TEACHERS’ RETIREMENT SYSTEM OF OKLAHOMA Actuarial Valuation as of June 30, 2008 Presented by J. Christian Conradi and Mark Randall on October 22, 2008

1 Actuarial Valuation  Prepared as of June 30, 2008, using member data, financial data, benefit and contribution provisions, actuarial assumptions and methods  Purposes: ► Measure the actuarial liabilities ► Determine adequacy of current statutory contributions ► Provide other information for reporting GASB #25 CAFR State Pension Commission ► Explain changes in the actuarial condition of TRS ► Track changes over time

2 Membership – Actives and Inactives  The number of active members increased by 545, from 88,133 to 88,678 ► 0.6% increase, following a 1.1% increase last year ► Over last ten years, active membership has increased an average of 1.0% per year  Payroll for members active on June 30, 2008 increased from $3,599 million to $3,751 million, a 4.2% increase ► Payroll has increased by 48% in the last ten years, an average increase of 4.0% per year We assume a 3.5% average annual increase

3 Membership – Actives and Inactives  Average pay for active members increased 3.6%, from $40,835 to $42,304  Average age of active members increased to 45.9, from 45.8 and from 44.3 ten years ago  Average years of service remained at 11.5, and increased compared to 11.2 ten years ago  There are also 6,915 inactive vested members, and 6,908 inactive nonvested members

4 Membership – Annuitants  The number of annuitants increased by 1,732, from 43,506 to 45,238, a 4.0% increase ► Number includes service retirees, disabled retirees, special retirees, and beneficiaries receiving benefits ► Over the last ten years, the number of annuitants has grown an average of 3.5% per year  Average annual annuitant benefit is $17,532  There are 2.0 active members for each annuitant  Ratio is slowly decreasing, was 2.5 ten years ago  Over last ten years, the number of actives has increased 10%, while the number of annuitants has increased 41%

5 Active Members vs. Annuitants 1.0% average increase for active members over last ten years 3.5% average increase for annuitants over last ten years 2.0 active members per annuitant

6 Payroll 4.0% average increase over last ten years

7 Average Salary and Average Benefit 3.0% average increase in average salary over last ten years 2.4% average increase in average benefits over last ten years

8 Assets  Fair market value decreased from $ 9,293 million to $8,634 million ► Assets shown exclude 403(b) accounts ► 64% in equities, 36% cash and fixed income  Four sources of contributions ► Member contributions (7.00% of pay = $287 million) Includes service purchases, redeposits and EESIP payments ► Employer contributions = $309 million EESIP employers: 7.85% / 8.35% Non-EESIP employers: 7.05%/7.55% Rates scheduled to increase in future ► State contribution (5.0% of tax revenues = $267 million) ► Federal matching contributions (7.00%, $21 million)

9 Assets  Total contributions of $884 million, compared to $821 million in FY 2007  The distributions (benefit payments, refunds and administrative expenses) totaled $847 million  Therefore, there is a positive external cash flow of $37 million ► 0.4% of market value at end of year ► Not significant

10 Assets  Return on market of approximately -7.5% in FY 2008 ► Average return for last ten years was 6.6% 9.6% for last five years 9.2% for last fifteen years

11 Assets  All actuarial calculations are based on actuarial value of assets (AVA), not market value  AVA reflects 20% of the difference between last year’s expected return on market and the actual return ► 40% of FY 2007 difference, 60% of FY 2006 difference and 80% of FY 2005 difference ► AVA now $9,257 million vs. $ 8,422 million last year

12 Assets  Actuarial return was 9.4% in FY 2008  AVA is 107.2% of fair market value (was 90.6 % last year)  $623 million in deferred losses, not yet recognized ► Will be recognized over next four years

13 Actuarial and Market Values of Assets AVA is 107.2% of MVA Deferred losses of $623 million

14 Estimated Yield Based on Actuarial and Market Values of Assets 6.6% average compound return on market value over the last ten years 9.2% average compound return on actuarial value over the last ten years

15 Contributions vs. Benefits & Refunds by Fiscal Year * Includes member, state, employer and federal contributions ** Includes administrative expenses

16 External Cash Flow As Percentage of Market Value

17 Benefit and Contribution Structure Changes  New legislation – HB 3112 ► This bill implemented a 2% ad hoc COLA for TRS retirees who retired prior to July 1, Note that we assumed an increase of 1.00% per year in the last valuation, so we have a loss due to this ad hoc COLA Actuarial present value of 2.00% ad hoc COLA = $134.7 million This produced a loss (increase in UAAL) of $67.3 million, net of expected increase We get a gain in years when there was no COLA granted by the legislature

18 Changes in Actuarial Assumptions and Methods  During the summer, the Board voted to increase the assumed future ad hoc COLA assumption from 1% to 2%. Otherwise, the actuarial assumptions and methods used in this report are unchanged from last year.  Assumptions were set by the Board based on experience study following June 30, 2004 actuarial valuation ► Retirement rates modified in 2006 for EESIP  Next experience study scheduled to follow the June 30, 2009 actuarial valuation

19 Actuarial Results  Unfunded actuarial accrued liability (UAAL) increased from $ 7,603 million to $9,090 million  The increase in the UAAL is principally due to the increase in our assumed rate of future ad hoc cost of living adjustments (COLA) from 1% to 2%.

20 Change in UAAL for The Year (In $ Millions)

21 GASB #25 Funded Ratio

22 UAAL as a Percentage of Covered Payroll

23 Actuarial Results  Annual required contribution (GASB #25 ARC = normal cost plus 30-year funding of UAAL, using level percent of pay) of $714 million vs. $590 million last year ► 18.19% vs %

24 Annual Required Contribution (ARC) vs. Actual Contributions * Normal cost, plus 30-year level percent of pay amortization of UAAL since FY 2006 Normal cost, plus 40-year level dollar amortization of UAAL before that ** Employer, state and federal matching contributions

25 Actual Contributions as Percentage Of Annual Required Contribution

26 Actuarial Results  Funding period increased from 21.6 years to 54.4 years ► The increase in the funding period is principally due to the increase in our assumed rate of future COLAs from 1% to 2%.  UAAL projected to be fully amortized by end of FY 2063 ► 80% funded in FY 2052

27 Actuarial Results  Funding period and UAAL projections based on projection that: ► Reflects scheduled contribution rate increases ► Assumes net 8.00% market return each year ► Phases in deferred asset losses ► Assumes no benefit changes or other gains/losses ► Assumes no change in number of active members ► Projects state revenue starting from OSF estimate for FY $268 million--increasing at 2.25% through FY 2010, then increasing 3.50% per year ► Starting pay for each group of replacement hires increases 3.50% each year

28 Reporting for State Pension Commission  Specified assumptions ► Investment return rate: 7.50% vs. 8.00% in regular valuation ► Future COLAs: 2.00%/year (same as under regular valuation) ► Mortality: RP-2000 with projections, vs. OTRS tables ► Funding: 30-year amortization (level dollar vs. level %)

29 Reporting for State Pension Commission  Actuarial results: ► Actuarial accrued liability: $19.6 billion vs. $18.3 billion in regular valuation ► Actuarial assets: $9.3 billion (no difference) ► UAAL: $10.3 billion vs. $9.1 billion in regular valuation ► Funded ratio: 47.3% vs. 50.5% in regular valuation

30 Reporting for State Pension Commission  Calculated contribution (in millions)  Was net $719 million last year, or 19.09%