Summary annual financial report, year ended June 30, 2006 [2006]

2006 Summary ANNUAL Financial Report

Teachers Retirement System of Georgia
A Component Unit of the State of Georgia
Fiscal Year ended june 30, 2006

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10 Years

2006 TRS Summary Report
MESSAGE FROM THE eXECUTIVE DIRECTOR
I am pleased to present this Summary Financial Report for fiscal year 2006, written specifically with Teachers Retirement System of Georgia (TRS) members and retirees in mind. This report summarizes the more detailed 2006 Comprehensive Annual Financial Report (CAFR). The CAFR was prepared by TRS in conformity with generally accepted accounting principles and is available at the TRS office and at our website, www.TRSGA.com.
This report does not replace the CAFR, but includes important details to give you a basic understanding of our overall financial condition and investment performance. It also describes how our system works to serve our members and what benefits we offer.
I would like to take this opportunity to express my gratitude to Governor Sonny Perdue, members of the Georgia General Assembly, the TRS Board of Trustees, the staff, and the many people who have worked so diligently to ensure the successful operation of the System.
A Model Retirement System
Our vision at TRS is to be a model retirement system--one that provides unparalleled service to our members. The best way to accomplish this is through efficient and effective processes supported by a competent, empowered staff and innovative technology. Everything we do--such as allowing our members to manage their accounts online--revolves around this vision. Our commitment to excellence extends throughout TRS. It is essential that we build your retirement security and strive to exceed your expectations.
Accomplishments and Initiatives
In our continuous effort to make the services we provide to our customers faster, friendlier and easier, we have implemented some new initiatives and enhanced some old ones.
We have expanded our educational and counseling services to our active members, retirees, employers, and educational association members with the implementation of our Customer Excellence Program (Program). The Program, launched in January, 2006, enhances the quality of service we provide our customers by providing unique educational opportunities throughout their TRS membership, and by expanding the availability of these opportunities to various locations throughout the State. The Program allows TRS to partner with our customers by providing them with more opportunities to
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2006 TRS Summary Report
MESSAGE FROM THE eXECUTIVE DIRECTOR
learn about their retirement benefits, helping prepare them for life after retirement, and encouraging our customers to use the resources we have available to make their TRS membership and retirement as beneficial and as easy as possible. Our retirement planners travel throughout the State delivering educational information and counseling services to our customers and collect customer feedback, which is used to enhance all aspects of the business.
We continue to enhance our technological capabilities to streamline business processes and empower our customers to conduct business with us whenever and from wherever they please. Web enhancements made this fiscal year include: 1) allowing active members to change, delete, or add beneficiaries; 2) providing customers with the ability to seamlessly register for Customer Excellence Program events located throughout the State; 3) allowing active members to view and print their annual member statements; and 4) improving the security of online account access. All of these additions enable our customers to quickly change and add information or register for an event and receive immediate confirmation of the transaction, with the added relief that they are doing so in a secure environment.
And finally, a new organizational structure was created to streamline operations and enhance the level of customer service delivered internally, between divisions, and externally to all TRS customers. A focus on strategic and operational leadership ensures the TRS vision is supported by the daily operations of the agency. In creating this new structure, I sought champions of change who could translate the TRS vision into a reality. Stephen J. Boyers, Chief Financial Officer, and R. David McCleskey, Chief Operating Officer, were brought on to manage the daily operations of the TRS divisions. The division directors continue to lead their staff to ensure the "customer service excellence" attitude is continued throughout the agency.

Jeffrey L. Ezell

M Mission: to provide exceptional service in the administration of pension benefits and related services to TRS

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members, retirees, and employers.

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S S I

Vision: To be a model retirement system, providing comprehensive customer service to members, retirees, and employers. This vision will be accomplished

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by utilizing innovative, efficient, and effective processes supported by state of the art technology and a fully

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trained, empowered, and motivated staff.

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2006 TRS Summary Report
2006 bOARD OF TRUSTEES
TRS was created in 1943 by an act of the Georgia General Assembly to provide retirement security to those individuals who choose to dedicate their lives to educating the children of the State of Georgia. TRS is administered by a ten-member Board of Trustees. Members of the Board of Trustees listed are as of November 1, 2006.
Dr. Virginia J. Dixon Mr. Russell W. Hinton

Mrs. Brenda B. Barrow

CHAIR Retired Educator Elected by Board of
Trustees
Mr. Paul E. DeMersseman

VICE-CHAIR State Auditor
Ex-Officio
Mr. W. Daniel Ebersole

Dr. Lorelle C. "Buster" Evans

Instructional Leader Effingham
County Schools Appointed by Governor

Vice President Peachtree Planning
Corporation Appointed by Governor

Director Office of Treasury and
Fiscal Services Ex-Officio

Superintendent Bleckley
County Schools Appointed by Governor

Professor Dwight R. Lee

Mrs. Lisa S. Muldrew

Mr. Charles E. Sward

Mr. J. Alvin Wilbanks

Economics Department The University of Georgia
Appointed by Board of Regents

Business & Chorus Teacher Bulloch
County Schools Appointed by Governor

Retired Businessman Elected by Board of
Trustees

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Superintendent Gwinnett
County Schools Appointed by Governor

2006 TRS Summary Report
eLIGIBILITY AND bENEFITS AT A GLANCE
Retirement eligibility
You become eligible to receive retirement benefits once you are vested with TRS and terminate your TRS covered employment. Upon application and approval, you are eligible for a monthly benefit for the rest of your life and, if you select a survivorship option, your beneficiary would also receive lifetime benefits upon your death. Vesting occurs when you reach 10 years of service. The age at which retirement benefits begin depends on your length of service.
Length of Service for Full Retirement benefits
10 or more years of service at age 60 30 years of service at any age If you have between 25 and 30 years of service and have not reached the age of 60, you can retire with a reduced monthly benefit.
The Amount of Your Retirement benefit
Under the Maximum Plan of Retirement, you receive a monthly benefit for life based on the following formula:
Your years of service established with TRS x
2% multiplier x
Your average monthly salary for the highest two consecutive years of service =
Your initial monthly benefit You also have the option of selecting one of five different survivorship plans that allows you to leave a monthly lifetime benefit to one or more beneficiaries should they outlive you. You could, for example, leave a beneficiary 50% or 100% of your monthly benefit amount. If you select a survivorship plan, your monthly benefit is reduced based on actuarial factors, which take into consideration your age and the age of your beneficiary at the time of your retirement. Regardless of the plan you select, you also may elect the Partial LumpSum Option Plan which provides you with a lump-sum distribution in exchange for a permanently reduced monthly retirement benefit. The amount
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2006 TRS Summary Report
eLIGIBILITY AND bENEFITS AT A GLANCE
of your lump-sum distribution cannot exceed the sum of 36 monthly benefit payments under the Maximum Plan of Retirement. Your age, plan of retirement, and the amount of your lump-sum distribution are used to determine the reduction in your monthly benefit. A lump-sum distribution will be made as a single payment at the time the first monthly benefit is paid.
To help counter the effects of inflation, cost-of-living adjustments (COLA) are granted by TRS to increase your benefit. The current COLA is 1.5%, which is granted semi-annually in January and July.
For more details on eligibility and benefits, please refer to the TRS Member's Guide, which is available through your employer or by visiting the TRS website at www.TRSGA.com.
A benefit Comparison
Defined Benefit Plan vs. Defined Contribution Plan TRS is a defined benefit plan. This means your final benefit is defined
because it is based on a formula that includes your salary and length of service. You know in advance what your benefit will be regardless of any other factors, such as TRS investment performance. Also, your monthly benefit is guaranteed for your entire lifetime and can be increased through COLAs.
Many TRS employers also offer their employees a defined contribution plan, such as a 403(b) or 457 plan. Participants in this type of plan determine in advance what dollar amount they wish to contribute to their accounts, hence the name defined contribution plan. Participants do not know what their final benefit amount will be or how long the benefit will last since their account balances are subject to change as money is withdrawn and as investment performance goes up and down. As a result, benefits can run out if a member outlives the funds available. COLAs are not a feature of standard defined contribution plans.
Thus, defined contribution plans include considerably more uncertainty and investment risk when compared to defined benefit plans. Defined contribution plans do have some advantages, such as shorter vesting periods and increased versatility because participants have more control over investment decisions. But this also means that you have to stay abreast of current market conditions and trends because you control the selection of funds in which your money is invested.
Although supplements, such as personal savings, a defined contribution plan, and social security, will enhance your retirement savings, your TRS benefit will be the foundation of your retirement plan and security.
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2006 TRS Summary Report
eLIGIBILITY AND bENEFITS AT A GLANCE
The Value of Your benefit
To give you a perspective on the value of the TRS defined benefit plan, consider the following examples based on actual benefit calculations:
1) Ms. Smith is 60 years old with 30.444 years of creditable service and earns $4,312 per month. Assuming she retires now, her projected retirement benefit will be $2,705 per month.* If Ms. Smith had to provide either of these benefits on her own, she would need to have saved approximately $484,620 at retirement and would need to earn a 7.5% return on these savings each year for the rest of her life.
2) Mr. Jones is currently 33 years old with 9 years of creditable service and earns $3,916 per month. Assuming he retires at age 54 with 30 years of creditable service, and he receives a 3.75% annual salary increase, his projected monthly benefit will be $5,528* per month. If Mr. Jones had to provide this benefit on his own, he would need to have saved approximately $1,110,743 at retirement and would need to earn a 7.5% return on these savings each year for the rest of his life.
In both examples, the projected monthly retirement benefit is under the Maximum Plan of Retirement and is calculated using the benefit formula on the previous page.
*The projected monthly benefit includes a special 3% COLA on the first $37,500 in benefits.
TRS Strategic Goals for FY 2006
1. Payment of benefits and collection of
employer contributions will be made efficiently, timely, and accurately.
2. Maximize the rate of return on our invest-
ments through the management of a prudent pension investment policy.
3. Information provided to customers will
be timely, relevant, and accurate.
4. Enhance relationships with members,
retirees, and employers.
5. Develop a fully trained, empowered, and
motivated staff that will provide exceptional customer service.
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2006 TRS Summary Report
MEMBERSHIP AND bENEFIT STATISTICS
Total Membership
As of June 30, 2006
Members Active plan members ......................................................... 209,349 Terminated members entitled to benefit..s............................ 64,771 Total .................................................................................... 274,120 Retired Members ................................................................ 70,239 Grand Total ................................................................... 344,359

TRS Average Monthly benefits for Retirees
As of June 30, 2006 and 2005

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

Average Monthly Benefit Number of Retirees

FY 06

FY 05

FY 06

FY 05

$ 718 $1,174 $1,672 $2,494 $3,418 $2,431

$ 697 $1,147 $1,619 $2,424 $3,307 $2,353

8,941 7,506 8,236 14,628 30,479 69,790

8,503 7,064 7,799 13,733 28,609 65,708

Note: Retirees who belonged to a local retirement system and who receive supplemental payments are not included.

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2006 TRS Summary Report
LEGISLATION & FINANCIAL INFORMATION
During the 2006 session, the Georgia General Assembly passed a piece of legislation that was signed into law by the Governor that substantially impacted the System.
The legislation became effective July 1, 2006 and granted an increase in the monthly retirement benefit payments to TRS' eldest retirees. This onetime increase was in addition to the regular COLA received by all retirees in July. According to the bill, retirees who retired: 1) on or before June 30, 1974 received a 10% increase; 2) on or after July 1, 1974, but before July 1, 1982, received a 6% increase; and 3) on or after July 1, 1982, but before July 1, 1987, received a 2% increase in his or her monthly benefit. If any of these retirees had less than 20 years of service at the time of retirement, their increase was reduced.
Financial Information: Key Changes in Data
By reviewing the Schedule of Plan Net Assets and Schedule of Changes in Plan Net Assets on the following page, you can see how the plan's current assets, liabilities, additions, and deductions have changed from last year. Key changes include the following:
Member and employer contributions increased in 2005 and 2006 primarily because of increased membership and higher average payroll in both years.
Deductions increased in 2005 and 2006 due to increases in the number of retirees and beneficiaries receiving benefit payments and postretirement benefit adjustments in both years.
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2006 TRS Summary Report

FINANCIAL INFORMATION

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

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

June 30,

2006
$ 570,353 46,803,873 13,502 47,387,728

2005
$ 406,080 44,935,545 16,257 45,357,882

141,381 $ 47,246,347

79,202 $ 45,278,680

Schedule of Changes in Plan Net Assets
(dollars are in thousands)
This schedule shows additions to and deductions from TRS plan net assets.

Additions Employer contributions Member contributions Net investment income Total additions
Deductions Benefit payments Refunds of member contributions Administrative expenses, net Total deductions
Net Increase

Year Ended June 30,

2006 $ 855,626
485,721 2,691,062
4,032,409

2005 $ 815,693
464,931 3,279,505
4,560,129

1,991,431 53,138 20,173
2,064,742
1,967,667

1,799,478 50,491 19,558
1,869,527
2,690,602

Net Assets Held in Trust for Pension Benefits
beginning of year
end of year

45,278,680 $ 47,246,347

42,588,078 $ 45,278,680

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2006 TRS Summary Report

INVESTMENTS

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

Growth Of Investments
[in billions]

Ten Years Ending June 30, 2006

$50 $40 $30 $20 $10
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Investment Mix
[Dollars in Millions]
61% Stocks
$28,654
37% bonds
$17,244
2% Short-term
Securities & Cash $906

For the Year Ending June 30, 2006

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2006 TRS Summary Report
FUNDING
Under the TRS defined benefit pension plan, your employer contributes an amount that, when combined with the employee contribution and the expected investment earnings, is sufficient to pay the benefits promised. Many variables must be considered and many projections and estimates must be made to determine the amount your employer contributes. Some projections and estimates include length of service, retirement age, life expectancy (mortality), vesting rates, salary increases, and future promotions. Economic variables also must be considered. Return on investments and inflation must be projected and included in the computation as well. Currently, the employer contribution rate is 9.28% of payroll.
An important way to measure the sufficiency of contributions to TRS and the overall financial soundness of a public retirement plan is to look at the relationship, over time, between the retirement plan's liabilities and its assets. One such measure of financial soundness is called the "funding ratio." This ratio measures the extent to which the actuarial accrued liability1 of the retirement system has been funded by comparing the liability against the actuarial value of assets2 held by the retirement system. The funding ratio is calculated by dividing the actuarial value of assets by the actuarial accrued liability. The higher the funding ratio, the more able we are to pay our current and future retirees.
As of June 30, 2005, the date of the most current valuation, the funding ratio for TRS was 98.0%. This means that based on the various assumptions, projections, and estimates used in the analysis of liabilities and assets, TRS will have sufficient assets to pay for all benefits that had been earned by retirees and members. This indicates TRS is a well funded and financially sound retirement system.
1 Actuarial Accrued Liability Each year our actuary performs a study, called a valuation, to estimate the longterm costs of the retirement system. This long-term cost is called the actuarial accrued liability. To do a valuation, the actuary must calculate the amount of money the retirement system must have on hand today in order to pay all the retirement benefits earned to date for both retirees and active members. This calculation relies on many assumptions, projections, and estimates. The actuarial accrued liability as of June 30, 2005, the date of our last valuation, was $47.8 billion.
2 Actuarial Value of Assets For funding purposes, the financial condition of a pension fund should be viewed over the long-term. Therefore, we use an asset valuation method that includes long-term factors. Market value would not be a good valuation method for funding purposes since it is based on what our assets could be sold for on a specific
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2006 TRS Summary Report

FUNDING
date, which is a value that can change significantly from day-to-day. Using true market value could introduce much volatility into the management of the pension fund, causing the employer contribution to increase or decrease significantly and frequently. The actuarial value of assets, on the other hand, is a more stable valuation method because it "smooths" out short-term market gains and losses over a five-year period. This technique produces an asset valuation that approximates market value but removes much of the volatility. With less volatility in the value of our assets, we can better predict long-term funding needs and ensure those needs are met while providing level funding rates for employers. The actuarial value of assets as of June 30, 2005, the date of our last valuation, was $46.8 billion.

Actuarial Assets & LiaBilITieS
[in billions] $55

Actuarial Value of Assets Actuarial Accrued Liabilities

$45

$35

$25

$15 2000

Corresponding Funding Ratio

102.3%

2001 103.9%

2002 102.0%

2003 101.1%

2004 100.9%

2005 98.0%

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

The Government Finance Officers Association of the United States and Canada (GFOA) has given an Award for Outstanding Achievement in Popular Annual Financial Reporting to the Teachers Retirement System of Georgia for its Popular Annual Financial Report for the fiscal year ended June 30, 2005. The Award for Outstanding Achievement in Popular Annual Financial Reporting is a prestigious national award recognizing conformance with the highest standards for preparation of state and local government popular reports.
An Award for Outstanding Achievement in Popular Annual Financial Reporting is valid for a period of one year only. We believe our current report continues to conform to the Popular Annual Financial Reporting requirements, and we are submitting it to GFOA.

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