TEACHERS’ RETIREMENT SYSTEMOF OKLAHOMA

Actuarial Valuationas of June 30, 2008

Presented by J. Christian Conradi and Mark Randallon October 22, 2008

2

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

3

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

4

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

5

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%

6

Active Members vs. Annuitants

88,67888,13387,19484,28681,68383,127

85,36684,38783,02481,85180,578

45,23843,50641,78240,87939,59338,05936,51535,18834,11733,03332,032

0

20,000

40,000

60,000

80,000

100,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Active Members Annuitants1.0% average increase for active members over last ten years3.5% average increase for annuitants over last ten years2.0 active members per annuitant

7

Payroll

$3,175

$2,648$2,538 $2,738$2,991 $3,047

$3,046 $3,031

$3,355$3,599 $3,751

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$M

illi

on

s

4.0% average increase over last ten years

8

Average Salary and Average Benefit

$42,304$40,835$38,476

$31,493 $32,356 $32,982$35,438

$35,695

$36,639 $37,104$37,671

$17,532$16,994$16,795$16,416$15,552 $15,706$15,344$13,819 $14,015 $14,425 $14,621

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Average Annual Salary Average Annual Benefit

3.0% average increase in average salary over last ten years2.4% average increase in average benefits over last ten years

9

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)

10

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

11

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

12

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

13

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

14

Actuarial and Market Values of Assets

$4.7

$8.4

$4.1

$5.4

$6.0 $6.3$6.4

$6.7

$7.0$7.5

$9.3

$4.9

$5.4$5.9

$5.7 $5.4 $5.6

$6.7

$7.2$7.9

$9.3

$8.6

$.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

$9.0

$10.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$Bill

ions

Actuarial Value of Assets (AVA) Market Value of Assets (MVA)

AVA is 107.2% of MVADeferred losses of $623 million

15

Estimated Yield Based on Actuarial and Market Values of Assets

9.4%12.4%

11.4%

8.2%5.7%

15.5%

5.8%

2.9% 4.6%

17.1%

15.8%

-7.5%

18.0%

9.4%10.0%

20.2%

4.8%

-5.4%

-2.3%

10.5%

11.9%

21.4%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Actuarial Value Market Value

6.6% average compound return on market value over the last ten years9.2% average compound return on actuarial value over the last ten years

16

Contributions vs. Benefits & Refundsby Fiscal Year

$884

$821

$592

$708

$641$608

$583

$545

$472

$435$445

$806 $847

$763

$685

$643$592

$572

$533

$507$466

$733

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$ Millions

Contributions* Benefits & Refunds**

* Includes member, state, employer and federal contributions** Includes administrative expenses

17

External Cash FlowAs Percentage of Market Value

0.4%

-0.7%

-1.3%

-0.5%

-1.3%-1.1%-1.1%

0.2%0.0%

-1.0%

-0.4%

-2.0%

-1.0%

0.0%

1.0%

2.0%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

18

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, 2007.

• 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

19

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

20

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%.

21

Change in UAAL for The Year(In $ Millions)

FY 2008 FY 2007

1. UAAL, beginning of year $7,602.5 $7,672.9

2. Expected increase (decrease) 130.2 222.5

3. Liability loss / (gain) 30.5 123.3

4. Asset loss / (gain) (117.7) (332.7)

5. Actual vs. expected contributions (28.8) (83.4)

6. 2% ad hoc COLA 67.3 0.0

7. Increase in future ad hoc COLA assumption

1,406.0 0.0

8. UAAL, end of year $9,090.1 $7,602.5

22

GASB #25 Funded Ratio

50.5%

52.6%

49.3%49.5%47.3%

51.4%51.4%

53.7%

45.9%

54.0%

49.8%

0%

10%

20%

30%

40%

50%

60%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

23

UAAL as a Percentage of Covered Payroll

224% 229%

242%

211%245%

196%188%

169%

189% 180%179%

0%

50%

100%

150%

200%

250%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

24

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. 15.68 %

25

Annual Required Contribution (ARC)vs. Actual Contributions

$375.3$405.8

$459.5

$714.4

$590.5

$575.7

$456.9 $455.3 $451.5

$556.2

$534.8

$722.1

$535.2

$585.2$596.8

$244.3 $275.8$328.1

$365.0 $362.0

$535.9

$0

$100

$200

$300

$400

$500

$600

$700

$800

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

$ M

illio

ns

Annual Required Contributions* 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

26

Actual Contributions as Percentage Of Annual Required Contribution

101.1%

93.1%

85.8%

56.2%

65.6%70.2%

61.9%

72.7%

60.6%59.1%

53.5%

0%

25%

50%

75%

100%

125%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

27

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

28

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 2009--$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

29

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 %)

30

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

31

Reporting for State Pension Commission

Calculated contribution (in millions)

Was net $719 million last year, or 19.09%

Total $1,346 34.29%

Less members: (275) -7.00%

Less employers: (336) -8.55%

Less federal: (25) -0.64%

Net (State) $711 18.10%