agreements, whereby the System and a broker exchange cash for direct obligations of the U.S. Government or obligations unconditionally guaranteed by agencies of the U.S. Government or U.S. corporations. The System or broker promises to repay the cash received plus interest at a specific date in the future in exchange for the same securities. The System held repurchase agreements of $738,569,000 and $676,859,000 at June 30, 2005 and 2004, respectively.
U.S. Treasury obligations with varying terms up to 360 days.
Other short-term securities authorized, but not currently used, are:
Commercial paper, with a maturity of 180 days or less. Commercial paper is an unsecured promissory note issued primarily by corporations for a specific amount and maturing on a specific day. The System considers for investment only commercial paper of the highest quality, rated P-1 and/or A-1 by national credit rating agencies.
Master notes, an overnight security administered by a custodian bank, and an obligation of a corporation whose commercial paper is rated P-1 and/or A-1 by national credit rating agencies.
Investments in commercial paper or master notes are limited to no more than $100 million in any one name.
b) Long-Term:
Fixed-income investments are authorized in the following instruments:
Obligations unconditionally guaranteed by agencies of the U.S. Government and corporate bonds with at least an "A" rating by a national rating agency and limited to no more than 5% of total System assets in

any one name. Maturities of these securities vary up to a period of 40 years to provide the System with flexibility necessary to meet changing market conditions. The System held agency and corporate bonds of $6,352,852,000 and $5,145,756,000 at June 30, 2005 and 2004, respectively.
U.S. and foreign government obligations with terms up to 30 years. Quality and call requirements of corporate bonds are applicable. The System held U.S. Government obligations of $10,722,363,000 and $11,323,649,000 at June 30, 2005 and 2004, respectively.
Private placements are authorized under the same general restrictions applicable to corporate bonds.
Mortgage investments are authorized to the extent that they are secured by first mortgages on improved real property located in the state of Georgia having a loan-to-value ratio no higher than 75%. Mortgages as a group cannot exceed 10% of total assets or 1% for any one loan.
Equity securities are also authorized (in statutes) for investment as a complement to the System's fixed-income portfolio and as a long-term inflation hedge. By statute, no more than 60% of the total invested assets may be placed in equities and no more than 5% in any one corporation. Equity holdings in any one corporation may not exceed 5% of the outstanding equity of the issuing corporation. The equity portfolio is managed by the Division of Investment Services (the "Division") in conjunction with independent advisors. Buy/sell decisions are based on securities meeting rating criteria established by the Board of Trustees; in-house research considering such matters as yield, growth, and sales statistics; and analysis of independent market research. Equity trades are approved and executed by the Division's staff. Common stocks eligible for investment are approved by the Investment Committee of the Board of Trustees before being placed on an approved list.
GASB Statement No. 40 was effective for the fiscal year ending June 30, 2005; the System has determined that it is not practical to show these amounts for the previous year.
Credit Risk: Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations to the Teachers Retirement System. State law limits investments to investment grade securities.
It is the System's investment policy to require that the bond portfolio be of high quality and chosen with respect to maturity ranges, coupon levels, refunding characteristics, and marketability. The System's policy is to require that new purchases of bonds be restricted to high grade bonds rated no lower than "A" by any nationally recognized statistical rating organization. The System's investment in U.S. Agencies was 21.6% of the total fixed income portfolio and was rated AAA
2005 Comprehensive Annual Financial Report 23

FINANCIAL Section

NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2005 and 2004

C. Investment Program:
Investments (continued):
by Standard & Poor's and Aaa by Moody's Investors Service. The System's investment in corporate bonds was 15.6% of the total fixed income portfolio, which consisted of 9.1% rated AAA/Aaa and 6.5% rated AA/Aa.
The investment policy requires that repurchase agreements be limited to the purchase of U.S. Treasury or Agency obligations or corporate bonds rated at no lower than "A" by any nationally recognized statistical rating organization, with a market value in excess of funds advanced. As of June 30, 2005, the System held repurchase agreements of $738,569,000.
Concentration of Credit Risk: Concentration of credit risk is the risk of loss that may be attributed to the magnitude of a government's investment in a single issue. State statutes and the System's investment policy limit investments to no more than 5% of total System net assets in any one corporation. On June 30, 2005, the System did not have debt or equity investments in any one organization, other than those issued by the U. S. Government, which represented greater than 5% of plan net assets.
Interest Rate Risk: Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. This risk is managed within the portfolio using the effective duration method. This method is widely used in the management of fixed income portfolios and quantifies to a much greater degree the sensitivity to interest rate changes when analyzing a bond portfolio with call options, prepayment provisions, and any other cash flows. Effective duration makes assumptions regarding the most likely timing and amounts of variable cash flows and is best utilized to gauge the effect of a change in interest rates on the fair value of a portfolio. It is believed that the reporting of effective duration found in the table below quantifies to the fullest extent possible the interest rate risk of the System's fixed income assets.
Effective Duration of Fixed Income Assets and Repurchase Agreements by Security Type

Fixed income and repurchase agreements security type
U.S. Treasuries U.S. Agencies Corporate bonds Repurchase agreements
Total

Market value, June 30, 2005
$ 10,722,363,210 3,688,953,184 2,663,898,250 738,569,000
$ 17,813,783,644

Percent of all fixed income assets
and repurchase agreements
60.2 % 20.7 % 15.0 % 4.1 %
100.0 %

Effective duration (years)
6.2 2.4 4.7 0.0
5.0

D. Investments Lending Program:
State statutes and Board of Trustees' policies permit the System to lend its securities to broker dealers with a simultaneous agreement to return the collateral for the same securities in the future. The System is presently involved in a securities lending program with major brokerage firms. The System lends equity and fixed income securities for varying terms and receives a fee based on the loaned securities' value. During a loan, the System continues to receive dividends and interest as the owner of the loaned securities. The brokerage firms pledge collateral securities consisting of U.S. Government and agency securities, mortgage backed securities issued by a U.S. Government agency, and corporate bonds. The collateral value must be equal to at least 102% to 110% of the loaned securities' value, depending on the type of collateral security.
24 Teachers Retirement System of Georgia

NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2005 and 2004

D. Investments Lending Program (continued):
Securities loaned totaled $16,709,071,014 and $15,638,669,751 at market value at June 30, 2005 and 2004, respectively. The collateral value was equal to 105.1% and 104.8% of the loaned securities' value at June 30, 2005 and 2004, respectively. The System's lending collateral was held in the System's name by the tri-party custodian.
Loaned securities are included in the accompanying statements of plan net assets since the System maintains ownership. The related collateral securities are not recorded as assets on the System's statements of plan net assets, and a corresponding liability is not recorded, since the System is deemed not to have the ability to pledge or trade the collateral securities. In accordance with the criteria set forth in GASB No. 28, the System is deemed not to have the ability to pledge or sell collateral securities, since the System's lending contracts do not address whether the lender can pledge or sell the collateral securities without a borrower default, the System has not previously demonstrated that ability, and there are no indications of the System's ability to pledge or sell the collateral securities.

E. Capital Assets:

The following is a summary of capital assets and depreciation information as of June 30 and for the years then ended:

Balance at June, 2004

Additions

Balance Disposals at June, 2005

Capital Assets:
Land Building Furniture and fixtures Computer equipment Computer software

$ 944,225 2,800,000 333,975 721,368 10,468,336 15,267,904

$

--

--

--

207,956

4,511,377

4,719,333

$

--

$ 944,225

--

2,800,000

--

333,975

--

929,324

--

14,979,713

--

19,987,237

Accumulated Depreciation:
Building Furniture and fixtures Computer equipment Computer software

-- (161,007 ) (281,697 )
-- (442,704 )

(70,000 ) (47,711) (173,802 ) (2,995,943 ) (3,287,456 )

--

(70,000)

--

(208,718)

--

(455,499)

--

(2,995,943 )

--

(3,730,160 )

Capital Assets, Net

$14,825,200

$1,431,877

$

--

$16,257,077

Balance at June, 2003

Capital Assets:
Land Building Furniture and fixtures Computer equipment Software under development

$ 944,225 2,800,000 253,378 630,034 5,855,757 10,483,394

Accumulated Depreciation:
Furniture and fixtures Computer equipment

(124,810 ) (155,690 ) (280,500 )

Capital Assets, Net

$10,202,894

Additions

Balance Disposals at June, 2004

$

--

--

80,597

91,334

4,612,579

4,784,510

$

--

$ 944,225

--

2,800,000

--

333,975

--

721,368

--

10,468,336

--

15,267,904

(36,197 ) (126,007) (162,204 )

--

(161,007)

--

(281,697 )

--

(442,704 )

$4,622,306

$

--

$14,825,200

2005 Comprehensive Annual Financial Report 25

FINANCIAL Section

NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2005 and 2004

F. Due from Fulton County School Employees Pension Fund:
As of July 1, 1988, substantially all members of the Fulton County School Employees Pension Fund became members in the System. The transfer involved 3,990 members at a total cost to the Fulton County School Employees Pension Fund of $168,976,347. The employer's portion of contributions plus accrued interest (maximum 9%) is payable over 23 remaining annual installments.
G. Administrative Expenses:
Administrative expenses are reported in the financial statements; however, the actual accounting for the expenses is performed in a separate expense fund. Administrative expenses paid out of System earnings are as follows:

H. Commitments and Contingencies:
The System is subject to legal actions in the ordinary course of its business. In the opinion of management, the System has adequate legal defenses and insurance coverage with respect to such actions and their final outcome will not have a material adverse effect upon the financial status of the System.
The System has entered into a one-year agreement for building maintenance with yearly optional renewal terms. The management fees related to the agreement were $723,975 for each year ended June 30, 2005 and 2004.

2005

2004

Salaries and Employee Benefits $14,158,288 $12,608,113

Other Operating Expenses

8,398,804 5,430,599

Total Administrative Expenses 22,557,092 18,038,712

Less Reimbursement by other State

Retirement Systems for services

rendered on their behalf

2,998,985

2,660,822

Net Administrative Expenses $19,558,107 $15,377,890

26 Teachers Retirement System of Georgia

REQUIRED SUPPLEMENTARY SCHEDULES
See Independent Auditors' Report

Schedule of Funding Progress (dollars in thousands)

Actuarial Valuation
Date
6/30/99 6/30/00 6/30/01 6/30/02 6/30/03 6/30/04

Actuarial Value of Plan Assets
(a)
$ 31,832,431 35,675,729 38,584,834 40,502,333 42,372,661 44,617,956

Actuarial Accrued Liability (AAL) -Entry Age
(b)
$ 32,763,470 34,876,171 37,153,421 39,706,523 41,905,676 44,230,031

Unfunded AAL
(UAAL)/ (Funding Excess)
(b-a)
$ 931,039 (799,558 )
(1,431,413 ) (795,810 ) (466,985 ) (387,925 )

Funding Ratio (a/b)
97.2 % 102.3 % 103.9 % 102.0 % 101.1 % 100.9 %

Annual Covered Payroll
(c)

UAAL/
(Funding Excess) as a
Percentage of Covered Payroll
[(b-a)/c]

$ 6,832,672 7,218,644 7,306,855 7,617,869 8,261,961 8,038,118

13.6 % (11.1) % (19.6) % (10.4) % (5.7) % (4.8) %

This data, except for annual covered payroll, was provided by the System's actuary.

Schedule of Employer Contributions (dollars in thousands)

Years Ended June 30,
1999 2000 2001 2002 2003 2004

State Annual Required
Contribution
$ 776,178 779,571 808,480 716,917 768,673 782,301

Percentage Contributed
100 % 100 % 100 % 100 % 100 % 100 %

See accompanying notes to required supplementary schedules.

2005 Comprehensive Annual Financial Report 27

FINANCIAL Section

REQUIRED SUPPLEMENTARY SCHEDULES
See Independent Auditors' Report
Notes to Required Supplementary Schedules
Schedule of Funding Progress The actuarial value of assets recognizes a portion of the difference between the market value of
assets and the expected actuarial value of assets, based on the assumed valuation rate of return. The amount recognized each year is 20% of the difference between market value and expected actuarial value. The actuarial value of assets is limited to a range between 80% and 120% of market value.
Schedule of Employer Contributions The required employer contributions and percent of those contributions actually made are
presented in the schedule.
Actuarial Assumptions The information presented in the required supplementary schedules was determined as part of
the actuarial valuations at the dates indicated. Since the previous valuation on June 30, 2003, the remaining amortization period was reduced from 13 to 11 years. Additional information from the actuarial valuations for the most recent two-year period is as follows:

Valuation Date Actuarial Cost Method Amortization Method Remaining Amortization Period Asset Valuation Method Actuarial Assumption:
Investment Rate of Return Projected Salary Increases Inflation Rate Post-Retirement Cost-of-Living Adjustments

June 30, 2004 Entry Age Level Percent of Pay, Open 11 Years 5-Year Smoothed Market
7.50% 3.75 to 8.00% 3.75% 3% Annually

June 30, 2003 Entry Age Level Percent of Pay, Open 13 Years 5-Year Smoothed Market
7.50% 3.75 to 8.00% 3.75% 3% Annually

28 Teachers Retirement System of Georgia

ADDITIONAL INFORMATION - ADMINISTRATIVE EXPENSES
For the Years Ended June 30, 2005 and 2004

Personal Services:
Salaries and wages Retirement contributions Health insurance FICA Miscellaneous
Total personal services
Communications:
Postage Publications and printing Telecommunications Travel
Total communications
Professional Services:
Computer services Contracts Actuarial services Audit fees Legal services Medical services
Total professional services
Management Fees:
Building maintenance Total management fees
Other Services and Charges:
Temporary services Repairs and maintenance Supplies and materials Courier services Depreciation expense Miscellaneous Office equipment
Total other services and charges
Total administrative expenses
Less reimbursement by other state retirement systems for services rendered on their behalf
Net administrative expenses

2005
$ 10,879,778 1,130,107 1,424,179 687,566 36,658
14,158,288
232,155 273,730 219,511 32,869 758,265
2,916,884 --
148,262 65,848 48,433 135,665 3,315,092
723,975 723,975
308 40,676 144,626 12,810 3,287,456 114,801
795 3,601,472 22,557,092
2,998,985 $19,558,107

2004
$ 9,696,531 1,006,945 1,269,018 607,663 27,956 12,608,113
250,103 216,618 180,403
40,349 687,473
3,113,570 29,484 101,108 72,166 36,036 144,745
3,497,109
723,975 723,975
70,552 31,429 148,149 11,735 162,204 97,130
843 522,042 18,038,712
2,660,822 $15,377,890

See accompanying independent auditors' report.

2005 Comprehensive Annual Financial Report 29

INVESTMENT Section

INVESTMENT OVERVIEW

The financial markets continued to be volatile, as has been the case over the last ten years. The System has continued to invest in a mix of high quality bonds and stocks as it has historically done.
These types of investments have allowed the System to participate in rising markets while moderating the risks on the downside. New funds continue to be invested in high quality securities. A high quality balanced fund has proven to be a successful strategy in a variety of markets over a long period of time.
As in previous years, maintaining quality was a primary goal and was successfully met. "Conservation of Capital" and "Conservatism" continue to be the principal guides in investment decisions. The Board of Trustees continued to use a diversified portfolio to accomplish these objectives.
Both U.S. and worldwide economic growth rates remained above trend over the last year. U.S. employment growth has improved somewhat, but remained below expectations for this point in the recovery. Inflation levels decreased to around 2.5%. The consumer and the housing market both continued strong during the year, and there was a pickup in business spending. Corporate profits again showed strong growth with a large contribution from the energy sector due to increasing oil prices. Rising energy prices in the last half of the year not only impacted inflation, but also began to have an effect on various economic sectors.
Studies undertaken to evaluate the investment returns of pension funds over very long time horizons indicate that the asset allocation decision has the most impact on the fund's returns. Although the returns for the various asset categories vary from year to year, over the long term, equities have outperformed fixed income and cash by a very wide margin. For that reason, the System has maintained a maximum equity exposure with the remainder of the fund in fixed-income securities designed to generate income and preserve capital.
Returns for rolling three- and five-year periods are presented in this section. These longer time periods, in our opinion, allow for more valid evaluation of returns, both in absolute

terms and relative to an asset class index, by reducing emphasis on the short-term volatility of markets.
Rates of return are calculated by using a modified "Dietz time-weighted method," which is in accordance with theAssociation for Investment Management and Research (AIMR) objectives.
Equity markets achieved most of their performance in the first half of the year ended June 30, 2005. Among individual companies, returns varied depending upon the company's size, industry, and exposure to global markets. Returns were significantly below the prior year's rebound off market lows. Small and Mid-Cap domestic stocks and foreign stocks were the best performing indices, rising 13%-14%. Among Large-Cap indices, performance varied from 6% for the S&P 500 to 1% for the Dow Jones Industrials. Much of this variance can be explained by the different weightings of the outperforming energy sector and the lagging technology sector.
Returns for the fixed-income markets were higher than average this year as yields on longterm Treasury bonds dropped from 5.3% in June 2004 to 4.2% at the end of June 2005. The 10year U.S. Treasury Note returned 10% and the 30-year U.S. Treasury Bond returned 22%. In comparison, the one-year U.S. Treasury Note returned less than 2% as the Federal Reserve continued to raise short-term rates. Our primary benchmark, the Lehman Government / Credit Index returned 7%. It is a shorter maturity index containing higher yielding corporate bonds as well as Treasuries. Lower quality bonds outperformed higher quality as evidenced by the 11% return for BBB versus 6% for AAA & AA bonds.
In summary, the investment status of the System is excellent. The high quality of the System's investments is consistent with the continued policy of "Conservatism" and "Conservation of Capital."
Prepared by the Division of Investment Services

30 Teachers Retirement System of Georgia

TIME-WEIGHTED RATES OF RETURN

Equities (%)
2001 25 20 15 10
5 0 -5 -10 -15
5yr 3yr

2002
5yr 3yr

2003
5yr 3yr

Equities S&P 500

2004

2005

5yr 3yr

5yr 3yr

3-Year: Equities S&P 500
5-Year: Equities S&P 500
3-Year: Equities S&P 500
5-Year: Equities S&P 500

2003
-10.6% -11.2%

2004 2005
.1% 8.4% -.6% 8.3%

-1.6% -1.6% -1.4% -1.6% -2.1% -2.4%
2001 2002
3.2% -7.7% 3.9% -9.2%

13.6% 14.5%

3.6% 3.7%

Fixed Income (%)

2001 12

2002

10

8

6

4

2

0

5yr 3yr

5yr 3yr

2003

Fixed Income Lehman Govt/Credit

2004

2005

5yr 3yr

5yr 3yr

5yr 3yr

3-Year: Fixed Income Lehman Govt/Credit
5-Year: Fixed Income Lehman Govt/Credit
3-Year: Fixed Income Lehman Govt/Credit
5-Year: Fixed Income Lehman Govt/Credit

2003 2004 2005
11.3% 7.2% 6.0% 10.8% 6.7% 6.4%
8.1% 7.7% 7.8% 7.8% 7.1% 7.7%
2001 2002
5.7% 9.2% 6.0% 7.9%
8.8% 9.3% 7.4% 7.5%

Total Portfolio (%)

2001 20

2002

15

10

5

0

-5
5yr 3yr

5yr 3yr

2003
5yr 3yr

Total Portfolio CPI

2004

2005

5yr 3yr

5yr 3yr

3-Year: Total Portfolio CPI
5-Year: Total Portfolio CPI
3-Year: Total Portfolio CPI
5-Year: Total Portfolio CPI

2003 2004 2005
-1.6% 3.3% 7.4% 2.2% 2.1% 2.7%
2.6% 2.4% 2.5% 2.4% 2.7% 2.2%
2001 2002
4.3% -.7% 3.0% 2.7%
11.5% 6.1% 2.6% 2.3%

Note Rates of return are calculated by using a modified "Dietz time-weighted method," which is in accordance with AIMR objectives.

2005 Comprehensive Annual Financial Report 31

INVESTMENT Section

ASSET ALLOCATION
Asset Allocation at Fair Value

70% 60% 50% 40% 30% 20% 10%

Equities Fixed Income Short-Term Securities (1)

2000

2001

2002

2003

2004

2005

Asset Allocation at June 30, Equities Fixed Income Short-Term Securities (1)

2000
61.2% 37.8% 1.0%

2001 2002

56.9% 41.7% 1.4%

53.9% 44.0% 2.1%

2003 2004

51.5% 46.2% 2.3%

59.4% 39.0% 1.6%

2005
60.4% 38.0% 1.6%

Asset Allocation at June 30,

A(isnsemt Ailloiocantsio)n at June 30, (In millions)

Equities

$25,288

Fixed Income Short-Term Securities (1)

15,643 412

Total Investments

$41,343

$22,310 16,380
541
$39,231

$20,142 16,446
781
$37,369

$20,059 17,961
899
$38,919

$25,121 16,469
677
$42,267

$27,122 17,075
739
$44,936

(1) Short-term securities include mortgages.

32 Teachers Retirement System of Georgia

PORTFOLIO DETAIL STATISTICS

Twenty Largest Equity Holdings*

Shares

Company

12,754,800 7,231,278 10,755,142 6,233,969 4,377,180 10,709,800 11,558,600 4,132,000 4,498,114 7,845,200 3,364,520 3,407,598 4,699,400 2,855,000 3,343,200 3,291,576 3,169,420 3,010,100 6,047,585 2,387,000

General Electric Exxon Mobil Pfizer, Inc. Citigroup Inc. Johnson & Johnson Microsoft Corp. Cisco Systems Medtronic, Inc. Bank of America Corp. Intel Corp. Amgen, Inc. ConocoPhillips Dell Inc. Altria Group Inc. Unitedhealth Group Inc. Procter & Gamble Pepsico Inc. American Express Co. MBNA Corp BP p.l.c.

Total of 20 Largest Equity Holdings

Total Equity Holdings

Fair Value
$ 441,953,820 415,581,547 296,626,816 288,196,387 284,516,700 266,031,432 220,538,088 213,996,280 205,158,980 204,132,104 203,418,879 195,902,809 185,438,324 184,604,300 174,314,448 173,630,634 170,926,821 160,227,623 158,204,824 148,901,060
$ 4,592,301,876
$ 27,121,761,474

Ten Largest Fixed-Income Holdings*

Description

Maturity Date

Interest Rate (%)

U.S. Treasury Bond U.S. Treasury Note U.S. Treasury Note FHLMC-Callable U.S. Treasury Note U.S. Treasury Note FHLMC-Callable U.S. Treasury Bond U.S. Treasury Note General Electric Cap Corp

02/15/31 03/31/07 08/31/06 04/25/08 11/15/06 02/28/07 10/18/07 08/15/29 01/15/10 09/13/10

5.375 % 3.750 2.375 3.560 3.500 3.375 3.520 6.125 3.625 4.250

Total of 10 Largest Fixed-Income Holdings

Total Fixed-Income Holdings

Par Value
$ 2,249,000,000 1,562,000,000 1,330,000,000 1,115,000,000 1,091,000,000 975,000,000 735,000,000 534,000,000 637,000,000 615,000,000

Fair Value
$ 2,653,820,000 1,564,374,240 1,311,925,300 1,101,620,000 1,089,767,170 970,739,250 727,650,000 681,832,560 633,986,990 613,191,900
$ 11,348,907,410
$ 17,075,214,644

* A complete listing is available upon written request.

2005 Comprehensive Annual Financial Report 33

ACTUARIAL Section

ACTUARY'S CERTIFICATION LETTER

200 Galleria Parkway, N.W., Suite 1900 Atlanta, Georgia 30339-5945
May 1, 2005
Board of Trustees Teachers Retirement System of Georgia Suite 100, Two Northside 75 Atlanta, Georgia 30318
Members of the Board:
Section 47-3-23 of the law governing the operation of the Teachers Retirement System of Georgia provides that the actuary shall make annual valuations of the contingent assets and liabilities of the Retirement System on the basis of regular interest and the tables last adopted by the Board of Trustees. We have submitted the report giving the results of the actuarial valuation of the System prepared as of June 30, 2004. The report indicates that annual employer contributions at the rate of 9.24% of compensation for the fiscal year ending June 30, 2007, are sufficient to support the benefits of the System. In preparing the valuation, the actuary relied on data provided by the System. While not verifying data at the source, the actuary performed tests for consistency and reasonableness. Our firm, as actuary, is responsible for all of the actuarial trend data in the financial section of the annual report and the supporting schedules in the actuarial section of the annual report.
In our opinion, the valuation is complete and accurate, and the methodology and assumptions are reasonable as a basis for the valuation. The valuation takes into account the effect of all amendments to the System enacted through the 2004 session of the General Assembly.
The System is funded on an actuarial reserve basis. The actuarial assumptions recommended by the actuary and adopted by the Board are in the aggregate reasonably related to the experience under the System and to reasonable expectations of anticipated experience under the System. The assumptions and methods used for funding purposes meet the parameters set for the disclosures presented in the financial

section by Governmental Accounting Standards Board (GASB) Statement Nos. 25 and 27. The funding objective of the plan is that contribution rates over time will remain level as a percent of payroll. The valuation method used is the entry age normal cost method. The normal contribution rate to cover current cost has been determined as a level percent of payroll. Gains and losses are reflected in the unfunded accrued liability, which is negative and being amortized as a level percent of payroll within an 11-year period.
The System is being funded in conformity with the minimum funding standard set forth in Code Section 47-20-10 of the Public Retirement Systems Standards Law. In our opinion the System is operating on an actuarially sound basis.Assuming that contributions to the System are made by the employer from year to year in the future at the rates recommended on the basis of the successive actuarial valuations, the continued sufficiency of the retirement fund to provide the benefits called for under the System may be safely anticipated.
This is to certify that the independent consulting actuary is a member of theAmericanAcademy of Actuaries and has experience in performing valuations for public retirement systems, that the valuation was prepared in accordance with principles of practice prescribed by the Actuarial Standards Board, and that the actuarial calculations were performed by qualified actuaries in accordance with accepted actuarial procedures, based on the current provisions of the retirement system and on actuarial assumptions that are internally consistent and reasonably based on the actual experience of the System.
Sincerely yours,
Edward A. Macdonald Principal, Consulting Actuary

34 Teachers Retirement System of Georgia

SUMMARY OF ACTUARIAL ASSUMPTIONS & METHODS

The laws governing the Teachers Retirement System of Georgia (the "System") provide that an actuary perform an annual valuation of the contingent assets and liabilities of the System and perform at least once every five years an actuarial investigation of the mortality, service, and compensation experience of the members and beneficiaries of the System. The latest actuarial valuation of the System prepared as of June 30, 2004, was made on the basis of disability retirement mortality tables approved by the Board of Trustees on June 20, 1962, interest rate assumption and salary increase tables approved by the Board on November 19, 2003, service retirement mortality tables approved by the Board on May 22, 1996, and rates of separation approved by the Board on May 17, 2000.
The more pertinent facts and significant assumptions underlying the computations included in the June 30, 2004, report are as follows:
a) Actuarial Method UsedThe actuarial cost method used to determine funding is the entry age actuarial cost method. Gains and losses are reflected in the unfunded accrued liability. Adopted December 30, 1976.
b) Investment Return7.50% per annum, compounded annually. Adopted November 19, 2003.
c) Earnings ProgressionSalaries are expected to increase 3.75% to 8.00% annually depending upon the employee's age. Includes inflation at 3.75%. Adopted November 19, 2003.
d) Death, Disability and Withdrawal RatesDeath, disability and withdrawal rates for active employees and service retirement tables are based upon the System's historical experience. The death-after-retirement rates are based on the 1983 Group Annuity Mortality Table (set back one year for males). Adopted May 22, 1996.
e) Asset Valuation Method5-year smoothed market actuarial value. The actuarial value of assets recognizes a portion of the difference between the market value of the assets and the expected value of assets, based on the assumed valuation rate of return. The amount recognized each year is 20% of the difference between market value and actuarial expected value. The actuarial value of assets is limited to a range between 80% and 120% of market value. Adopted May 26, 1996.
f) Service Retirement BenefitThe service benefit (pension) paid to members is an annuity that is owed to them at retirement that will provide a total annual pension equal to 2% of the average of the member's two consecutive highest paid years of service multiplied by the number

of years of creditable service up to 40 years. It is also assumed that certain cost-of-living adjustments will be made in future years.
g) Actuarially Determined Unfunded Accrued Liability (Funding Excess)The present value of the funding excess, based on unaudited data provided the actuary by the System, was approximately $388 million at June 30, 2004.
h) Required Contributions (% of compensation)Adopted May 1, 2005. Contributions required by the annual actuarial valuation as of June 30, 2004, to be made for the year ended June 30, 2007:

(1) Member (2) Employer:
Normal Unfunded accrued liability Expenses

5.00 %
9.66 % (0.57 )%
.15 % 9.24 %

2005 Comprehensive Annual Financial Report 35

ACTUARIAL Section

SUMMARY OF ACTUARIAL ASSUMPTIONS & METHODS

Service Retirement
Adopted May 12, 1996

Annual Rate*

Age

Men

50

23%

55

21

60

20

61

20

62

30

63

20

64

24

Women 22% 22 20 20 30 25 25

Annual Rate*

Age

Men

Women

65

40%

40%

66

30

30

67

30

30

68

30

30

69

30

30

70

100

100

*It is also assumed that 5% of eligible active members will retire each year with a reduced early retirement benefit and that an additional 15% of active members will retire in their first year of eligibility for unreduced
retirement.

Separation Before Service Retirement
Adopted May 17, 2000

Annual Rate of

Withdrawal

Age

Death

Disability

0-4 Yrs

5-9 Yrs

10+ Yrs

MEN

20

0.04%

25

0.04

30

0.06

35

0.08

40

0.11

45

0.19

50

0.35

55

0.57

60

0.84

64

1.24

0.09% 0.09 0.14 0.14 0.18 0.23 0.50 1.05 -- --

39.42% 17.62 14.13 13.54 12.61 10.70 9.00 10.28
-- --

-- 16.52% 7.07 6.35 5.12 4.63 3.89 4.50
-- --

-- -- 4.71% 2.96 1.84 1.44 1.21 1.80 -- --

20

0.02%

25

0.03

30

0.03

35

0.05

40

0.07

45

0.10

50

0.17

55

0.25

60

0.42

64

0.64

0.05% 0.06 0.07 0.09 0.13 0.22 0.39 0.63 -- --

WOMEN

27.32% 14.97 14.29 11.84 10.00 8.61 8.49 10.32
-- --

-- 11.22% 7.79 6.62 4.94 4.00 3.47 3.50
-- --

-- -- 4.55% 3.09 2.31 1.56 1.35 1.57 -- --

36 Teachers Retirement System of Georgia

Active Members

Fiscal Year(1)
1999 2000 2001 % 2002 2003 2004

Members
186,822 190,911 192,654 199,029 205,453 198,572

ACTUARIAL VALUATION DATA

Active Members

Annual

Payroll

Average

(000's)

Pay

$ 6,832,674 7,218,644 7,306,855 7,617,869 8,261,961 8,083,118

$ 36,573 37,812 37,927 38,275 40,213 40,706

% Increase
10.9%% 3.4% 0.3% 0.9 5.1 1.2

Retirees and Beneficiaries

Fiscal Year (1) 1999 2000 2001 2002 2003 2004

Added to Roll

Number

Annual Allowances
(000's)

Removed from Roll

Number

Annual Allowances
(000's)

3,614

$ 105,400

1,302

$ 19,976

4,814

187,262

1,441

25,067

5,246

171,642

1,584

26,671

4,858

169,833

1,403

26,286

5,097

188,458

1,627

30,581

5,381

206,251

1,483

29,525

Roll- End of Year Annual
Allowances Number (000's)
43,732 $ 871,129 47,105 1,033,324 50,767 1,178,295 54,222 1,321,842 57,692 1,479,719 61,590 1,656,445

% Increase in Annual Allowances
10.9% 18.6 14.0 12.2 11.9 11.9

Average Annual Allowance
$ 19,920 21,937 23,210 24,378 25,649 26,895

* (1) Fiscal year refers to the actuarial valuation performed as of June 30 of that year and determines the funding necessary for the second
subsequent fiscal year. An actuarial valuation for the fiscal year ended June 30, 2005, is currently in process and was not available for this analysis.

2005 Comprehensive Annual Financial Report 37

ACTUARIAL Section

ACTUARIAL VALUATION DATA
Solvency Test (in thousands)

Aggregate Actuarial Accrued Liabilities For

Fiscal

(1) Active Member

(2) Retirees
and

(3) Active Members Actuarial (Employer-Financed Value of

Year* Contributions Beneficiaries

Portion)

Assets

Portion of Accrued Liabilities Covered by Assets
(1) (2) (3)

1999 2000 2001 2002 2003 2004

$ 3,897,847 4,092,231 4,251,816 4,487,248 4,739,109 4,923,415

$ 11,124,459 12,657,649 14,075,798 15,915,320 17,581,264 19,870,020

$ 17,741,164 18,126,291 18,825,807 19,303,955 19,585,303 19,436,596

$ 31,832,431 35,675,729 38,584,834 40,502,333 42,372,661 44,617,956

100.0% 100.0% 94.8% 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

* Fiscal year refers to the actuarial valuation performed as of June 30 of that year and determines the funding necessary for the fiscal year beginning two years after the valuation date. (Prior to fiscal year 2003 the actuarial valuation performed as of June 30 of that year determined the funding necessary for the subsequent fiscal year.) An actuarial valuation for the fiscal year ended June 30, 2005 is currently in process and was not available for this analysis.

Member and Employer Contribution Rates

Fiscal Year
2000 2001 2002 2003 2004 2005 2006

Member
5.00% 5.00 5.00 5.00 5.00 5.00 5.00

Employer
11.29% 11.29 9.24 9.24 9.24 9.24 9.24

38 Teachers Retirement System of Georgia

ACTUARIAL VALUATION DATA

Analysis of Financial Experience (in millions)

Item
Interest added to previous unfunded accrued liability
Accrued liability contribution Experience:
Valuation Asset Growth Pensioners' Mortality
Turnover and Retirements (1) New Entrants Salary Increases Method Changes Amendments (2) Assumption Changes (3)
Total Increase (Decrease)

Analysis of the Change in Unfunded Accrued Liability Increase (Decrease) During the Years Ended June 30,

2004

2003

2002

2001

2000

1999

$ (35.0) $ (57.7)

79.6

77.4

$ (103.8) 41.1

$ (60.0) $ 65.2 $ 63.3

(169.1)

(164.5)

(224.3)

507.5 48.8 26.8 118.5 (667.1) -- -- --

788.5 (30.0) 277.0 149.1 372.4 -- 78.7 (1,326.6)

$ 79.1 $ 328.8

667.7 (35.1) (236.5) 99.9 202.3 -- -- --
$ 635.6

(269.4) (10.9) (553.8) 92.7 (319.3) -- -- 657.9
$ (631.9)

(1,533.0) 3.4
643.8 106.4 106.7 -- -- (958.6)
$ (1,730.6)

(1,779.3) 9.0
639.9 111.1 1,207.3 -- -- --
$ 27.0

(1) Turnover and Retirements 2004 - Reflects impact of change in reported data due to a change in computer system. Previous years' data reported active members as any participant who contributed during the fiscal year. The 2004 data reported active members as only those who were contributing any of the last three months of the fiscal year.
(2) Amendments 2003 - Reflects an ad hoc cost-of-living adjustment of 0.5% to all retirees as of July 1, 2002.
(3) Assumption Changes 2000 - Rates of separation from active service and rates of salary increase have been revised to more closely reflect the actual and anticipated experience of the System. In addition, the interest rate assumption has been changed from 7.00% to 7.50%.
2001 - Reflects a reduction in interest rate assumption from 7.50%, to 7.25% and a decrease in the salary increase assumption by 0.25% at each age.
2003 - Reflects an increase in interest rate assumption from 7.25% to 7.50% and an increase in the salary increase assumption by 0.25% at each age.

2005 Comprehensive Annual Financial Report 39

STATISTICAL Section

MEMBER DATA

Benefit Payment Statistics

Number of Retirees (In Thousands)

2005

66,282

2004 2003 2002 2001

61,590 57,692 54,222 50,767

2000

47,105

0

10

20

30

40

50

60

70

Annual Benefit (In Millions)

$20
$15 $1,011.6
$10

$1,153.4

$1,434.6 $1,284.4

$1,598.5

$1,799.5

$5

$0 2000

2001

2002

2003

2004

2005

Average Monthly Benefit

$2,300

$2,100

$1,900

$1,700

$1,790 2000

$1,893 2001

$2,072 $1,974

$2,163

$2,262

2002 2003 2004 2005

40 Teachers Retirement System of Georgia

MEMBER DATA

Member Withdrawal Statistics

Number of Members

13 12 11 10 9,923 9 8 7
2000

12,563 2001

9,120 2002

7,714 2003

7,805 2004

8,518 2005

Annual Withdrawal (In Millions)

$60 $55 $50 $45 $40

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

$44.7

2000

$58.8
$41.3 2001 2002

$40.9 2003

$42.6 2004

$50.5 2005

Average Withdrawal

2005 2004 2003 2002 2001 2000

$5,929 $5,458 $5,302 $4,523 $4,683 $4,507 $4,500 $4,750 $5,000 $5,250 $5,500 $6,000

2005 Comprehensive Annual Financial Report 41

STATISTICAL Section

BENEFIT DATA

Benefit Expense by Type (in thousands)

Fiscal Year

Partial Lump-Sum Service Option (1)

Type of Retirement
Survivor Supplemental Disability Benefit Payments (2)

Lump-Sum Death
Settlement

Total

2000 $ 923,049

--

2001 1,058,683

--

$ 34,160 37,118

$ 48,063 52,528

$ 4,334 3,881

$ 1,962 1,166

$ 1,011,568 1,153,376

2002 1,181,838

--

40,418

57,178

3,582

1,355

1,284,371

2003 1,323,871

--

2004 1,481,710

--

43,545 47,002

62,223 65,821

3,120 2,757

1,881 1,177

1,434,640 1,598,467

2005 1,656,652 $15,653

50,959

72,025

2,398

1,791

1,799,478

(1) Partial Lump-Sum Option Plan became effective July 1, 2004. (2) Supplemental payments to retirees who belong to a local retirement system.

Average Monthly Benefit Payments

Effective Retirement Dates

For Fiscal Years Ended

June 30,

10-15

16-20

2000 Average monthly benefit Number of new retirees
2001 Average monthly benefit Number of new retirees
2002 Average monthly benefit Number of new retirees
2003 Average monthly benefit Number of new retirees
2004 Average monthly benefit Number of new retirees
2005 Average monthly benefit (1) Number of new retirees

$ 631.36 $1,074.51

687

414

$ 639.66 $1,184.73

751

447

$ 669.01 $1,129.23

721

445

$ 783.71 $1,526.45

807

483

$1,405.03 $1,351.04

906

579

$ 729.34 $ 1,216.78

907

689

Years Credited Service

21-25

26-30 Over 30

$1,432.55 657

$2,373.56 $3,121.26

1,819

1,237

$1,549.76 633

$2,474.70 $3,198.55

2,017

1,398

$1,646.88 614

$2,624.62 $3,322.04

1,795

1,283

$1,859.12 545

$2,604.05 $3,462.68

1,714

1,661

$1,895.12 630

$2,763.31 $3,557.04

1,864

1,611

$1,751.04 693

$2,575.64 $3,474.65

1,379

2,545

Total
$2,076.92 4,814
$2,183.38 5,246
$2,258.01 4,858
$2,418.00 5,210
$2,527.79 5,590
$2,431.70 6,213

(1) Average monthly benefits have been reduced for Partial Lump-Sum Option payments of $15.7 million in fiscal year 2005.
42 Teachers Retirement System of Georgia

REVENUES & EXPENSES DATA

Revenues by Source (in thousands)

Fiscal Year
2000 2001 2002 2003 2004 2005

Member Contributions
$ 355,948 369,006 403,952 438,998 448,929 464,931

Employer Contributions

Dollar Amount

Percentage Of Annual Covered
Payroll

Net Investment Income (loss)

$ 779,571 808,480 716,917 768,673 782,301 815,693

11.29% 11.29 9.24 9.24 9.24 9.24

$ 2,788,202 (2,099,972) (1,610,477) 1,669,768 3,794,733 3,279,505

Total
$ 3,923,721 (922,486) (489,608) 2,877,439 5,025,963 4,560,129

Expenses by Type (in thousands)

Fiscal Year
2000 2001 2002 2003 2004 2005

Benefit Payments
$ 1,011,568 1,153,376 1,284,371 1,434,640 1,598,467 1,799,478

Net Administrative
Expenses
$ 9,058 10,502 15,966 14,804 15,378 19,558

Refund Payments
$ 44,718 58,831 41,250 40,883 42,580 50,491

Total $ 1,065,344
1,222,709 1,341,587 1,490,327 1,656,425 1,869,527

Contributions were made in accordance with actuarially determined contribution requirements.

2005 Comprehensive Annual Financial Report 43

STATISTICAL Section

RETIRED MEMBERS BY TYPE OF BENEFIT

Amount of Number of Type of Retirement (1)

Monthly Benefit Retirees A

B

C

D Maximum Opt-1

Option Selected (2)

Opt-2

Opt-3 Opt-4

Opt-2

Opt-3

Pop-Up Pop-Up

$0,001 - 1,250 1,024 477 79 156

251 - 1,500 4,113 3,236 495 359

501 - 1,750 4,689 3,737 484 399

751 - 1,000 4,314 3,466 478 290

1,001 - 1,250 3,684 3,005 398 254

1,251 - 1,500 3,568 3,019 349 189

1,501 - 1,750 3,660 3,198 320 141

1,751 - 2,000 3,713 3,275 318 118

2,001 - 2,250 4,101 3,750 254 97

2,251 - 2,500 4,601 4,325 198 78

2,501 - 2,750 4,876 4,694 126 56

2,751 - 3,000 4,926 4,822 68 36

3,001 - 3,250 4,048 3,965 38 45

3,251 - 3,500 3,184 3,138 25 21

3,501 - 3,750 2,536 2,507 13 16

3,751 - 4,000 1,801 1,776 15 10

4,001 - 4,250 1,405 1,386

7 12

4,251 - 4,500 1,213 1,196

4 13

4,501 - 4,750 962 951

2

9

4,751 - 5,000 819 813

2

4

Over 5,000 3,045 3,012

8 25

Totals

66,282 59,748 3,681 2,328

312 648

9 236

23 2,967

73

681

69 3,352 118 777

80 3,058 120 664

27 2,572 113 591

11 2,440 114 523

1 2,586 126 481

2 2,603 146 459

2,955 128 433

3,380 179 446

3,538 250 386

3,757 236 322

3,046 216 283

2,412 156 215

1,874 138 167

1,322

94

146

981

81

116

797

68

114

647

66

90

537

55

72

1,823 160 347

525 47,295 2,646 7,549

47

58

18

168

53 112

227

48

97

220

40 124

204

36 103

254

46

97

230

48 117

241

42 124

263

70 128

246

67 160

268

99 181

232

92 153

214

70 106

181

57

69

164

55

68

117

40

39

112

32

40

115

45

36

81

23

20

82

31

20

369 160

70

4,035 1,212 1,882

8 59 70 88 65 94 72 98 124 123 154 134 113 94 70 43 43 38 35 22 116 1,663

(1) Type of Retirement A - Service B - Disability C - Survivor benefit D - Supplemental payments to retirees who belonged to a local retirement system.
(2) Refer to Introductory Section, pages 12 and 13 for descriptions of Options.

44 Teachers Retirement System of Georgia

PARTICIPATING EMPLOYERS

Universities and Colleges Abraham Baldwin Agricultural
College Albany State University Armstrong Atlantic State University Atlanta Metropolitan College Augusta State University Bainbridge College Clayton College and State University Coastal Georgia Community College Columbus State University Dalton State College Darton College East Georgia College Fort Valley State University Gainesville College Georgia College and State University Georgia Highlands College Georgia Institute of Technology Georgia Perimeter College Georgia Southern University Georgia Southwestern State
University Georgia State University Gordon College Kennesaw State University Macon State College Medical College of Georgia Middle Georgia College North Georgia College and State University Savannah State University Skidaway Institute of Oceanography South Georgia College Southern Polytechnic State University University of Georgia Valdosta State University Waycross College State University of West Georgia
Boards of Education
Appling County Atkinson County Atlanta City Bacon County Baker County Baldwin County Banks County Barrow County Bartow County Ben Hill County Berrien County

Bibb County Bleckley County Brantley County Bremen City Brooks County Bryan County Buford City Bulloch County Burke County Butts County Calhoun City Calhoun County Camden County Candler County Carroll County Carrollton City Cartersville City Catoosa County Charlton County Chatham County Chattahoochee County Chattooga County Cherokee County Chickamauga City Clarke County Clay County Clayton County Clinch County Cobb County Coffee County Colquitt County Columbia County Commerce City Cook County Coweta County Crawford County Crisp County Dade County Dalton City Dawson County Decatur City Decatur County DeKalb County Dodge County Dooly County Dougherty County Douglas County Dublin City Early County Echols County Effingham County Elbert County

Emanuel County Evans County Fannin County Fayette County Floyd County Forsyth County Franklin County Fulton County Gainesville City Georgia Military College Gilmer County Glascock County Glynn County Gordon County Grady County Greene County Griffin-Spalding County Gwinnett County Habersham County Hall County Hancock County Haralson County Harris County Hart County Heard County Henry County Houston County Irwin County Jackson County Jasper County Jeff Davis County Jefferson City Jefferson County Jenkins County Johnson County Jones County Lamar County Lanier County Laurens County Lee County Liberty County Lincoln County Long County Lowndes County Lumpkin County Macon County Madison County Marietta City Marion County McDuffie County McIntosh County Meriwether County
2005 Comprehensive Annual Financial Report 45

STATISTICAL Section

PARTICIPATING EMPLOYERS

Boards of Education cont.
Miller County Mitchell County Monroe County Montgomery County Morgan County Murray County Muscogee County Newton County Oconee County Oglethorpe County Paulding County Peach County Pelham City Pickens County Pierce County Pike County Polk County Pulaski County Putnam County Quitman County Rabun County Randolph County Richmond County Rockdale County Rome City Schley County Screven County Seminole County Social Circle City Stephens County Stewart County Sumter County Talbot County Taliaferro County Tattnall County Taylor County Telfair County Terrell County Thomas County Thomasville City Thomaston-Upson County Tift County Toombs County Towns County Treutlen County Trion City Troup County Turner County Twiggs County Union County Valdosta City
46 Teachers Retirement System of Georgia

Vidalia City Walker County Walton County Ware County Warren County Washington County Wayne County Webster County Wheeler County White County Whitfield County Wilcox County Wilkes County Wilkinson County Worth County
Public Libraries
Athens Regional Library Barnesville-Lamar County Library Bartow County Library Bartram Trail Regional Library Brooks County Library Brunswick Regional Library Camden County Library Chatsworth-Murray County Library Chattooga County Library Cherokee Regional Library Chestatee Regional Library Clayton County Regional Library Coastal Plains Regional Library Cobb County Public Library Conyers-Rockdale Library Dalton Regional Library DeKalb County Public Library Desoto Trail Regional Library Dougherty County Public Library East Central Georgia Regional Library Elbert County Public Library Fitzgerald-Ben Hill County Library Flint River Regional Library Forsyth County Public Library Gwinnett County Public Library Hall County Library Hart County Library Hawkes Library Henry County Library Houston County Public Library Jefferson County Library Kinchafoonee Regional Library Lake Blackshear Regional Library Lee County Public Library Lincoln County Library

PARTICIPATING EMPLOYERS

Public Libraries cont.
Live Oak Public Library M.E. Roden Memorial Library Mary Vinson Memorial Library Middle Georgia Regional Library Moultrie-Colquitt County Library Mountain Regional Library Newnan-Coweta Public Library Newton County Library Northeast Georgia Regional
Library Ocmulgee Regional Library Oconee Regional Library Ohoopee Regional Library Okefenokee Regional Library Peach Public Library Piedmont Regional Library Pine Mountain Regional Library Roddenberry Memorial Library Sara Hightower Regional Library Satilla Regional Library Screven-Jenkins Regional Library Sequoyah Regional Library South Georgia Regional Library Southwest Georgia Regional
Library Statesboro Regional Library Thomas County Public Library Three Rivers Regional Library Toccoa-Stephens County Public
Library Troup-Harris-Coweta Regional
Library Uncle Remus Regional Library Victoria Evans Memorial Library Warren County Public Library West Georgia Regional Library
Technical Colleges
Albany Technical College Altamaha Technical College Athens Technical College Atlanta Technical College Augusta Technical College Central Georgia Technical College Chattahoochee Technical College Columbus Technical College Coosa Valley Technical College DeKalb Technical College East Central Technical College Flint River Technical College

Georgia Aviation & Technical College Griffin Technical College Gwinnett Technical College Heart of Georgia Technical College Lanier Technical College Middle Georgia Technical College Moultrie Area Technical College North Georgia Technical College North Metro Technical College Northwestern Technical College Ogeechee Technical College Okefenokee Technical College Pickens Technical College Sandersville Technical College Savannah Technical College South Georgia Technical College Southeastern Technical College Southwest GA Technical College Swainsboro Technical College Valdosta Technical College West Central Technical College West Georgia Technical College
Regional Educational Service Agencies
Central Savannah River Area RESA Chattahoochee Flint RESA Coastal Plains RESA First District RESA Griffin RESA Heart of Georgia RESA Metro RESA Middle Georgia RESA North Georgia RESA Northeast Georgia RESA Northwest Georgia RESA Oconee RESA Okefenokee RESA Pioneer RESA Southwest Georgia RESA West Georgia RESA

Charter Conservatory for Liberal Arts and Technology, Inc.
Cooperative Extension Service Dekalb Path Academy Department of Community Health Department of Juvenile Justice Department of Natural Resources Department of Public Safety Fulton County DFACS Fulton Science Academy Charter
School Georgia Association of Educators Georgia Dept of Early Care and
Learning Georgia Dept of Economic Development Georgia Dept of Education Georgia Dept of Human Resources Georgia Dept of Labor Georgia Dept of Motor Vehicle Safety Georgia Dept of Revenue Georgia Dept of Technical and Adult
Education Georgia High School Association Georgia Magnet Charter School Georgia Public Defender Council Georgia Public Telecommunications International Community Charter
School Kidspeace Charter School Kipp Achieve Academy Kipp South Fulton Academy Kipp Ways Academy Neighborhood Charter School Odyssey Charter School Office of Planning and Budget Tech High School The School for Integrated Academics
and Technologies at Georgia, Inc. Secretary of State South East Health Unit Victory Charter School

Other
Academy of Lithonia Charter Atlanta University Center Academy
Charter School Baconton Community Charter School Baldwin County Board of Health Board of Regents Chancellor Beacon Academy Charles Drew Charter School

2005 Comprehensive Annual Financial Report 47

tirement Georgia

Teachers Retirement System of Georgia
Two Northside 75, Suite 100 Atlanta, Georgia 30318-7901
www.TRSGA.com
(404) 352-6500 (800) 352-0650