Summary of Report 05-022

January 2005

Report Number 05-022

In our audit report dated November 9, 2004, we concluded that the Teacher Retirement System's (System) basic financial statements for fiscal year 2004 were materially correct and presented in accordance with accounting principles generally accepted in the United States of America.

We also issued a report on compliance and internal control over financial reporting as required by auditing standards. Our procedures were not intended to provide an opinion on compliance with laws and regulations or to provide assurance on internal control over financial reporting. However, our procedures did not identify any noncompliance with laws or regulations that materially affected the financial statements or any material weaknesses in internal control over financial reporting.

The major internal controls that we tested in the process of forming our opinion on the financial statements were generally operating effectively. In a separate letter to System management, we recommended changes to address several less significant issues affecting System operations.

Conducting our audit of the System's financial statements enabled us to obtain information on the pension plan's actuarial funding status, which has declined for the fourth consecutive year. In fiscal year 2004, the deficit of the plan's actuarial assets compared with its actuarial liabilities-its unfunded actuarial accrued liability-grew by more than $2.7 billion to $8.0 billion. The actuary calculated that the current total annual contribution rate of 12.4 percent of employee pay is not sufficient to ever pay off, or amortize, the existing $8.0 billion unfunded liability. As a result, System management stated in the Letter of Transmittal for its fiscal year 2004 Comprehensive Annual Financial Report that absent significant investment gains, long-term changes will have to be made to the funding structure and/or benefit designs. (See the Actuarial Soundness portion of the System's transmittal letter in Appendix 2 of the audit report.)

For example, the actuary concluded that increasing the employer portion of the contribution rate from 6.0 to 7.31 percent starting in fiscal year 2005 would position the plan to amortize this unfunded liability over the next 30 years. According to the System's estimates, this increase would cost the State an additional $634 million ($606 million from the General Revenue Fund and $28 million from Educational and General funds of higher education institutions) and school districts an additional $63 million if implemented for the 2006-2007 biennium.

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