Summary of Report 04-017

December 2003

Report Number 04-017

In our audit report dated November 10, 2003, we concluded that the basic financial statements of the Teacher Retirement System (System) for the fiscal year ended August 31, 2003, were materially correct in accordance with accounting principles generally accepted in the United States of America. We compliment the System because, for the sixth consecutive year, we found no instances of significant noncompliance or material weaknesses in internal control.

Although current member benefits are not in jeopardy, the System's pension and retiree health insurance plans are both facing important funding challenges comparable to similar benefit programs across the nation. Specifically:

• In fiscal year 2003, the market value of the pension plan's net assets rose to $77.6 billion. However, based on the valuation the System's actuary made as of August 31, 2003, the pension plan's financial health continued to decline. At the end of fiscal year 2003, the pension plan's projected funding shortfall (unfunded actuarial accrued liability) was $5.2 billion, a significant increase from the $3.3 billion projected funding shortfall it faced at the end of fiscal year 2002. Although additional annual funding is not needed immediately to cover current member benefits, additional funding would be necessary over the long term to amortize the pension plan's unfunded liability. Assuming that pension benefits remain the same and investment returns do not improve significantly, additional funding (above the current contribution rates) of $329 million per year would be needed to amortize the unfunded liability over a 30-year period.
  
  
• Even with the addition of $124.7 million in supplemental state appropriations, the net assets of the System's retiree health insurance plan were negative $83.0 million at the end of fiscal year 2003. Unlike the pension plan, the retiree health insurance plan is funded on a pay-as-you-go basis. To maintain the solvency of the retiree health insurance plan for the 2004-2005 biennium, the 78th Legislature increased state and employee contributions and began requiring school districts to make contributions; the System's Board of Trustees also increased premiums and co-payments. However, increases in both enrollment and health care costs may require further changes in the future to ensure that the plan stays solvent.

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