Summary of Report 03-014

January 2003

Report Number 03-014

In our audit report dated November 8, 2002, we concluded that the basic financial statements of the Teacher Retirement System (System) for the fiscal year ended August 31, 2002, were materially correct in accordance with accounting principles generally accepted in the United States of America. For the fifth consecutive year, we found no instances of significant noncompliance or material weaknesses in internal control.

Although we noted no problems with the System's basic financial statements, compliance, or internal control, we want to inform the Legislature of serious issues that could negatively affect the System's pension and retiree health insurance plans:

• On August 31, 2002, the System had an unfunded actuarial accrued liability of $3.3 billion. Even if pension plan benefits remain the same, additional funding (above the current contribution rates) of more than $260 million per year would be needed to amortize the unfunded liability over a 30-year period.
  

• Unless the pension plan's contribution rate increases or investment returns are significantly greater than expected, it might not be possible to provide pension benefit increases during the 78th legislative session and possibly within most of the current decade. According to the System's actuary, if there is no significant market recovery over the near term, an increase in the contribution rate will be necessary to maintain the actuarial soundness of the System.

• The pension plan's actuarial valuation does not include net investment losses of $16.2 billion. These losses will be recognized during the next four years in accordance with the System actuary's use of a smoothing process to translate annual market returns to actuarial returns. To offset these losses, the System's actuary estimates that the pension plan would need to average a 12.4 percent return on investments during the next four years (or a 21.2 percent return on investments during the next three years) to achieve its 8 percent actuarial expected investment rate of return.

• The retiree health insurance plan's net assets grew during fiscal year 2002, but only because of $285.5 million in supplemental state appropriations. Excluding the supplemental state appropriations, the plan's expenditures exceeded the plan's contributions by $177.6 million in fiscal year 2002. Significant changes will have to be made to keep the plan solvent.

• Under the current funding arrangement and benefit structure, the retiree health insurance plan is projected to need an additional $720 million above the amounts appropriated for the 2002-2003 biennium to pay claims incurred through August 31, 2005. The System's management has been closely monitoring the funding status of the retiree health insurance plan and has been reporting information regarding the plan's funding status to state leaders on a monthly basis for the last three years.

We anticipate that, to varying degrees, all state retirement systems will experience problems similar to those the System is experiencing.

Contact the SAO about this report.

Download the PDF version of this report. (.pdf)

HTML Equivalent (utilizing Adobe's PDF Conversion by Simple Form).